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Yao Yang:What is the solution to China’s age problem?

China is becoming an ageing society. But, unlike other ageing societies such as Japan and Germany, it is getting old when its income is still relatively low. In terms of the share of old people in the population, China today looks like Japan at the end of 1980s, but in terms of per-capita gross domestic product, it has just reached the level of Japan in the early 1970s. Japan started more than 20 years of stagnation in the early 1990s, and many people fear that China will follow its footsteps in the next 10 to 20 years.           

China’s demographic structure was almost the same as India’s until late 1970s when China started to enforce a stringent family planning policy. Since then its demographic transition has been very abrupt. The proportion of people over 60 years old is now more than 12 per cent of the population and those of working-age, between 16 and 65 years old, has begun to decline by 2.5m a year. Furthermore, labour movement from the countryside to the city, which used to be a major source of growth in China, is drying up. According to the official numbers, agriculture still employs 30 per cent of China’s total labour force. But most economists, such as Cai Fang, one of the most prominent economists on labour issues, believe that the real number is much smaller. The average farm is tiny — only about one hectare — so most farmers have to take additional jobs outside the farming sector to sustain a decent living.

The official data on urbanisation are also problematic. These figures only count people living in government-designated cities as urban dwellers. So, while many villages in coastal provinces have become industrial towns, their inhabitants are still counted as rural dwellers. In recent years, employment growth in coastal provinces has been stagnant. The number of migrant workers has even declined in 2015. Although rural-to-urban labour movement will continue in inland provinces, thanks to the government’s policy aim to move 100m people into the city, it is unlikely to be a major driver for China’s overall growth.               

The first is to postpone retirement. The current retirement ages were set in the early 1950s. They allow blue-collar female workers to retire at 50, and blue-collar male workers at 55. This means that most women can enjoy a pension for 30 years, probably longer than they have worked for. The sixth National Census (these happen every ten years) conducted in 2010 shows that women’s labour-force participation rate dropped by 20 percentage points at 50. A sensible policy is gradually to raise the retirement ages until they uniformly reach 60.       

The second thing China can do is continue to raise the educational level of its young people. Currently, less than 40 per cent of young people go to college. While an average young adult in the city can almost always finish high school (having had 12 years of education), his rural counterpart — including migrant workers in the city — barely finishes middle school (nine years of education). The return on education is quite high; one more year of formal education can raise a person’s wage by 10 per cent. On average, people in their 20s have had 4.3 more years of education than people in their 50s.        

The third thing is to strengthen research and development. Both Japan and South Korea became world technology leaders after they reached China’s per-capita income of today. This, of course, does not guarantee that China can do the same, but the signs are that it is on the right track. Thanks to its miraculous growth, China has accumulated a huge amount of wealth. As a result, it can afford to increase its R&D spending -and fast. Last year, R&D spending reached 2.1 per cent of GDP; by 2020, it will certainly reach 2.5 per cent, higher than in many advanced countries.           

The reforms initiated by Premier Li Keqiang have created a vibrant financial sector that channels money to support innovation; private equity and venture capital companies are flourishing. As a result, private R&D spending is now higher than that by the government.             

So, while ageing is taking a toll on China’s growth, it will be balanced in the next 10-15 years by improvements in education and technological capacity as well as policy adjustment on retirement ages. China’s real demographic challenge will only come between 2025 and 2030, when there will be little room left for improvement in education, R&D spending will be likely to plateau, and the baby boomers of the 1960s will have all left the labour force — even if retirement ages are pushed back.        

To better prepare for that period, it is probably time for China to give up its family planning policy. The one-child policy was introduced in 1979: the birth rate in the country was 25m in 1987, 20m in 1997 – and 16m last year.             

The writer is director of the China Center for Economic Research at Peking University        

Source:Finacial Times