February 16, 2006

Grey China

Hatched by Dafydd

The limitation of demography is that it's almost by definition a form of static analysis: it cannot take into account significant changes that the demographics themselves may cause in demography's own predictions.

Thus, when Mark Steyn remarks that China will never be a superpower because "its population will get old before it gets rich," he is including a hidden assumption: that they will not notice what is happening and respond in any way to mitigate the danger.

What is the underlying science behind this claim, and how might a nation avoid Economic Progeria Syndrome?

Tom Bevan at RealClearPolitics blog links not only to the Steyn column but also to Andy Mukherjee at Bloomberg (they seem to like Bloomberg at RCP); Mukherjee explains it all for you (longish quote, but you should read it all):

Helen Qiao, an economist at Goldman Sachs Group Inc. in Hong Kong, posed an interesting question this week: "Will China grow old before getting rich?"

Qiao's research shows that China's dependency ratio -- the number of people too young and too old to work divided by the working-age population -- will start rising at the end of this decade and approach 50 percent in 2030, from less than 40 percent at present, making China as gray as Japan was last year.

By 2050, every 10 Chinese workers in the age group of 15 to 64 will support a total of seven younger and older people -- a dependency ratio of 70 percent.

An aging society may be an inevitable part of demographic transition, though "what makes China's case unique is that the sharp rise in dependency ratio will arrive earlier in terms of per capita income level relative to other countries,'' Qiao says in her report.

In 2030, China's annual per capita income will be a little more than $11,000 measured in current prices, compared with almost $36,000 in Japan last year, according to Goldman Sachs's estimates. South Korea's dependency ratio will approach 50 percent in 2025, with its citizens earning $52,000 a year.

Does it matter if China gets old before it gets rich? It does, for a number of reasons. First, economic growth rates taper off with aging: It's difficult for a developing nation to get rich after its population has already grown old.

Of course, the increase in China's "dependency ratio" doesn't come from a bunch of extra children being born; the real increase, not only for China but for the United States, Japan, South Korea, and every other country as it develops, comes from people living longer. (Considering the alternative, we should hope this is a "ratchet" effect that will never go backwards.)

It's fairly well known that when FDR pushed Social Security through Congress in 1935, the life expectancy of a white male who lived to twenty years old (entering the workplace) was only about 66-67 years, meaning the typical person would only receive four or five years of "old-age" benefits before conveniently dying. But a twenty year old white male today can expect to live at least ten years longer -- more, much more, if we factor in likely breakthroughs in medical science and life extension.

But note the important point, what makes the dependency ratio static analysis: all such projections assume that at a certain set age, each person retires and ceases earning income, therefore becoming dependent upon a "worker" to support him.

The first step in recovery is to admit you have a problem. The first step in making static analysis dynamic is to identify the hidden assumptions of stasis. The question is, if people are aging and retaining mental and physical health longer... why shouldn't they continue earning money longer?

The typical economist's answer is that if old people don't retire, there will be no jobs available for younger workers. Therefore, they conclude (with a patronizing flourish), you have simply moved the dependency from the end to the beginning of the work career.

But of course, this argument is just as static: the hidden assumption of stasis this time is that the old model of big corporations that hire X number of human robots to produce Y number of widgets will continue unto the era of our children's children's children.

In reality, we are already seeing a massive shift in the earning model, and have been for decades: more and more entrepreneurs are starting up their own businesses, then hiring some small number of people. This is not a trivial component of the economy of an advanced nation like the United States; about 75% percent of all new job growth is due to more and more small business (fewer than 500 employees) hiring more and more people. In fact, 20 million Americans work for companies that employ fewer than twenty workers each... almost half as many workers as are employed by large companies (> 500 employees), 47 million.

Small businesses are more concerned with the individual than with demographics, and they are far more likely to employ older workers. And of course, there is no age limit at all to starting your own business, as (Honorary) Col. Harland Sanders proved as long ago as 1952, when he used his Social Security check to open a restaurant called Kentucky Fried Chicken.

This, then, is the dynamic solution to the static problem of the dependency ratio: there is no economic danger in an earner "living too long" if he continues to earn money as an entrepreneur (or working for one). Note the change in nomenclature: we should call productive people earners, not "workers," because it's irrelevant how they earn money: by employment, by investment, or by royalties.

Additionally, consider that the damage wrought by too much dependency occurs when the government is forced to support older and older retirees via Social Security, Medicare, Medicaid, and other entitlement programs. There are far more rational policies that a country can adopt: for example, an earner's Social-Security tax can actually be privately invested on his behalf, owned and controlled by the earner (with limits), and paid out after "retirement" to supplement whatever other money he continues to earn... as opposed to the current American model, where the tax is taken by the government and spent on current budget items, leaving it up to future Congresses to find the money to pay retirees. In a privatized system, much of a senior citizen's income would simply be interest, dividends, and growth from his own investments. This, too, reduces dependency, working hand-in-glove with his own entrepreneurship.

A country can likewise mitigate the damage caused by the dependency ratio by switching entitlement programs like Medicare and Medicaid towards "defined contribution," where the program pays a fixed amount towards a benefit, and away from "defined benefit," where the program guarantees certain specific benefits, no matter what the cost.

The solutions to a rising dependency ratio are out there; but Mark Steyn is inadvertently right on one point: China, because of its Communist history, is very unlikely to embrace these free-market solutions to their crisis until it becomes too late. But then again, so are we... as the privatization wars of 2005 make pretty plain.

If we want to survive as a hyperpower throughout the 21st century, it's time to kick butt and take names in Congress, cramming economic salvation down the Democrats' throats whether they want it or not.

Hatched by Dafydd on this day, February 16, 2006, at the time of 8:45 PM

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» The Greying of China & Economics of Ageing from
Dafyyd over at Big Lizards presents a very thought provoking piece on ageing populations and economic ramifications thereof. Specifically talking about China, but applicable to any modern society. The limitation of demography is that it’s almost [Read More]

Tracked on February 17, 2006 6:20 AM


The following hissed in response by: unclebenjamin

One thing that worries me about being flexible enough to meet this new challenge, aside from the bumblers in Congress, is the influence of unions. I find it hard to believe that they won't try to impede longer working lives for their employees. If these employees are being guarenteed pensions they won't necessarily feel a need to stay in the workforce. What can we do to further weaken their influence or bypass them altogether?

The above hissed in response by: unclebenjamin [TypeKey Profile Page] at February 17, 2006 10:55 AM

The following hissed in response by: BigLeeH

The other problem with the dependency ratio calculation is not that the transition points between working and non-working ages are arbitrary and static, but involves the assumption that the distribution of work done per capita as a function of worker age is square at the ends.

The effect of improved medical technology on the effective dependency ratio will depend on how it changes the shape of the productivity curve at the end. Ideally, from a productivity ratio point of view, one would want workers to live a long, vigorous and productive life and then fall over dead. To the extent that medical technology lets them linger on after their productivity is less than the average for the population then medical technology makes the effective dependency ratio worse.

I am not saying that you are wrong in suggesting that a static analysis of aging in China tends to overstate the problem it poses for the Chinese economy -- but I am saying that one cannot put granny on the gurney and wheel her down to the factory floor and claim to have driven the dependency ratio to zero.

The above hissed in response by: BigLeeH [TypeKey Profile Page] at February 17, 2006 2:16 PM

The following hissed in response by: Kathy K

Well, no - one can't exactly " put granny on the gurney and wheel her down to the factory floor" and expect her to do the factory work. But that "granny on the gurney" has probably been working at that factory for a good long time, and may well be a very good candidate for managing the factory floor. Which could be done from a gurney.

I'll add anectodatal evidence (for what little it's worth) to Dafydd's comment on small businesses being much more willing to hire older workers. The company I work for is very small and one employee (out of 7) is over retirement age. (Nor am I a spring chicken myself.) She only works part time (because she's retired - we'd be happy to give her more work) but she's invaluable.

The above hissed in response by: Kathy K [TypeKey Profile Page] at February 17, 2006 5:24 PM

The following hissed in response by: RBMN

I think we're underestimating the basic agricultural skills and healthy lifestyle of most older Chinese. As a group, I'd say most older Chinese have the life skills to be extremely self-reliant if given a small stipend, good shelter, and maybe a garden. They wouldn't be productive in a pure economic sense, but they wouldn't be the financial drag that happens in the West either. Their expectations are a lot lower than in the West. Medical care for example.

The above hissed in response by: RBMN [TypeKey Profile Page] at February 17, 2006 10:18 PM

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