Fertility rates in OECD countries have halved since 1960, according to a new OECD report.
Leren Lu | Stone | Getty Images
China’s population is shrinking, and demographic change will eventually hurt its economy, shrinking its workforce and putting pressure on fiscal policy.
“The working age population [in China] will fall so fast over the next decade that the Chinese economy will need to cope with GDP growth of 1% per year for the next 10 years,” said Darren Tay, head of Asia country risk at BMI Country Risk & Industry Analysis . Squawk Box Asia” in June, citing estimates gathered from the assessment world population data released by the United Nations.
“The fiscal strain as a result of aging is immediate and alarming,” the The Economist Intelligence Unit warned.
“Economic growth depends on productivity, capital accumulation and labor inflows. The negative impact of an unfavorable demographic landscape will manifest itself mainly through a shrinking labor force,” according to the report published in January.
Raising the retirement age is “one of the few viable options” to maintain long-term fiscal balance, the EIU said.
“Our calculations suggest that if the retirement age were to rise to 65 by 2035, the pension budget deficit could be reduced by 20% and the net pension could increase by 30%, suggesting a reduction in both the government burden and household”, I REPORT.
Birth rates are falling around the world as women choose to have children later or not at all.
Fertility rates have halved in OECD countries – some of the world’s richest nations – from about 3.3 children per woman in 1960 to about 1.5 children per woman in 2022, according to OECD or Organization for Economic Cooperation and Development.
“This is significantly below the ‘replacement level’ of 2.1 children per woman needed to keep the population stable in the absence of immigration,” according to the June report.
China’s population is shrinking
China’s population fell for a second straight year in 2023 to 1.409 billion people — down 2.08 million from the previous year, data from National Bureau of Statistics of China.
This is more than population decline of around 850,000 in 2022; — The first year of deaths outnumbered births in the country since the early 1960s during the Great Famine.
“This is a consequence of the one-child policy [set] in place [in] in the 1980s,” Erica Tay, director of macroeconomic research at Maybank, told CNBC.
China’s population is expected to shrink to 1.317 billion by 2050 and reduced by almost half — to 732 million — by 2100.
The country’s fertility rate is falling faster than its peers such as South Korea and Japan, Tianchen Xu, senior economist at The Economist Intelligence Unit (EIU), told CNBC.
He said the three countries were disproportionately affected by a rapidly aging population, largely because of improved living standards, which have a “very strong inverse relationship with fertility rates”.
China, in particular, “has been growing at a very high rate for nearly three decades.” and its economic expansion was “rapid and extensive,” he added.
The country’s welfare system is also “lagging behind” and fiscal support for childbearing is “quite low compared to the international market,” according to Xu.
Rising house prices aren’t helping.
“The government has been largely unable to manage the significant rising housing costs,” according to Xu, who pointed out that as housing becomes more expensive, people may struggle to buy homes and delay starting a family.
Decline in births
The rapid economic expansion seen in recent decades in developed countries has resulted in rising income levels and expanding educational and career opportunities for women.
These improved conditions have led to a higher opportunity cost of having children, Xu said.
“In more developed societies, the trend is that parents face much higher costs of raising children and this tends to be a deterrent [them],” said BMI’s Tay.
“The more developed an economy, the more skills the economy’s agents must have, and therefore the required investment in each [child] increases by that amount,” he said.
The work culture in Asia can also play a role.
“Among Asian countries, there is an entrenched mentality of working long hours,” Xu said, which is “particularly an issue in China, South Korea… [and] other parts of East and Southeast Asia’.
“These countries are where total working hours are the longest in the world,” and as a result, workers have less time to raise a family, Xu told CNBC.
Shrinking the workforce
A declining fertility rate puts pressure on the economy and society at large as the working population shrinks.
“A country’s birth rates will translate into working-age population growth about two decades down the line,” Maybank’s Tay said.
In addition, falling fertility rates can affect the proportion of elderly people who need support from younger generations, which can put “excessive burdens on a country’s healthcare and pension systems,” Maybank’s Tay told CNBC.
Ultimately, the burden on the younger generations will increase as they have to care not only for their own children, but also for their aging parents.
This demographic change in parts of Asia is a structural issue that will require a “resolute and holistic government effort,” in both fiscal and monetary policy, he said.
China’s policy changes
In China, policymakers are putting a lot of emphasis on “increasing productivity,” Xu told CNBC.
“They have [seen] that there is a very large reduction in the contribution of labor to GDP, [which] it can’t be mitigated through any kind of policy intervention in the short term,” he said. “That’s why they’re focusing on increasing their productivity.”
The country has invested heavily in shifting to digital solutions and developing technologies such as automation and advanced chips, Xu said, with the aim of making traditional industries more efficient and overall improving productivity.
Looking ahead, Chinese policymakers are encouraged to do more for the working environment. “This probably involves stricter enforcement of labor laws and promotion of work-life balance,” Xu said.
Economists also agree that Chinese policymakers should also work to raise the country’s retirement age, create more aggressive tax credits for child-rearing costs and step up efforts to build affordable housing. of housing in the country.
Despite the slowdown in growth expected in China due to its demographic issue, the country’s GDP has grown by an average of 9% per year since 1978, according to The World Bank.
Ultimately, “the fact remains that growth even around 3% would not, by any stretch of the imagination, be a disaster for the Chinese economy,” BMI’s Tay told CNBC.
“If they continued to grow at this rate, which would probably be more sustainable, the average Chinese citizen would be in real terms, 13 percent better off by 2033,” he added. “So living standards will continue to rise.”
