Demographic change and long‐term growth in China: Past developments and the future challenge of aging

• Published date: 01 August 2018
• DOI: http://doi.org/10.1111/rode.12405
• Author: Min Zhao,Pei‐Ju Liao,Minchung Hsu
• Date: 01 August 2018

SPECIAL ISSUE ARTICLE

Demographic change and long-term growth in

China: Past developments and the future challenge

of aging

Minchung Hsu

1

|

Pei-Ju Liao

2

|

Min Zhao

3

1

National Graduate Institute for Policy

Studies, Tokyo, Japan

2

Department of Economics, National

Taiwan University, Taipei, Taiwan

3

World Bank Beijing Office, Beijing,

China

Correspondence

Minchung Hsu, National Graduate

Institute for Policy Studies, Tokyo, Japan

Email: minchunghsu@gmail.com

Funding information

GRIPS Policy Research Center; Nomura

Foundation; JSPS KAKENHI; National

Science Council, Grant/Award Number:

20467062; 16KK0052; 17H02537; NSC

100-2410-H-001-026-MY2

Abstract

This paper explores the influence of demographic changes,

particularly the sharp decline in fertility and the evolution of

the population age structure, on economic development in

China. A general equilibrium overlapping generations model

with endogenous decisions on fertility, educational invest-

ment, and factor accumulation is employed for our analysis.

The family support provided by children to the elderly, which

is a component of traditional culture in Chinese society, is

also considered. We find that technological changes matter

most for growth. Demographic changes, on average, account

for approximately 4% of the growth in China, while the effect

is negative in the pre-1980 period. With an extension to

include population aging, we find that aging is not necessarily

adverse to growth. This finding reflects the fact that a longer

life expectancy requires more savings and makes educational

investment in children more attractive, which accelerates

physical capital and human capital accumulation. However, if

the social norm of family support for aging parents is strict,

aging will significantly increase the children’s burden and

crowd out physical and human capital accumulation.

1

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INTRODUCTION

China has experienced rapid economic growth in the past three decades, particularly following its

market-oriented economic reform. Figure 1 shows the per capita GDP of China during the period

from 1952 to 2014. China experienced stagnation in the 1950s and 1960s and significant growth

since the early 1980s.

DOI: 10.1111/rode.12405

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©2018 John Wiley & Sons Ltd wileyonlinelibrary.com/journal/rode Rev Dev Econ. 2018;22:928–952.

China’s high economic growth has been associated with a sharp decline in fertility. As Figure 2

shows, the total fertility rate (TFR, number of children per woman) in the 1950s and 1960s was

above 6 (disregarding the drought period from 1959 to 1965). The TFR rapidly declined to fewer

than 3 children at the implementation of the one-child policy and remained between 1 and 2 after

1990.

The decline in fertility reduces the dependency ratio in China. Figure 3 shows that the total

dependency ratio in China has sharply declined since the 1980s. Labor quality also greatly

improved during the same period, as shown in Figure 4. The literature on the demographic transi-

tion and economic growth has documented the quantity–quality trade-off mechanism for children

and discussed the benefit of lower fertility in the early stage of development.

1

The aforemen-

tioned figures also suggest a similar pattern in China. Therefore, in addition to productivity

growth and factor accumulation, it is natural to ask how important demographic change is for

China’s growth.

2

This paper takes a structural approach. We first develop a structural model that is consistent

with certain main economic/demographic features and the pattern of the quantity–quality trade-off

of children in China to quantify the importance of the demographic transition in China’s develop-

ment. Although the total dependency ratio has largely declined since 1970, China will soon have

to confront population aging due to the low fertility rate and extended longevity. Figure 5 plots

the projected old-age dependency ratio up to 2100 in China. The old-age dependency ratio will

increase by a factor of 5, from approximately 10% in 2010 to 50% in 2100. The impacts of aging

on the economy are at least threefold. First, the proportion of the working-age population will

decline, which reduces the labor supply. Second, increased savings are required for a longer retire-

ment life. Third, the extended longevity may affect the incentives for education investment. There-

fore, this paper also investigates the potential impact of rapid aging on China’s future

development.

A general equilibrium overlapping generations model with endogenous decisions on fertility,

education investment, and factor accumulation is employed for a structural analysis.

3

Given the

Chinese culture and social norms, adult children are expected to support their retired parents. To

1960 1970 1980 1990 2000 2010

0

2000

4000

6000

8000

10000

12000

GDP per capita

FIGURE 1 GDP per capita in China [Color figure can be viewed at wileyonlinelibrary.com]

Source: Penn World Table version 9.0. The series of real GDP at constant national prices (2011 US dollars) and

population are used to compute the per capita GDP.

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