Population Change and its Impacts on Potential GDP Growth Rate: Comparison between China and Japan

Transcription

1 Populaion Change and is Impacs on Poenial GDP Growh Rae: Comparison beween China and Japan Lu Yang Absracs: Demographic change could influence a counry s poenial growh rae by direc and indirec channel. The argumen ha demographic dividend diminished will reduce he poenial growh rae has been esimaed in a grea many lieraure. China s demographic has changing fundamenally based on he daa of he 6 h Naional Census. I shows he same demographic changing paern as Japan s in 990s. We esimae he poenial GDP growh rae for China and Japan separaely. The findings are as follows: firsly, like Japan s siuaion in 20 years ago, China s poenial growh rae will slow down in he very near fuure because of he changing demographic. Even relaxing he exising populaion feriliy policy, China could no reverse he downward rend in he poenial growh rae. China is sill a middle income counry when demographic dividend has disappeared in 200. However, Japan has been a high income counry in he ransiion poin in 990. This is he firs big difference beween China in 200 and Japan in 990. The second big difference is human capial in China in 200 are lower han ha of Japan in 990. Tha means China has a risk so-called middle income rap. We should learn he lessons of Japan in he early 990s, ha is, Japan sill insised on using economic simulus plans aemping o mainain economic growh when he demographic dividend has disappearance. Ulimaely a so-called "los decade" follows Japan s economy afer he economic bubble burs. Keywords:Demographic Dividend, Poenial Growh Rae, Populaion Dependence Raio, Working Age Populaion JEL codes: O47, J2, C53 I Inroducion As is well documened in he economics lieraure (e.g. Bloom and Williamson, 998; Williamson, 998), he demographic dividend is no derived from populaion size or he growh rae of he populaion, bu from a specific feaure of he populaion age srucure. Simply pu, an increase in he proporion of he working age populaion in he oal populaion and a decline in he dependence raio provide a counry an Lu Yang, Associae Professor, Insiue of Populaion and Labor Economics, Chinese Academy of Social Sciences, Beijing, China. luyang2002@cass.org.cn. 43

2 opporuniy o siuae hemselves so ha a high savings rae, heavy invesmen and rapid economic growh can be obained; he counry hus benefis from he demographic dividend. There are many evidences of demographic dividend providing by he real economies of he world, e.g. Japan s in 990s. Fas growh of economics were driven by heir demographic dividend, however, hese counries did experience a "roller coaser" ype of economic growh afer he demographic dividend has disappeared. The unprecedened economic growh in China over he pas 30 years can be aribued largely o he demographic dividend. Mouns of lieraures has refer ha demographic dividend played he mos par of aribuion o he fas growh rae of economic in China. However, he populaion age srucure is ever-changing. In fac, he process of demographic ransiion has aken place in China much more rapidly han anyone could have expeced, and he number of people from ages 5 o 59 years has already decreased and he depend raio has increased in 20, and ages 5-64 years has already decreased in 203 base on he 6 h Naional Census daa. In fac, he fas changing paern of demographic srucure of China during he year 200 o 205 is similar wih Japan s siuaion in he 990s. However, Japan has experience a so-called los decades afer he demographic dividend. Japan s governmen ignored he demographic facor in he decreasing economic growh rae and sill insised on using economic simulus plans aemping o mainain economic growh rae above he poenial rae when he demographic dividend has disappeared. We should learn he lessons of Japan in he early 990s, ha is, economic simulaion plan only aribue he economic bubble when he demographic dividend has ended. I s meaningful of our work o make a separae esimae on he poenial growh rae in China and Japan. We ry o find he common and differen feaure beween China and Japan, and make a comparison beween China in and Japan in The poenial GDP growh rae is deermined by supply-side facors, including labor, capial, human capial, and oal facor produciviy (TFP). In a growh accouning equaion, holding consan he labor force paricipaion rae and he naural unemploymen rae (i.e. he non-acceleraed inflaion rae of unemploymen (NAIRU)), a changing demographic srucure will hrough he direcly and indirecly channel o reduce he poenial GDP growh rae. The Direcly Effecs can be said as: he reduced supply of labor can deduce he decrease of employmen and poenial GDP growh rae when keeping oher facor consan. The Indirecly Effecs can be described as: firsly, he same as he naural rae of unemploymen, he labor force 44

3 paricipaion rae is a funcion of age. Tha means he labor force paricipaion rae and naure rae of unemploymen will no show a liner curve as changing as he demographic srucure. The changed labor fore paricipaion rae and he naure rae of unemploymen can deduce he decrease of employmen and poenial GDP growh rae when keeping oher facor consan. Secondly, he capial sock is deermined by he rae of capial formaion of GDP, and he capial formaion rae is also a funcion of age. The increase in he dependence raio causes a decline in he savings rae and capial formaion rae, which do no suppor he fas growh of capial formaion. Therefore, holding he oher facors consan, a reversal of he growh rend of he working age populaion and populaion dependence raio in China will ineviably slow is economic growh. China implemened he one-child policy in 980. Aspec of he fas growh of he working age populaion, a decline in he dependence raio (he raio of he dependen populaion o he working age populaion) helps China o mainain a high savings rae and capial formaion rae, which is he condiion for capial formaion; and an unlimied supply of labor prevens reurn on capial from diminishing, which allows heavy invesmen o be he main source of GDP growh (Cai and Zhao, 202). However, China s demographic srucure changing dramaically afer 200, and his rend will no be reversed even if here is a moderae relaxaion of he one-child policy. This paper gives an esimaion of China s poenial GDP growh rae from he year 980 o 2030 and Japan s from he year 960 o 200 by he growh accouning equaion wih human capial. We ry o make aribuions on five direcions comparing o previous lieraure. Firsly, we add human capial in our esimaion. Secondly, he poenial growh rae is more sensiive o he demographic srucure because he labor fore paricipaion and naural rae of unemploymen is a funcion of age. Thirdly, we ry o give a comparison beween Japan and China and comparing he year 990 in Japan and he year 200 in China. Fourhly, he capial formaion rae is considered as a funcion of demographic dependency raio in our model. Fifhly, we use a unique daa se provided by Guo (203) who make a quie accurae populaion forecas by using he 6 h naional census daa. The amoun of populaion by sex and age is forecased base on differen hypohesis of TFR (The oal feriliy rae), e.g. TFR=.6 (low scenario); TFR=.77 (middle scenario); TFR=.94 (high scenario); TFR=.4 (baseline: he TFR is coninued keep.4 unil he year 2035 and han increase o.94). We forecas he poenial growh rae of China during 20 o 2050 by using he differen populaion scenario. 45

4 Based on he laes populaion daa, he presen paper simulaes a decline in he average poenial GDP growh rae from 9.8 percen over he period from 995 o 2009 o 7.75 percen during he 2h Five-year Plan period (20 205) and 6.70 percen over he 3h Five-year Plan period ( ), and he poenial growh rae of China may coninue decrease o 3.4 percen in he year There also shown a decline in he average poenial GDP growh rae in Japan from 4.5 percen in 990 o less han. percen in 995. In ligh of he properies of he poenial growh rae and he experiences of China and he res of he world, we make he following wo suggesions which have been menioned in Cai and Lu (203). Firs, he governmen should no seek an acual growh rae exceeding he poenial growh rae. Because he poenial growh rae is fixed by assuming full employmen of exising facors of producion, arificial simulus aimed a lifing he acual economic growh rae above he poenial rae would have unhealhy consequences. For example, frequenly implemened simulus plans could cause inflaion; overacive indusrial policies migh resul in overcapaciy by inappropriaely proecing inefficien enerprises and backward producion capaciy; and regional and indusrial policies using heavy subsidies could lead o disorion of prices of producion facors, and affec regional indusrial srucure by impacing comparaive advanage. Second, he poenial growh rae can be enhanced hrough he applicaion of measures o enlarge he supply of labor and capial, and o improve produciviy. This requires deepening reforms in various areas, such as he household regisraion sysem reform and insiuional reform. Tha is, economic reform is he key o susaining China s economic growh. Kharas (20) poins ou ha i would ake 0 years or more for China o see any obvious effecs of such reforms, which implies ha he Chinese Governmen should wase no ime in iniiaing urgen reforms, while being ready o accep lower growh raes. However, here exis reform opporuniies ha could enhance China s poenial growh rae fairly swifly, which we discuss in he presen paper. Ⅱ Mehod. Cobb-Douglass producion funcion wih human capial We use a sandard Cobb-Douglass producion funcion o projec poenial GDP growh rae. In his paper, we also add human capial in our model. This mehod was applied boh by Kuijs and Wang (2006) and Kuijs (2009) bu wihou he human capial. 46

5 α α Y AK (hl) () = Where Y is real GDP, A is oal facor produciviy (TFP), L is employmen, and K sands for capial sock (in consan price), h sands for human capial. We deduce he labor produciviy by dividing hl on boh sides of he equaion (). α Y / hl = A( K / hl) (2) In equaion (2), labor produciviy Y / hl (represened by y) is a funcion of he TFP and capial-labor raio Y / hl (represened by k). Tha is y = Ak α. Wih some manipulaion, labor produciviy growh rae can hen be rewrien and esimaed form model (3): y / y ˆ α + ε (3) = A / A + k / k Esimaing equaion (3) and we can ge he esimaed value of reurn o capial αˆ and reurn o labor ( ˆ α) by using y / y as he dependan variable and k as he independen variable. / k From ime series of y / y, αˆ, k / k, he growh rae of oal facor produciviy A ˆ / A + ε = y / y α k / k could be esimaed by using equaion (3). And hen, A / A can be calculaed by applying Hodrick Presco filer mehod o diminish error ermε. 2. from he growh accouning equaion o he poenial growh rae All seps above are idenical wih he mehod which calculaing he growh rae of oal facor produciviy. We need use poenial employmen L o calculae he * poenial GDP growh rae. Where = populaion Tr NAIRU ), L 5+, 5+, ( 5+, populaion 5+, is he populaion aged 5 years above, Tr 5+, is he rends of labor paricipaion rae which can be esimaed by he Hodrick Presco filer mehod, and NAIRU 5+, is naural rae of unemploymen. 47

6 Adding h L in our model and k k and * * / y y can be obained. The * * / poenial labor produciviy growh rae y y could be calculaed as follows: * * / * * * * ˆ / y = A / A + k / k y α (4) Where k = K, * * / h L y = Y * * * / h L, and * Y is jus he poenial GDP in year. Building on y y and * * / h L, we could deduce an equaion as follows: * * * * * * Y / Y = ( y / y + ) ( h L / h L ) (5) Y Y is he poenial GDP growh rae in year. From equaion (4) and (5), * * / here are four facors would influence he poenial GDP growh rae. Tha is, poenial growh rae of capial-labor raio wih human capial, poenial growh rae of employmen, poenial growh rae of human capial and poenial TFP growh rae. We noe ha firs hree facors are all affeced by he changing demographic. However, TFP growh rae is more relaed o he insiuional facors, e.g. migraion, Hukou sysem, echnical progress, ec. If he demographic conribuion on a counry s economic growh can be called as "demographic dividend", hen he conribuion of TFP o economic growh can be called an "insiuional dividend". In his presen paper, we keep he insiuional dividend as consan variable and han he forecasing poenial growh rae can be esimaed in China. Ⅲ Daa and esimae he missing daa. Y and K The daa of GDP and capial sock are all pick up from Penn Table (PWT 8.0). We use he index of 2005 consan price US dollars for GDP and capial sock. However, China's capial sock during he period is unknown for us. I s necessary o esimae he missing daa. We know he capial sock is almos always consruced by he perpeual invenory mehod. The well-known equaion is as follows: K I p δ K (6) = / + ( ) where K is he measure of he real capial sock a ime, of he real capial sock a ime -, I is he normal invesmen in ime, K is he measure p is he 48

7 price index of invesmen in fixed asses in ime, and δ (=5%) is he rae of depreciaion. We noe ha K is a weighed sum of all pas levels of invesmen and depreciaed value of he iniial real capial sock. Capial formaion of GDP is available in WDI daabase, and he capial formaion is a funcion of populaion dependence raio. The relaionship beween capial formaion and populaion dependence raio is as follows: C = D, which is esimaed by he hisory daa during he period of China. Where C sands for he raio of curren capial sock o one lag of GDP, and D sands for one lag of populaion dependence raio. I s no difficul o esimae he capial formaion and capial sock during he ime period based on Guo(203) s populaion forecas. 2. Populaion aged 5 years above, economically acive populaion and employmen The hisorical populaion s daa is separaely come from China Saisical Yearbook and Saisical Yearbook of Japan. China s missing daa in he period is esimaed by Guo(203). 3. Labor force paricipaion rae and he missing daa for China The labor force paricipaion rae is calculaed separaely based on China Saisical Yearbook and Saisical Yearbook of Japan. China s missing daa in he period is esimaed by an alernaive mehod. Tha is, he labor force paricipaion rae is a funcion of age and sex. We obain he labor force paricipaion rae by sex and age of year 200 based on he 6 h naional census daa in 200. The labor fore paricipaion rae can be obained by adding he changing demographic of China in The equaion for economically acive populaion is as follows: i, n = 95 n= 6 ACT = populaion Par (i =, 2; 6 n 95) n, i, n, i, i 2 * = = * ACT ACT i, (7) i= Where n sands for age (6 n 95), i sands for sex (i = male, 2 female), populaion n, i, is he amoun of populaion by sex and age in year, Par n, i, is he 49

8 labor fore paricipaion rae by sex and age in year. ACT, sands for he oal i amoun of economically acive populaion by sex in year. 4. Naure rae of unemploymen and he esimaion mehod The naure rae of unemploymen can no be found direcly on he saisic year book or oher kind of daabase. The common mehod o esimae he naure rae of unemploymen is usually called riangle model which is an empirical relaionship beween inflaion and unemploymen. We use he same mehod and daa in Du and Lu (20). The naural rae of unemploymen in Japan and China can be obained. 5. The poenial employmen We know ha he naural rae of unemploymen is a funcion of age. Tha means he poenial employmen can be obained by he following equaion: n = 95 i, = ACTn, i, ( NAIRU n, i, ) n= 6 L (i =, 2; 6 n 95) i 2 * = = * L L i, (8) = i Where n sands for age (6 n 95), i sands for sex (i = male, 2 female), ACT n, i, is he amoun of economically acive populaion by sex and age in year, NAIRU,, is he naure rae of unemploymen by sex and age in year. n i L, sands i for he oal amoun of poenial employmen by sex in year. * L sands for he poenial employmen in year. 6. Human capial The daa of human capial are cied from Penn Table (PTW 8.0). Penn Table used he index of hc as he variable of human capial. According o he same mehod he missing daa in China during he period can be esimaed. Ⅳ Esimaion of he Poenial Growh Rae in China. Growh accouning equaion and he esimaion resuls The Parameer of reurn o capial is equal o for China and 0.78 for Japan by using he OLS esimaion mehod in he differen ime period. The share of facor is sabile in he long-erm for a counry, however, i s has a huge difference beween 50

9 he counries (Gollin, 2002). Table Esimaion resuls based on growh accouning equaion Parameer esimaion C k/k R 2 China: (0.0)*** (0.48)*** Japan: (0.006) 0.78 (0.099)*** Noe: ( ) sands for sandard deviaion. 2. Poenial growh rae: China vs. Japan Based on he assumpions made above on he decline in he labor force and TFP growh, we can esimae he poenial growh rae of he Chinese economy for he period of 20 o 2030, and esimaing he poenial growh rae of he Japanese economy for he period of 960 o 200 and he poenial growh rae of he Chinese economy for he period 980 o 200 by busing he hisorical daa. Our finding ha he poenial growh rae of China will decline and he rend will coninue is no surprising, because many ohers have reached he same conclusion (e.g. Kuijs, 2009; World Bank, 202). However, our prediced poenial growh rae is much lower han ha esimaed by ohers (e.g. see Kuijs, 2009). Table 2 China vs. Japan : esimaion resuls base on growh accouning equaion Index (%) China: Acual growh rae Poenial growh rae Poenial employmen growh rae TFP growh rae K/hL* growh rae Index (%) Japan: Acual growh rae Poenial growh rae Poenial employmen growh rae TFP growh rae K/hL* growh rae Noe: he esimaion resuls are esimaed by he growh accouning equaion. 5

10 The poenial GDP growh rae we esimae is 7.75 percen for he 2h Five-year Plan period and 6.70 percen for he 3h Five-year Plan period, however China s poenial growh rae has reached o nearly percen from 200 o 200 (Table 2). Japan s poenial growh rae has slowed down from 4.43 percen o.97 percen during he demographic ransiion period from 990 o 995. We do no consider our conclusion as any exaggeraion, given ha we have no aken ino accoun he ineviable slowdown of mass labor migraion from agriculural o non-agriculural secors, which has been he main source of TFP growh (see Fig.7). Ⅴ China vs. Japan : Similariies and Differences. China vs. Japan : he Similariies () The oal populaion, populaion srucure and dependency raio: We found ha boh Japan and China, populaion srucure for China and Japan has undergone fundamenal changed afer 200 and 990, bu he oal size of he populaion coninued o increase afer ha ime poin, and changing exhibis similar characerisics: Japan's oal populaion decreased afer he year 2007, and China s oal populaion will began o decline afer 2023 (see Figure ). Tha illusraes he demographic dividend has nohing o do wih he oal populaion size (Million) China: (Million) China's Toal Populaion Japan: Japan's Toal Populaion Fig. Toal Populaion Trends:China vs. Japan

11 200 (Uni: million) China Years old Years old Years old (A) China_5-64: (Uni:00 housand) Japan Years old Years old Years old (B) Japan_5-64: Fig.2 Demographic change 5-64:China vs. Japan

12 % Children Dependency Raio (0-4) Gross Dependency Raio Old Dependency Raio (65+) (A) China_5-64: % 60 Gross Dependency Raio Children Dependency Raio (0-4) Old Dependency Raio (65+) (B) Japan_5-64: Fig.3 Toal Dependency Raio 5-64:China vs. Japan (2) Labor force paricipaion rae and economically acive populaion: Japan's 54

13 oal labor force paricipaion rae showed a downward rend afer 990. The rends of China's labor force paricipaion rae will decrease afer 200 which is very similar wih Japan s (see Fig.4). Alhough China's populaion srucure has been changed in 200, he economically acive populaion will no reach a peak unil 206. This is very similar o Japan, alhough Japan's demographic ransiion occurs from he period 990 o 995 he economically acive populaion reached is peak in 998 (see Fig.5). (3) Poenial employmen: Poenial employmen is a key facor in deermining poenial economic growh. We find he poenial employmen will show a down rend in China in 206. Japan s poenial employmen has shown he down rend afer 998 (see Fig.6) % 80 China's Labor Force Paricipaion Rae Japan's Labor Force Paricipaion Rae Fig.4 Labor Force Paricipaion Rae:China vs. Japan

14 (Million) (Million) China: China's 80 Economically Acive Populaion Japan: Japan's Economically Acive Populaion Fig.5 Economically Acive Populaion:China vs. Japan (Million) (Million) 800 China: China's Poenial Employmen Japan: Japan's Poenial Employmen Fig.6 Poenial employmen:china vs. Japan

15 (4) Poenial economic growh rae: Japan has hree characerisics when he demographic dividend weekend from 990 o 995. Tha is, reducing he absolue number of working-age populaion, he populaion dependency raio rises and capial formaion rae has dropped. Afer ha, he poenial growh rae declined rapidly afer 990. China has he same characerisics during he period of The China s poenial growh rae has shown a sharp decline afer 200 because of he demographic dividend disappeared (see Fig.7). % Japan's Poenial GDP Growh Rae (%) China: 200 Japan: China's Poenial GDP Growh Rae (%) Fig.7 Poenial economic growh rae:china vs. Japan China vs. Japan : he Differences China's per capia income is $ 8,579 (2005 consan US dollar) in 200, which is far lower han Japan in 990. Japan s per capia income level is abou $ 27,039. I can be said ha alhough a similar rend of economic growh beween China and Japan, due o he large amoun of populaion, China is sill in he middle-income level. However, Japan is a high income counry in he 990s when he demographic has changed. In fac, he ulimae goal of economic growh is no he economic growh bu he income level. We find ha Japan s per capia GDP is $ 3,437 in 200 (in 2005 consan US dollar), while China's per capia GDP will be $ 27,073 in The gap beween he wo counries will decrease. 57

16 Ⅵ. Conclusion and Policy Implicaions As a resul of he changes in he populaion age srucure, he working age populaion (aged 5 o 64 years) sopped growing in 203. Chinese economy is enering a phase of ransiion from dual economy developmen o neoclassical growh. The ransiion is very similar wih Japan s in 990s. According o he neoclassical heory of growh, i is unlikely ha developed economies can realize growh raes comparable o heir developing counerpars, sill in he process of caching up. Accordingly, fas growh will evenually slow down as an economy moves o a cerain urning poin, as experiences worldwide sugges (Eichengreen e al., 20). China s poenial growh rae will slow down in he very near fuure because of he changing demographic. Japan has shown a similar demographic ransiion in he pas 20 years. We also find ha even relaxing he exising populaion feriliy policy, China could no reverse he downward rend in he poenial growh rae (see Fig.8). China is sill a middle income counry when demographic dividend has disappeared in 200. However, Japan has been a high income counry in he ransiion poin in 990. This is he firs big difference beween China in 200 and Japan in 990. The second big difference is human capial in China in 200 are lower han ha of Japan in 990 (see Fig.9). % Base Line TFR=.94 TFR=.77 TFR= Fig.8 China s poenial growh rae under differen oal feriliy rae:

17 Japan's Human Capial China's Human Capial Fig.9 The human capial: China vs. Japan However, here is no need o fear he slowdown of he poenial growh rae. The new sage of developmen requires China o accomplish a fundamenal ransformaion of is economic growh paern from sole reliance on inpus of capial and labor o greaer improvemens in TFP. Therefore, he key o susaining economic growh hrough expanding he poenial growh rae lies in supply-side facors. If he governmen policies wrongly focus on simulaing demand-side facors o reach a growh rae exceeding he poenial capaciy of producion, long-erm economic growh will no be healhy and will cause disorions. Insead, sound policies should be implemened bearing he following in mind. Firs, he cenral and local governmens should accep slower economic growh. Policy decisions should be made by adjusing supply-side facors raher han demand-side facors. Even an undesirable fall in he growh rae caused by shocks from demand-side facors should no be a reason for policy-makers o inroduce expansionary macroeconomic policy measures. Insead, policy-makers need o deermine wheher growh raes have been reduced o below-poenial levels. If his is no he case, a siuaion where expor demand and invesmen demand are weak could be aken as a chance for he economy o accelerae is ransiion owards a consumpion-driven paern and o grow in a more balanced manner. 59

18 Second, economic reforms should modify he radiional growh paern. Reforms have been a major driving force of he unprecedened economic growh over he pas 30 years. A compeiive environmen is vial for enhancing he poenial growh rae in China over he nex decade or so. Reference: Du, Yang and Lu Yang, Zhongguo de Ziran Shiyelu Suiping jiqi Hanyi (The Naural Rae of Unemploymen in China and Is Implicaion), Shijie jingji (The Journal of world economy), 20, (4). Guo, Zhigang, nian Zhongguo Renkou Yuce (Projecion of Chinese populaion, ), Working paper, 203. Cai, Fang and Lu Yang, Populaion Change and Resuling Slowdown in Poenial GDP Growh in China. China & World Economy, 203, Vol. 2, Issue 2, pp.-4. Barro, Rober J. and Lee, Jong-Wha., A New Daa Se of Educaional Aainmen in he World NBER Working Paper No. 5902, 200. Bloom, David E. and Williamson Jeffrey G., Demographic ransiions and economic miracles in emerging Asia. World Bank Economic Review, 998, Vol. 2, No. 3, pp Gollin, Douglas., Geing Income Shares Righ. Journal of Poliical Economy, 2002, Vol.0, No.2, pp Williamson, Jeffrey G.., Growh, disribuion, and demography: Some lessons from hisory. Exploraions in Economic Hisory, 998, vol. 35, No. 3, pp Weihers, T. M. and Sullivan, E. J., Demographic Effecs on he Naural Rae of Unemploymen or Baby Booms and Unemploymen. Economics Leers, 99, Vol. 37, pp Psacharopoulos, George., Reurns o invesmen in educaion: A global updae. World Developmen, 994, Vol.22, No.9, pp Caselli, Francesco., Accouning for cross-counry income differences. in Phillipe Aghion and Seven N. Durlauf (eds.) Handbook of Economic Growh, 2005, Volume A, Elsevier: Kuijs, Louis and Tao Wang., China s Paern of Growh, Moving o Susainabiliy and 60

19 Reducing Inequaliy. China and World Economy, 2006, Vol.4, No., pp.-4. Kuijs, Louis., China hrough 2020 A macroeconomic scenario. World Bank China Office Research Working Paper, 9, World Bank China Office, Beijing,