Cai Fang on Promoting Growth With an Ageing and Declining Population

"Failure to share the cake properly at this point will probably widen [China’s] income gap and dampen economic growth from the demand side"

Dear Everyone,

China’s population is ageing, declining and, according to a recent estimate from the UN, may just have been surpassed by India’s. Beijing recently reacted to this shift by stating pointedly that “population dividends don’t only depend on quantity but also on quality”. Chinese experts addressing this issue tend to remain relatively non-alarmist in their assessments too. Ipsos Public Affairs CEO Darrell Bricker’s observation that, “Population change isn’t necessarily a good thing or a bad thing. But it is a big thing.” seems to be their adopted mantra.

Today’s post focuses on a speech made by one of China’s top economists, Cai Fang (蔡昉), at an event organised by China Finance 40 Forum and the Sun Yefang Foundation on 30 March, coinciding with the launch of Cai’s new book, “The Age of Negative Population Growth: Challenges and Opportunities for China's Economic Growth” (人口负增长时代：中国经济增长的挑战与机遇). Below is a summary of his policy recommendations, some of which will be familiar to those of you who are already acquainted with Cai’s views.

THE SPEAKER

Name: Cai Fang (蔡昉)
Year of birth: 1956 (age: 66)
Current roles: Chief Expert, National High-End Think Tank(s), Chinese Academy of Social Sciences (CASS); a member of the People’s Bank of China’s monetary policy committee; and an advisor to a number of towns and provinces in China, among other things.
Formerly: Vice-president of CASS from 2014 until 2021 (when he reached the age limit of 65); Head of CASS’s Institute of Population and Labour Economics (1998-2014); Member of the Standing Committee of the 11th-13th National People's Congress (2008-2023). For a more exhaustive list, see here.
Research focus: Labour economics, population economics, income redistribution and poverty.
Education: BA Renmin University of China (1982); MA University of Chinese Academy of Social Sciences (1985); PhD University of Chinese Academy of Social Sciences (1989)

The facts

• China’s population peaked at around 1.41 billion in 2021 and has since begun to shrink.

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• According to recent estimates from the UN, India is either already the world’s most populous country or is poised to become so in the next couple of months.

• Furthermore, China is ageing rapidly. Those aged 65 and over already account for around 15% of its population (compared with 17% in the US and 19% in the UK). By 2050, this figure could rise to 30%.

• With a GDP per capita roughly the same as the world’s average (US$13,000), this means that China is getting old before it gets rich.

Consequences

• China’s working-age population began shrinking in 2012. This has led to labour shortages and slower improvement in the country’s human capital as well as slower productivity and ROI growth.

• The rise of China’s old-age dependency ratio

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  coupled with a deficient social-security system risks constraining consumption, Cai says.

• Reforms are needed to address these issues and to reduce their impact on China’s economic growth.

Policy recommendations

• Immigration as a potential solution to some of these problems is, as so often in these debates, dismissed out of hand and not discussed further.

  • Cai: “It is true that China has no way of increasing its labour supply or solving its problems through immigration as the US does.” (中国的确无法增加劳动力供给了，也无法像美国那样通过移民解决问题。)

• Raising China’s retirement age (currently 60 for men and 50-55 for women) is taken as a given for Cai and is mentioned just once and then only to say that other measures will also be needed.

  • Cai in a different article: “There is no time to lose in extending [China’s] legal age for retirement. This needs to be introduced and implemented as soon as possible.”

• Increasing household consumption:

  • Private consumption in China is still too low (approx. 40% of GDP) when compared with other countries (60% or more in most OECD economies).

  • There is therefore still a lot of room for improvement. This would help drive economic growth.

• Reforming China’s household registration system:

  • Cai points out that 23% of China’s labour force is still in agriculture compared with around 3% in developed countries.

  • Beijing should therefore encourage the transfer of this workforce to other sectors by continuing to reform China’s household registration system (or hukou system).

  • Cai: “The reform of the household registration system is a reform that can kill three birds with one stone, releasing both supply-side and demand-side dividends.”

  • On the demand side, too many migrant workers continue to live in towns without an urban hukou, depriving them of access to many public services. Granting them local hukous would relieve them from this burden and thus boost consumption.

• Improving China’s human capital:

  • Beijing must extend the number of years of compulsory education “by three years in each direction” (向前向后分别延长三年). This would imply making education compulsory both from age 15 to 18 and also from 3 to 6, thereby extending China’s compulsory education from nine years to fifteen.

• Reducing income inequality:

  • Cai: “In the past, we relied on making the cake bigger in order to share it well. On the whole, although the cake was not shared entirely fairly and some groups got a bigger share, everyone was nevertheless able to get a piece of it as it was made bigger and bigger. In future, [however,] the pace of making a bigger cake will slow down. Failure to share the cake properly at this point will probably widen [our] income gap and dampen economic growth from the demand side, which in turn will make it even more difficult [for us] to make a bigger cake.”

  • Using the Palma ratio, which measures inequality by dividing the income share of the top 10% of the population by the income share of the bottom 40%, Cai shows that although overall income inequality in China has declined somewhat since 2010, the urban income gap has widened. This does not bode well for a country that is still urbanising, he says.

    • Beijing must therefore double down on wealth redistribution and continue to reduce the urban-rural gap. This should help stimulate consumption and China’s economic growth.

    • Cai: “Redistribution is not simply a matter of robbing the rich to help the poor [抽肥补瘦、劫富济贫], but is achieved through providing equal access to basic government public services.”

• Building a welfare state: boosting fertility and social mobility

  • Cai refers to Sweden as a cradle-to-grave welfare state which was able to address a stagnating and ageing population successfully.

  • He argues that a human development index of 0.8 or more (China’s HDI was already at 0.768 in 2021) combined with high gender equality should help boost a country’s fertility rate.

  • Cai: “By building a welfare state with basic and adequate public services for all, there is hope that the decline in [our] fertility rate [1.18 in 2022] can be reversed.”

  • Building a welfare state is also key to encouraging social mobility, which in its turn is good for the economy.

  • Cai: “Ultimately, it is through redistribution and the government's provision of better basic public services that people will have a chance to climb the social ladder.”

• Technology

  • Beijing should not rely too much on technological breakthroughs to make up for China’s labour shortages.

  • It should also not assume that new technologies and artificial intelligence will necessarily increase productivity. The opposite could even happen (i.e. the so-called Solow paradox).

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1. China’s working-age population peaked in 2011.

2. i.e. the ratio of the number of elderly people at an age when they are generally economically inactive, compared with the number of people of working age.