Demographic transitions: implications for growth

Abstract

China will need to maintain an annual GDP growth rate of 7.2 per cent to meet official ambitions to raise the general prosperity of Chinese society, with GDP in 2020 predicted to be four times the level in 2000. Achievement of this goal would mean that China had sustained a high rate of annual economic growth for more than 40 years. This would not be unique. Economies in Asia, such as Korea, Malaysia, Singapore, Thailand and Hong Kong all sustained economic growth of more than 7 per cent per annum between 1960 and 2000 (Table 4.1). Growth patterns in the Japanese economy over the past 40 years, however, offer an alternative model. Between the early 1950s and mid 1970s, the Japanese economy grew quickly and overtook many industrial economies. High rates of economic growth in the 1980s were the product of an unsustainable 'bubble economy'; growth has stagnated since the bubble burst in the 1990s. The annual growth rate in Japan was 5.3 per cent between 1960 and 1990 but only 1.5 per cent during the 1990s. What factors stimulate sustainable economic growth and what are the reasons for low growth rates? The literature is extensive. Growth economists consider a range of factors to explain economic growth, such as the domestic and international economic and political environment, improving education and public health standards, the implementation of family-planning and labour market policies, and policy support for greater international trade and savings (Barro 1997; Bloom et al. 2002). Demographic factors, especially the population and age structures, affect economic development. The reduction of high fertility rates creates opportunities for economic growth when accompanied by education, health and labour-market policies (Bloom et al. 2002). Sustained, rapid economic growth in East Asia demonstrates that 35 Demographic transition developing economies can move swiftly to bridge the income gap with industrial economies. Recent studies indicate these successes can be attributed to a considerable extent to the demographic transition that occurred in East Asian economies (Bloom and Williamson 1997; Williamson 1997). Demographic transitions in East Asian economies began in the 1940s and 1950s. Prior to 1970, economic growth potential was limited, income per capita was low and accompanied by a high child-dependence ratio. The average per capita GDP growth rate was estimated at only two per cent. As a result of the demographic transition, the proportion of the working population to the total population increased, while the population dependence ratios declined (Table 4.1). These population trends favoured the labour supply and savings rate and provided an additional source of economic growth—the demographic dividend. According to Williamson (1997), between 1970 and 1995, East Asian economies grew at average annual rate of 6.1 per cent, 4.1 percentage points above the steady state growth rate. Demographic transition contributed 1.5 to 2.0 percentage points to the steady state growth rate, accounting for one-quarter to one-third of the actual growth rate and one-third to one-half of the steady state growth rate during the period. As the demographic transition progresses, the aging of the population reduces the productiveness of the population and reduces the demographic dividend. Japan completed the demographic transition first in East Asia and now has the most rapidly aging population among developed economies. Some researchers (Hewitt 2003) attribute the sustained stagnation of the Japanese economy to its rapidly Table 4.1 Growth rates and dependence ratios in East Asia