The impact of demographic transition and aging on economic growth : a comparative study of Japan and China

Abstract

China is growing old before it is growing affluent. This situation is not unique to China; at least three other countries are in the same situation. While some of these had family planning campaigns, none had a one-child policy which implies that one-child policy is not the direct cause of this predicament. While China’s working-age share of the population has peaked, any shortages of low-skill labor currently observed in China are primarily caused by the hukou system and its barriers to labor mobility. A reform of the hukou system would secure ample supplies of migrant labor even in the face of mildly declining working-age share of the population. The absence of reforms could mean the arrival of a policy-induced Lewis Turning Point, prompting a premature and potentially counterproductive reorientation of industry. China does not yet possess an advantage in capital and technology intensive production and thus risks falling into the middle-income trap if the reorientation of industry takes place too early. If the Lewis Point can be postponed and the current rate of capital stock growth can be maintained for another decade or two, China might be able to avoid the middle-income trap. Both China’s and Japan’s current pension systems are unsustainable and their PAYGO nature is detrimental to long-run economic growth, especially so for aging societies. It is possible for China to make the system sustainable in the long if reforms are implemented while the transition costs are manageable. Although China is aging, the pace will be relatively slow until 2030. It will still take many years before the country is as old as Japan is a present. A low debt-to-GDP ratio also offers China more flexibility than Japan currently enjoys.