A Marriage of Development and Demography

Tectonic demographic shifts are happening to the foundations of the world economy.

Consider that about 85% of world GDP is generated in countries that face an unprecedented reversal of the population ageing pyramid. As it happens, this rapid process of population ageing is affecting developed and developing countries alike.

Among developing countries, China’s leaders were early to focus on ageing-related challenges. Their country’s long-run joint approach to demographic change and development offers a useful case study for today’s poor and young countries.

China: First old, not (yet) rich

In 1979, leaders of — then poor and demographically youthful — China initiated an economic modernization agenda commonly known as “reform and opening.” The aim was for those reforms to facilitate economic development and poverty alleviation. At that time in China, poverty was endemic and hunger a major concern.

The parallel implementation of a complementary population policy, which would become known as the One Child Policy, was considered a step in the direction of supporting that modernization and poverty alleviation journey.

Chinese leaders foresaw, however, that a low total fertility rate and falling mortality rates, including via rising life expectancy, would also mean that China’s population structure would age more rapidly.

Figures 1 and 2 below tell the story of a transformed population pyramid. China’s median age in 1980 was 21.9 years and had risen to 37.0 years by 2015.

Worse, there was basically no feasible rate of economic development that would mean China realise high per capita income living standards for its people – before the population itself was “old.” China, that is, would be old, and not yet rich.

Worse, China’s policy makers worried that facing such aging-related challenges as a “poor” country would weigh upon China’s prospects of ever becoming a “rich” country.

What is the Economic Demography Transition?

Implicit in China being “poor-old and old” are three parallel economic demography categories: “Poor-old and young,” “rich and old” and “rich and young.”

Put together, these form the economic demography matrix (EDM). The EDM is a simple and useful framework for categorizing countries and regions via their economic and demographic profile.

By extrapolation, it also forms the basis for study of the interaction of demographic and economic transition within and across countries over time, or study of the economic demography transition.

Whether, for example, a country first moves from “young” to “old” or “poor” to “rich,” may be essential to understanding how demography and the economy are interacting. Japan, which got rich before it got old, and China, which is old but not (yet) per capita income rich, make for an interesting comparison on that point.

As the world’s largest economies almost all move rapidly out of their respective demographic dividends window, understanding the particular national dynamics of economic demography over time is increasingly essential to shaping effective fiscal and monetary policies, as well as for determining needed microeconomic reforms.

Similarly, at the other extreme, today’s poor and young countries, most of which are concentrated in South Asia and sub-Saharan Africa, can also learn from China’s very explicit utilization of its demographic dividend for development.

Hence, they can shape a long-run economic demography transition strategy, a development strategy that takes demographic change as integral.

All countries, whether rich-old, rich-young, poor-old or poor-young, would best consider how to adjust fiscal and monetary policies over time accordingly — before time and opportunity are lost and change becomes even harder to make.

An economic demography transition strategy needed

Rapid population ageing across most of the world’s major economies is the new normal. This may serve to stagnate global growth.

Whether ageing populations effectively also “age” their economies or whether economic and social structures are able to be sustainably and continuously adjust to this new structural reality will determine how late-stage demographic transition affects the future of the global economy.

And hence, whether poor-old countries (e.g., Brazil, China, Russia and Turkey), rich-old countries (most OECD economies) or poor-young countries hoping to embark on a sustained process of development — it seems timely that every country’s policymakers might best learn from China by advancing an economic demography strategy. Understanding the economic demography transition (a process that appears to have been implicit to China’s long-run development since the 1980s) — is the first step in that process.

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