September 5, 2019 Reading Time: 6 minutes
Image Credits: Harry Cao/Unsplash
Lauren A. Johnston*
Over recent decades most countries have seen a rise in average life expectancy, while fertility rates have fallen. In rich countries, this transition has been underway for many years. As a result, most of the world’s high-income countries are in the latter phases of demographic transition. In turn, these economies are now home to populations characterised by intensifying population ageing, and policymakers face the unprecedented challenge of working out how to adjust their economies and societies to the reversal of their population pyramid.
Falling fertility and mortality rates are, however, also being seen in countries at lower per capita income levels. As a result, middle-income countries are now also increasingly finding themselves in a similar position. Prominent among them are G20 members, Brazil, China, Russia and Turkey, which are all home to populations now categorised as ‘ageing’ (measured by population of least 7% aged 65 or over). All such countries that are ‘poor and old,’ are marked in yellow in Figure 1.
Figure 1: World Map by Economic Demography Matrix categories
Source: Johnston (2019a).1
Sri Lanka is among this group of ‘poor and old’ countries. In 2018, 10.4% of Sri Lanka’s population was aged 65 or over, a share slightly above the 10.1% average among other upper-middle-income countries. This places Sri Lanka very close to entering the phase of a late demographic dividend period, which is measured by a threshold of 10.9% of persons aged 65 and over.2
Where the economics literature is rich in ideas for addressing the developmental challenges of youth-filled developing countries, including those of Malthus and Lewis, there is little equivalent around a development process in the presence of an ageing population. But just as a high birth rate in poor countries can lead to widespread starvation thanks to falling per capita resource availability – the Malthusian trap – in principle the weight of the old, in rich and poor countries alike, also risks stagnating growth via setting off a downward productivity spiral – the Johnston trap.3
Thanks to a 1980s decision to align its population policy with the newly initiated ‘opening and reform’ economic agenda that began in 1979, China, however, offers a useful reference point and some related literature. ‘Poor-old’ Sri Lanka’s policy makers should indeed expeditiously grasp the opportunity to better understand China’s decades-long ‘economic demography transition strategy.’
Following the dramatic implementation of a One Child Policy in the early 1980s, China’s policymakers sought to extrapolate the consequences. The work of Renmin University demographer, Cangping Wu, highlighted that by the early 2000s, when China was predicted to enter a process of rapid population ageing, the economy would not, under any feasible scenario, have reached the high-income per capita group.
In other words, China’s destiny was to become old but not yet rich. And it was feared that getting old while still a developing country (Sri Lanka’s position now), might prevent China from attaining ‘rich economy’ status.4 This fear was also fuelled by comparison with neighbouring economies, Japan, Taiwan, Singapore and Hong Kong, which had all become rich economies with young populations. Another reason behind the fear was that an increasing share of resources, financial and human, would need to be re-directed to elderly care, leaving insufficient resources to maintain modernisation and productivity levels.
Ever since, China has taken steps to ensure that its economy can best sustain its demography. Related measures included promising the older population, very modest pension entitlements, so that these promises would not derail a large share of the resource envelope before China had attained its development goals. Similarly, China made sure to invest in the education of the future young cohort – the cohort that would need to be more productive per capita than its immediate ancestors, in order to maintain productivity per capita, and to continue an intended national advance toward the economic frontier. As a result, China’s human capital is not evenly spread across the population but biased in favour of the younger generation. At least theoretically, China has, via such economic demography strategic preparations, better positioned itself to be able to navigate the precipitous risks of this stage of its economic and demographic journey. Only time will prove its success.
Like China, Sri Lanka today, is an upper-middle-income country, hoping to avoid rapid population ageing undermining its path of successful economic development. Due to various factors such as the civil upheaval and emigration taking place at different stages between China and Sri Lanka, Sri Lanka, however, differs from China in having a higher child share of the population.
On average, upper-middle-income countries are home to a 20.8% population share of children aged 0-14 years, where 18.8% marks the threshold for late demographic transition. Sri Lanka’s child share of population, in 2018, was 23.7%. This level reflects mid-stage demographic transition, not late-stage demographic transition. It also infers some bandwidth for a higher fertility rate in the future. Moreover, in principle, Sri Lanka may have some time to follow China’s lead in, promoting elevated education of the younger cohort. The backdrop to this is that this younger generation will need to be able to be sufficiently productive per capita, so as to provide for the future elevated elderly dependency burden.
To ensure that that burden is manageable, China has kept its pension promises modest.5 If the weight of pension and related obligations is high in terms of the total fiscal and private sector spending envelope, this may have the same adverse effect as a debt overhang. Debt overhang is a phenomenon where existing debt is so great that it is not easy to borrow additional money even when new borrowing can be justified based on the productivity and return expected from a potential new investment.6 If the redirection of resources towards the older cohort becomes similarly high, countries may enter a downward productivity cycle. In other words, where the incentive to invest in the economy or the chance of receiving related government support is so low, that the investment itself won’t take place, even if the investment itself is productive in the long-run.
Hence, Sri Lanka, like China, must not only ensure that its youth are well-educated, and that the pension promises made are fit for the national economic demography carrying capacity over time. It might also and for example, study the efficiency of the taxation and social welfare system as the reality of a falling working-age population share sets in.
The former Governor of the Bank of Japan, Masaaki Shirakawa, recently acknowledged that failure to understand the impact of demography on the economy helped contribute to a downward economic and demographic spiral over recent decades. Japan is one of the world’s most aged societies, and its workforce population share has been falling since the mid-1990s. Failure to recognise the scale of the related consequences, Shirakawa wrote, that the mistaken economic conclusions about the cause of pervasive deflation, led to an inappropriate policy response. He urged other countries not to repeat Japan’s mistakes.7 A message from the Japan 2019 G20 is that a country cannot start preparing early enough to accommodate the challenging, co-integrated reality of economic and demographic change.8
Some 85% of global GDP is derived in countries that are now home to rapidly ageing populations. For Sri Lanka, a middle-income country, an ageing population is already the status quo. But, it may not be all bad news for ageing as a developing country – ageing rich economies confront a unique set of ageing-related problems of their own.9 To avoid the risk of an ageing population stagnating the development process, developing countries will need to make dexterous and difficult policy choices as early as possible in their economic demography transition, especially if deep pockets of poverty among the elderly are to be avoided.
In sum, the sooner countries devise a productivity-weighted long-term economic demography strategy, the better. Understanding the economic demographic transition—a process that appears to have been integral to China’s development since the 1980s, is the first step in that process.10 Understanding how to take advantage of the economic demographic transition of other countries will also be useful.
1Johnston, L. (2019). A timely economic demography lesson from China for the G20. [online] Institute for global dialogue and the University of South Africa. Available at: http://www.igd.org.za/jdownloads/Occasional%20Papers/A%20Timely%20Economic%20Demography%20Lesson%20from%20China%20for%20the%20G20.pdf [Accessed 21 August 2019].
2World Bank. (2019). World Development Indicators. [online] Available at: https://databank.worldbank.org/source/world-development-indicators [Accessed 21August 2019].
3Johnston, L. (2019). The Economic demography transition: Is China’s ‘Not rich, First old’ circumstance a barrier to growth? [online] Available at: https://onlinelibrary.wiley.com/doi/abs/10.1111/1467-8462.12325 [Accessed 21 August 2019].
5Yuan, C., Li, C. & Johnston, A., L. (2018). The intergenerational education spillovers of pension reform in China. Journal of Population Economics. 31(3). pp. 671-701.
6Borensztein, E. (1990). Debt overhang, credit rationing and investment. [online] Journal of development economics. 32(2):315-335. Available at: https://www.sciencedirect.com/science/article/pii/0304387890900419 [Accessed 21 August 2019].
7Shirakawa, M. (2019). Emerging Asia should learn from Japan’s demographic experience. Nikkei Asia Review. [online] Available at: https://asia.nikkei.com/Opinion/Emerging-Asia-should-learn-from-Japan-s-demographic-experience [Accessed 21 August 2019].
8Supra, note 1
9Johnston, L. (2019). Is ageing China facing Japanese style ‘lost decade?. Mercator Institute for China studies. [online] Available at: https://www.merics.org/en/blog/ageing-china-facing-japanese-style-lost-decade [Accessed 21 August 2019].
10Supra, note 3
*Dr. Lauren A. Johnston is Research Associate, China Institute, School of Oriental and African Studies (SOAS), University of London, and Research Fellow, Faculty of Social Sciences, Mohammed V University, Rabat. This blog is based on a newly published article, titled The Economic Demography Transition: Is China’s ‘Not Rich, First Old’ Circumstance a Barrier to Growth?, in the Australian Economic Review journal. The opinions expressed in this article are the author’s own and not the institutional views of LKI, nor do they necessarily reflect the position of any other institution or individual with which the author is affiliated.