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 China’s demographic transition: implications for the economy, society and the environment Can China become green, fair to all its citizens and rich as it becomes old? Yes, but only if it succeeds in restructuring its economy away from resource and carbon intensive sectors, radically improves environmental regulation and enforcement, broadens and deepens its social budget and taxation system, and invests heavily in education and innovation while increasing the role of markets in allocating resources. ROGER BEALE AO Member CCICED 7 July 2015 [email protected] The paradox of falling birth rates, economic growth and environmental decline •
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Like climate change and water scarcity across large areas, demography is likely to pose important tests for China’s ambitions to create an “eco-­‐
civilisation”. There is broad recognition that demography can have significant implications for economic growth, social welfare and the environment. In the 1970s control over population growth was widely seen around the world as critical to maintaining environmental health. In the past 35 years China has seen a remarkable transformation following bold action to open the economy to global trade, encourage markets and control population growth through the one child policy. GDP and GDP per capita have grown strongly and millions have been lifted out of poverty. Estimates suggest that around one third of the East Asian economic “miracle” (measured in GDP) could have flowed from the “demographic dividend” as birth and dependency rates dropped and working age cohorts grew strongly. Around one sixth to one quarter of China’s per capita GDP growth (a crude proxy for individual welfare) between the 1980s and now might have been due to changes in its age structure. However GDP, which measures only the size of “monetised” economy and GDP per capita, that reflects the same measure on a per person basis, fail to reflect other key dimensions of national and personal welfare. These include environmental quality (within and beyond China’s borders), life expectancy and educational access and dimensions of equity within society. While some of these dimensions improved sharply – for example life expectancy, poverty and education – some have deteriorated, particularly environmental quality and some measures of equity (the growth of the super rich). Ironically the rapid fall in the birth rate from 1980 might have indirectly contributed to the equally rapid decline in China’s environmental quality. This is because of the impact of the shift of age structures to favour the working age cohorts and the reduction in the total dependency ratio (children and elders as a proportion of working age population) on overall economic growth. Growth in the economy and in urbanisation outstripped the rate at which energy consumption per unit of GDP and emissions of the principal pollutants per unit of GDP fell from 1980 to current times. The same was true of organic pollutants to water and leaching of chemical and mineral contaminants to soil – so absolute levels of the key pollutants contributing to poor air quality, global warming, water pollution and land degradation rose. •
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This was a policy choice to “grow rich first, clean up later”. It resulted in a lift in total pollution loads and a rapid deterioration in the environment as a deliberate choice was made to emphasise growth in energy intensive export industries and to prioritise saving over consuming. A corollary was the rapid urbanisation of the population and the development of mega-­‐cities. The over riding conclusion is that demography does affect the economy quite directly, but any impact on the environment has to be seen as more subtle and partly mediated through its impact on the economy and the regulatory environment in which that happens. Structural changes in the economy can easily overwhelming otherwise beneficial changes in population growth. However, population size does still matter – China is the world’s largest polluter for a number of key transborder air and water borne pollutants and its largest greenhouse emitter. And aging and population decline offer an opportunity to significantly reduce China’s global environmental footprint as well as improve health and ecological outcomes. Seizing this opportunity will critically depend on decisions about industry structure, the pattern of growth and specific action to limit and clean up pollution. The future challenge: demographic change, the economy, the environment and equity •
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The demographic dividend that helped China boost GDP and GDP per capita is fading rapidly. From 2027 the population is expected to fall if current birth rates are maintained. The old age dependency rate is expected to double between 2010 and 2035 and to grow further from there. While the relationship between demographic change and economic growth is not simple – intervening variables include capital availability, savings and education and skill levels of the work force (which facilitate or hinder inter-­‐sectoral labour mobility) – it is plausible that aging might reduce China’s growth potential by one to two percentage points each year. China is not alone in facing an aging population – China’s dominant trading partners, the EU, East Asia, North America and Oceania are also aging. This could have a compounding effect on the impact on growth. Aging is expected to increase demands on an already stretched health system. Improving the environment is critical to healthy aging. Air pollution is leading to significant reductions in healthy and active life spans and cutting life expectancy in some regions by up to 5.5 years. Less precisely measured the impacts on water and soil degradation on human health are also likely to be significant. Again a problem exacerbated as the community ages. China has already seen some of the results of global warming – heat waves, severe weather events and progressive drying of some large inland areas – and these problems are likely to intensify and interact with •
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aging. The aged and infirm are particularly susceptible to heatwaves and less able to self-­‐help in severe weather events. So clearly an aging population increases the importance of improving the environment as key public health program, but does aging itself have an impact on the environment? The relationship between age structure, population growth and the environment is more nuanced. The impact of further aging and a possible contracting population on the environment is uncertain. Aging is likely to influence both production and consumption patterns. As the past has demonstrated, how these changes flow through to the environment will depend heavily on the policy responses of government to economic and social challenges. In a nation with only a partially developed social welfare system and heavy reliance on family support the emergence of the 4:2:1 problem (four grandparents, two parents, one child) and frequent inter-­‐
generational separation of families between rural and urban areas, aging is likely to risk increased inequality. In a number of regions pension funds might not be sufficient to cover emerging entitlements without central support. There is a considerable risk that many elderly will ‘fall through the cracks’. How is the developed world responding to aging? •
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Common responses across the developed world to the challenges of aging and the slowing or decline of population include policies to: o lift the birth rate or increase migration o increase workforce participation by older people and women with children – frequently by delaying access to age pensions and improving childcare o boost productivity through competition, increased and better directed capital investment, up-­‐skilling the workforce, greater workforce flexibility and taxation reform o lift investment in developing and deploying new technologies – perhaps the key factor in lifting total productivity o protect the budget by cutting back on government expenditures – often this has included reducing or delaying access to welfare and health benefits, and/or increasing user charging and taxes These are difficult changes and not all have even been pursued in each country facing the challenges of aging. Very few countries have looked explicitly at the interaction between aging and the environment. Indeed in the immediate shadow of the Global Financial Crisis of 2008 and the subsequent European Euro Crisis environmental issues, including global warming, received less attention than they did in the lead up to the Copenhagen climate conference. In some countries like Australia there was a backing away from effective market based instruments already in place to tackle carbon pollution – although not an abandonment of targets – as a result of political pressures arising from increased household energy costs and industry restructure •
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(neither of these could in reality be solely or even principally attributed to the carbon price). Similarly far less attention has been paid in the latest Australian official Inter-­‐generational Report which projects the interaction between long term Australian demographic projections, the economy and the government sector to long run environmental conditions than in the past. There has been a dangerous sense in many of these countries that with tougher times in terms of GDP and GDP per capita growth (cyclical and longer term flowing from aging), the environment should receive a lesser priority. Evidence has mounted that community aging might well contribute to inter-­‐generational inequity. Partly this is because of the increasing dependency ratio that those now entering and in the workforce will have to support. But it is also partly due to generous support for retirement systems and savings in many advanced countries and the impact of quantitative monetary easing on asset prices including equities and housing which have boosted the wealth of older generations and increased the barriers to home ownership and entry to equity markets for the young. The reduction of the progressivity of personal tax systems and inheritance taxes have also contributed to rapidly increasing income and wealth inequality in many developed economies. In many countries for the first time in the past sixty years there has been not just a prolonged stall in real post tax and transfers incomes for the bottom 60% of households but an increasing risk that the next generation will be less well off than their parents. Although there is also increasing evidence that this deepening inequality is likely to lower economic growth as well as increasing social tension there has been little systematic or successful effort to address it among developed countries. China: Progress, Problems and Promise…. Progress •
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China is moving firmly toward a new Chinese vision. It has embarked on progress toward an ecological civilisation. This will require consistent and sustained coordination of changes to the way the economy is structured and regulated, the development of a more comprehensive social welfare and health system and the strengthening of environmental protection and repair. The Government has announced that the economy will be restructured to move away from an emphasis on highly polluting, energy and resource intensive export oriented industries and infrastructure to a greater emphasis on services and consumption. The pace of urbanisation, particularly for China’s biggest cities is being slowed. The intensification of the reform of the economy will involve a – Pivot toward an innovation economy and becoming a world leader in science and technology –
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greater role for pricing and the market in determining the allocation of resources, deepening of Free Trade arrangements with a number of countries, reduced role for state sector enterprises particularly at the provincial and local level with a greater role for the private sector, new emphasis on fair competition and a crack down on corruption. Reducing air pollution has been given a very high priority and China has committed to peaking greenhouse emissions before 2030 and reducing the energy intensity of its economy more rapidly (commitments to be more formally confirmed in the Paris Conference of the Parties of UN Framework Convention on Climate Change later in 2015). It has strengthened the role of MEP in the struggle against air pollution. It is too early to see much progress. Further it has already begun to strengthen systems to support elders’ welfare and prolong working lives – as of 2013 it has been reported that 60% of those aged 60 and over were receiving pension support and elders and underemployed rural workers were continuing to boost active workforce participation. China has lifted spending on tertiary education – with an aim of producing 195 million college graduates by 2020 -­‐ so that those entering the workforce do so with higher skills than those leaving. Problems •
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Combining economic restructuring, environmental repair and managing the aging of the population and shrinking of the workforce is as challenging as the great difficulties that China has already over come. There is risk that the community, and hence the leaderships’ commitment to structural change, funding broader government services and improving environmental quality might be reduced if real living standards for most people stall or decline. This has certainly happened in many advanced countries. As we have seen from the past any failure on industry restructuring and any failure to redirect growth away from energy and resource intensive sectors would likely overwhelm new environmental regulations and their administration – and conditions wouldn’t improve. Similarly attempts to clean up China’s air and water will fail unless there is vigorous action to match the introduction of more power for the market with more effective regulation and consistent environmental enforcement. Both these factors -­‐ changing China’s economic structure and improving the strength and quality of regulation and enforcement -­‐ are equally important to achieving China’s climate goals. China’s social spending on welfare and education is likely to have to increase as a proportion of GDP if elder welfare is to be maintained, savings rates reduced to allow a greater emphasis on consumption and a •
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smaller workforce rapidly lifted in its productivity so that China becomes an innovation economy. This is likely to require broader reform of the taxation and social welfare systems. Lastly, any increase in strategic anxieties in the region leading to wasteful expenditures on armaments, and in particular any interruption to peaceful trade and commerce could be disastrous to efforts to improve living standards, environmental conditions and social welfare, so it is vital that China, along with other nations, plays a positive role in ameliorating any emerging tensions. None of these changes is easy, and all are more difficult in an economy and region that will inevitably be growing more slowly than previously. High growth in real incomes and GDP provides its own social and diplomatic lubricant. Promise •
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China has shown it can achieve changes that no other country has equalled on such a scale in so short a time. It has lifted millions from poverty. But it has come at a price for its people and its environment – and for many others around the globe through cross-­‐border pollution, climate change and resource depletion. China has set itself the goal of becoming green and rich as it becomes old. China has the commitment, skill and courage to achieve that providing that it carefully coordinates its economic, environmental and social transformation and its strategic transition. Appendix: Demography in context China’s transition China has made a remarkably fast demographic and economic transition from a developing country with a high population growth rate to an economic powerhouse with Total Fertility Rates1 (TFR) of 1.7 (2013) and in particular Net Reproduction Rates2 (NRR) of 0.7 at significantly below replacement levels (2.1 for TFR and 1.0 for NRR). Some informal estimates put the TFR and NRR still lower, perhaps a TFR of as low as 1.5. (Wang Ling Birth Rate Blues China Dialogue 21-­‐12-­‐2011). If current fertility and immigration patterns are maintained China’s population growth will continue to slow and total population is likely to peak in 2027 and then begin to fall in absolute terms. (OECD: The Silver and White Economy: China’s Demographic Challenge ISSN 2079-4797 (PDF) OECD Local Economic and
Employment Development (LEED) Working Paper Series.)
The age structure of the population has will continue to change quite rapidly – in part because of the increased longevity of the aged. The old age dependency rate (the ratio of people over 65 to those in the prime working age groups 25-­‐64) will likely double between 2010 and2035 (The Economist: Demography, growth and inequality April 26 2014). The growth in the labour force will be lower than total population growth, and without changes in age and gender participation rates the total labour force is likely to decline earlier than total population. If as suggested by some critics the fall in the TFR has been underestimated these changes could be more rapid and population decline come earlier. It is clear that these demographic changes will impact the economy and social welfare – two elements of eco-­‐civilization – and possibly in a profound way. However it is less clear how, and to what extent, they will impact China’s environmental outcomes and the effect that China has on the global environment. It is pertinent that will likely be happening in parallel with the longer term consequences of global warming and increased pressure to reduce emissions. Does demography affect the environment? Population was seen by many in the environment movement, particularly in the 1970s and through to the early 1990s as a, if not the, critical determinant of long run environmental and ecological outcomes (see for example Paul Erlich The Population Bomb 1968 Buccaneer Books reprint 1995). Many environmentalists gave population control measures a high priority as a means of limiting adverse environmental outcomes. 1 TFR total live berths per woman over a lifetime 2 NRR live births of daughters per woman over a lifetime 3 NRR 2
ote ltive hese births data oaf re daughters dated but pcer hosen woman to io
llustrate ver a lifetime the movement by a number of In the past quarter century the discussion has become more nuanced. It has become clear that across countries, and for any one nation through time, there is enormous variation in the use of resources and the creation of waste and pollution that is not simply linked to population size. On almost any dimension of environmental impact there is such large variation in per capita impacts that it significantly moderates national outcomes (see for example Global Footprint Network: National Footprint Accounts; WWF Living Planet Report: 2012; PBL Netherlands Environmental Assessment Agency Trends in Global CO2 emissions: 2013). Countries with high per capita GDP and a high ranking on the Human Development Index generally also have a high per capita ecological footprint. It is also true that positive movements in per capita GDP, and in the Human Development Index have generally, but not always, been accompanied by an increase in a nation’s per capita ecological footprint (Fig 22 WWF 2003). Figure 1: Human Development Index and Ecological Footprints3 Not only is that true for cross country comparisons, but it also true within countries through time. China’s environmental outcomes have rapidly deteriorated, and its demands on global eco-­‐systems increased, over the same period its population growth has slowed. Ironically this increased ecological damage might in part have flowed from the economic growth facilitated by population control. 3 Note these data are dated but chosen to illustrate the movement by a number of major countries including China. Norway and Australia have topped the Human Development Index in recent years. Note considerable variation even among countries who score at a high level on the HDI n-rice bowl’, whereby
d a job in the state
ned enterprises), has
le other reforms have
wed rapid growth in a
lopments, as well as
resulted in a massive
of rural migrants –
ral but who typically
year for employment
ed the pool of labour
n and manufacturing
ped China’s economy
these developments,
to: the nature of
ole of rural migrant
mographic challenges
coming decades.
phic Facts
tistics from China’s
population reached
with the population
erage rate of 0.6 per
wn from 1.0 per cent
slowing in the rate
The working-age population (ages 15–64) increased
to 74½ per cent of China’s population in 2010 (from
around 70 per cent in 2000), reflecting a significant
reduction in the share of the population below the
age of 15 (Graph 1). As a result, the dependency
ratio (defined as the ratio of the population aged
0–14 or 65 and over to the working-age population)
has declined
to amvery
low
levelthe by w
international
Lower TFRs eant that orking age cohort, born in the “baby boom” standards.
United
Nations
(UN)
projections
China’s
decades before 1980, initially eofxperienced lower overall dependency rates as the population
suggest
that
the
working-age
population
number of dependent children fell (Anthony Rush China’s Labour Market Reserve will peak within the next five years and subsequently
Bank of Australia March 2010). will begin to shrink, while the dependency ratio is
expected to rise rapidly as the population ages.1
Figure 2 Graph 1
China – Demographic Trends
%
Population age structure
Dependency ratio*
Share of total
80
60
%
80
15–64
60
40
40
0–14
20
20
65+
0
1950
1975
2000
2025
2050
1975
2000
2025
* Population aged 0–14 or 65+ divided by the population aged 15–64
Sources: RBA; UN
0
2050
1 See Hall and Stone (2010) for a detailed discussion of population
trends in China.
Both the workforce and savings grew strongly and in the broader East Asian context it has been suggested that up to one third of the growth associated with the Asian “economic miracle” was due to these demographic effects. ( Bloom, BULLETIN | S E P T E M B E R Q UA R T E R 2011
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Canning and Fink Implications of Population Aging for Economic Growth NBER January 2011) Both per capita GDP and total GDP grew strongly from 1980 through to the current time, but because that GDP growth was energy and resource intensive and because institutions and controls were weak, pollution grew fast as well. This underlines the inadequacy of GDP and GDP per capita as measures of overall community welfare. Nevertheless population does matter. China now has roughly equal per capita greenhouse emissions to the EU but because of its overall population and the greenhouse intensity of its economy it has far outstripped the EU and now even passed the US to become the world’s largest emitter. “Although China's CO2 emissions per capita are comparable to those in the EU and almost half of the US emissions per capita, its CO2 emissions per USD in Gross Domestic Product (GDP) are almost double those in the EU and the United States and similar to those in the Russian Federation.” (PBL Netherlands Environmental Assessment Agency Trends in Global CO2 emissions: 2013) Similarly as well as total population, it is changes in age, gender and geographic distribution of population that will impact the environment. This reflects the different consumption and production patterns and resource demands of populations in different age and gender groups and in rural or urban settings. In particular, even where total consumption levels are maintained, consumption in older households is likely to be oriented to health expenditure rather than work related expenses (including transport), housing and consumer durables [Yang Du and Meiyan Wang Population Ageing, Domestic consumption and Future Economic Growth in China ANU EPress 2011]. In short population growth and decline is strongly mediated in its impact on environmental outcomes by its impact on the economy and social welfare. There are many public policy choices in relation to workforce participation, productivity and pollution intensity of the economy, which can influence environmental outcomes of any given pattern of population change. Often these public policy choices will be driven by economic goals with social and environmental consequences receiving a lower priority. Figure 3: Population changes have an indirect impact on the environment Population (birth and death rates) Age and gender structure Workforce (participation) ENVIRONMENTAL OUTCOMES Pollution intensity Productivity Demography and the economy. Estimating the impact of demographic change For long run projections economists often use what are known as “3Ps” models (sometimes also called growth accounting). These combine Population changes, with assumptions about age and gender specific workforce Participation rates and Productivity. Population changes combine both natural change (birth and death rates) and migration. Participation rates reflect the capacity (health, education, family responsibilities) and incentives (wages, taxes, costs of childcare, pension and welfare entitlements) to engage with economic production. Productivity is influenced by the amount of capital (plant and equipment) available to workers, the allocative efficiency of capital and labour markets (the ease of moving capital and workers to the areas with the highest returns), technological advances and the education and skills of workers. In this way, although changes in working age population are important, they are intermediated by capital availability and skill levels, which have a major impact on productivity. A rapid increase in working age population, which is not matched or exceeded by savings, could increase in an offsetting decline in productivity per worker and similarly high levels of inter-­‐
sectoral labour mobility might reduce productivity if skills in the receiving sectors are reduced thereby.4 These long run models can then be linked with models of government finances, CGE models, which allow regional, and industry sector impacts to be examined and household models, which project household behaviour and the impact on household income and consumption. Some CGE models can in turn be linked with environmental outputs. The Australian Treasury produces periodic assessments of inter-­‐generational issues – most recently The 2015 Intergenerational Report: Australia to 2055 The Treasury, Barton ACT, March 2015. This report, unlike its predecessor in 2010, deals only briefly with long run environmental considerations such as global warming and water availability across Australia’s agricultural zone, and focuses more on the economic and budgetary implications of a community that is aging and relying heavily on net migration for workforce growth. The EC (The Ageing Report 2012: Economic and budgetary projects for 27 EU member states) and a significant number of OECD countries also produce periodic assessments, but few cover any interactions with the environment, or consider the implications of global aging for trade and exports. The UN has produced a series of reports at a global level since 2002 with the most recent being World Population Ageing 2013 Aging is a global phenomenon China is not alone in contemplating the impact of an aging, and eventually possibly a declining, population. This results from a rapid decline in birth rates in most developed and advanced developing countries linked with greatly extended life expectancy for those who reach 65. Figure 4: Ageing is a global phenomenon among more developed countries 4 Jane Golley and Annie Wei China’s Rural Urban Age Structure, Sectoral Employment and Economic Growth Crawford School ANU Working Paper No. 13-­‐
12 December 2013 0
1950
1975
2000
2025
2050
Figure 1.9
Distribution of countries by the proportion of the population that is aged 60 years or over in the less and
more developed regions, 1970-2050
Percentage aged 60 years or over
Percentage aged 60 years or over
Japan, South orea and many European countries ave the
already experienced Within
theKless
developed
regions
(left panel
of figureh1.9),
cross-country
variation in
the
proportion
of
population
aged
60
years
or
over
was
relatively
small
in
1970.
At
ageing and the beginnings of population decline. Taiwan will run out of ithat
ts time,
most
countries
clustered
around
proportions
between
3
per
cent
and
10
per
cent.
In
2010,
the
“demographic dividend” within 20 years. variability increased to values up to 20 per cent, and the projection for 2050 points to an even
wider dispersion, with the proportion aged 60 years or over in the population ranging from 4 per
Others, like Australia, Canada and the US will share the experience of aging cent to 39 per cent. By contrast, developed countries have progressed in tandem, and the
within more slowly growing populations. The World Bank has “back projected” the demographic changes expected ahead 12
World Population
Ageing
2013
of us onto the experience of the last 40 years. It concludes: “On average, had the world already experienced the future demographic transition within the last 40 years, the average GDP growth rate would have fallen by about 1.2 percentage points annually”. (Harun Onder and Pierre Pestieau Is Aging bad for the
Economy? Maybe. World Bank Economic Premise May 2014).
China’s ageing is likely to be more rapid than for many others and the
proportional annual reduction in growth rates might similarly be higher.
Japan Among China’s developed neighbours Japan has moved further down the path of aging than any others. Its population peaked in 2004 and has since begun a slow absolute decline. While it would be wrong to attribute the Japanese economic malaise of the past two decades principally to demographic impacts, growth accounting would suggest that they have had an impact. Besides the direct effects on workforce size, the declining and aging of the population might have reduced savings and the capital stock. (among many others see Kato The Japanese Economy among Ageing and Declining Population and Fiscal Deficits Japan Foreign Policy Forum January 2012 for a brief summary). Figure 5: Japan Growth Accounting – Kato Estimates the consequences of snotable
low growth, ncreasing demands on government for InOne theof meantime,
most
is ithe
result
of estimates
on technological
prog
services and successive attempts to prime the economy has been a burgeoning of government debt. Japan’s public debt to GDP was 199.7% in fiscal 2010, by far to 0.4% during f
The
contribution
of technological
progress
decreased
greatly
the highest among the G7 economies. compared to the 1980s. This supports the view that sluggish technological pro
Korea 1990s
was part of the reason for slower economic growth (Hayashi and Presco
Korea has been one of the region’s fastest growing economies. Its standards of results
estimates
also
show
that
of Utechnological
living hof
ave the
converged rapidly towards those of Jthe
apan rate
and the S. However, while progress recov
much of this is due to capital deepening and moving to the technology frontier, accounts
for almost all economic growth rates. The contribution of capital sto
Korea also benefited from a demographic dividend as the working age group increased nd Tearly
FR fell 2000s.
to 1.2 children per woman. later,
The corollary, owever, is that figures
in athe
As described
if the hdomestic
saving rate decli
Korea is now facing perhaps the fastest ageing in the OECD group. (OECD Economic Survey Korea 2012). progress, it may also have an effect
and
the declining
birthrate
Figure Ageing among Oin
ECD members trend
is6likely
torates continue
the
future.2010 to 2050 on the accumu
Fiscal deficits and economic growth
It goes without saying that fiscal deficits and the policy response to them will
state and future trends of the Japanese economy. In fiscal 2009, the general g
Further improving the education system to boost productivity growth.
Promoting Korea’s convergence to the high-income countries by developing the service sector,
where productivity is only about half of that in manufacturing.
Figure 6. Population ageing in Korea is projected to be the fastest in the OECD area
Population aged 65 and over as a share of the population aged 20 to 64
Per cent
Per cent
90
80
90
2010
2050
Average in 2010
Average in 2050
80
70
70
60
60
50
50
40
40
30
30
20
20
10
10
0
JPN DEU GRC BEL AUT CHE EST HUN SVN NOR LUX AUS USA ISL
IRL CHL
ITA SWE PRT FIN FRA DNK ESP GBR NLD CZE CAN NZL POL SVK KOR MEX
0
Source: Statistics Korea, Population Projection for Korea (2011 version) and OECD Demography and Population
Database.
“Korea’s
working-age population is projected to peak in 2016, and then fall by more
Achieving low carbon, green growth
than a quarter by mid-century. With a falling labour force, the Korea Development
Despite a decline since 1997, Korea’s energy intensity is still the sixth highest in the OECD area
Institute
Korea’s potential
growth industries.
rate will drop
2%ofduring
(Figure 7), estimates
reflecting itsthat
concentration
in energy-intensive
One ofbelow
the goals
Korea’s the
Green
Growth
Strategy
is
to
“attain
energy
independence”,
which
implies
a
fundamental
transition
in Korea’s
2030s.” (OECD Economic Survey Korea 2012). economic structure, given that net imports accounted for 86% of total primary energy supply in 2009.
Such a shift would have great potential for creating new industries, but will also impose heavy transition
costs. Implementing the Strategy, including the 2020 greenhouse gas (GHG) emission reduction target
Australia (see below), therefore requires a policy framework that provides appropriate incentives to induce the
necessary restructuring in a cost-effective way.
Australia’s experience has been very different from Japan and Korea’s but it too The Five-Year Plan for Green Growth
is beginning to worry about the impacts of ageing on growth, per capita GDP and The Five-Year Plan (2009-13) contains about 600 projects and a total budget of 108.7 trillion won (10%
fiscal balances. Australia has enjoyed close to a quarter of a century of virtually of 2009 GDP). Public R&D accounts for 11% of the total, motivated by the need to overcome market
failures related to G
the
high
degree
of N
uncertainty
and long ptime
in green–innovation,
uninterrupted DP and Gross ational Income er chorizons
apita growth including which
hinder private-sector research. In 2009, private firms were involved in nearly two-thirds of the 4 732 R&D
through t
he A
sian f
inancial c
risis a
nd t
he G
lobal F
inancial C
risis o
f 2
008. It has projects in the Five-Year Plan, although their financial contributions amounted to only 8% of total
outlays.
involvement
by business
enterprises
advance
green
research
and make it a
one of tGreater
he lowest government debt to GDP isrneeded
atios atomong the OECD economies. driver of private-sector innovation.
Both of these outcomes have been in part enabled by Australia’s role as a The government is pursuing various approaches to supply funds and overcome financial constraints.
provider of minerals, energy, agriculture and services to the rapidly growing Bank loans to green industries amounted to 2% of their corporate lending during the first half of the
East Asian region. Five-Year
Plan,
with state-owned
banks accounting for three-quarters of the loans. Such lending was
encouraged by large credit guarantees provided by public institutions. Meanwhile, investment in green
industries through the venture capital market nearly doubled between 2009 and 2011, rising to around
However there is a concern that this golden period might be coming to an end if East sian growth slows and as ageing affects the dependency ratio. © OECDA
2012
8
Figure 7: Australia Disposable Income per Person and GDP per Person Annual Percentage Change centre of the debate.
uld lead to falls in
overnments in
great challenge
mands they face have
n GST revenues.
rity | Why we need to talk
GFC
4%
120%
100%
80%
2010-11
2008-09
2006-07
2004-05
Commonwealth: Base Case
2049-50
2045-46
2041-42
2037-38
2033-34
2029-30
2025-26
2021-22
2017-18
2001-02
GDP per person
2013-14
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is not a big-tax, big-government
Disposable
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with income per
-20%
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Source:countries
ABS Cat No.
5204.0
standards of living (Figure 6).1
2002-03
1998-99
1996-97
1994-95
Therefore, governments at all levels
40%
Asset-price bubble
will
-6% need to be very careful about
which expenditure programs they
20%
choose to support, and will also need
2000-01
60%
2009-10
-4%
Figure 5: Commonwealth public net debt with a GFC-type shock, including
public debt interest capitalised from 2016-17, % of GDP
2005-06
would
also bring forward Australian
2%
governments’ move into deep debt. In
particular, sensitivity analysis shows
0% vulnerable Australia could be to
how
this type of shock, and how debt can
then
-2% increase exponentially if no action
is taken to cut expenditure or boost
revenue (Figure 5).
1992-93
most comprehensive
hese issues. And if
way – by ensuring we
s that have the least
growth, reduce our
hat are damaging,
pensation
ost vulnerable –
n also help us drive
h and lift real
n.
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6%
1990-91
d to enable
boost revenues and
8%
1986-87
ly cutting waste
e enough to do
Figure 1: Disposable income per person and GDP per person, Australia,
annual % change
1988-89
r of a century, and
d strong budgets,
ght not be able to
the next global
d from the GFC.
minerals, rose and the prices of
our imports – such as televisions,
computers and cars – fell.
Commonwealth: GFC-type shock
Source: PwC analysis
Figure 8: Government Expenditures and Deficits Government expenditure (% of GDP)
Budget deficit (% of GDP)
Denmark
France
Finland
Belgium
Austria
Sweden
about tax Italy
Greece
Netherlands
Slovenia
United Kingdom
Hungary
Portugal
Germany
Israel
Spain
Iceland
New Zealand
Japan
Norway
Czech Republic
Poland
Ireland
Luxembourg
OECD
Canada
United States1
Estonia
Slovak Republic
Australia
Switzerland
Korea
Denmark
France
Finland
Belgium
Austria
Sweden
Italy
Greece
Netherlands
Slovenia
United Kingdom
Hungary
Portugal
Germany
Israel1
Spain
Iceland
New Zealand
Japan
Norway
Czech Republic
Poland
Ireland
Luxembourg
OECD
Canada
United States
Estonia
Slovak Republic
Australia
Switzerland
Korea
30
40
50
60
-10
-5
0
10
20
Source: OECD 2012. OECD Economic Outlook
Again growth accounting can provide some insights about the underlying causes of these concerns. The net contribution to growth from labour utilisation will diminish significantly and if this is allied with continuing sluggish productivity growth and a reduction or reversal in the contribution from the terms of trade (if commodity prices stabilise or fall) then there could be a stalling and possible 1. Some OECD countries levy a social security contribution from employers as an element of their tax system. Australia has
decline in per capita income for the first time since the global shocks of the funds
raised
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this
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atoncerns all times lie within
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1970s and 980s. are lso system,
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bout sustainability of the Protecting prosperity | Why we need to talk about tax
9
Figure 10: Contribution to growth in average incomes, by decade
Figure 9: Growth Accounting Australia 1970 -­‐2010 2%
debt reduction.
mulative
ach year –
rmal funding
49-50.
3
-2%2
2
-4%1
1
0
-6%
0
1970s
1980s
Commonwealth: Base case
Labour productivity
2045-46
2041-42
-1
1990s
2000s
Commonwealth: GFC-type shock
Labour utilisation
Foreign income flows
Source: PwC analysis
2037-38
2033-34
2029-30
2025-26
2021-22
2017-18
2013-14
2009-10
-1
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3
Terms of trade
GNI per person
41st Australian Conference of
Economists. 10 July 2012
Figure 1
0: I
mpact o
f A
ging a
nd l
ow P
roductivity o
n T
otal P
ublic Net Debt Figure 4: Total public net debt: Commonwealth and state/territory
With interest c
apitalised. governments, with public debt
interest capitalised
fromit2016-17,
Productivity
matters because
% of GDP
‘grows the cake’ per person, and
80%
Productivity
measures the volume of
production or output – that is, goods
and services – for a certain volume
of60%
input (generally hours worked).11
Productivity growth occurs when
the
volume of outputs increases for
40%
the same amount of work hours, and
generally this can be linked to:
assumptions regarding productivity
of economic growth. It does not
guarantee real wage rises, but it
creates the room for real wage rises
without cutting job growth.
During the 1990s, productivity growth
• 20%
development and use of new
technologies (innovation/research
and development, and capital
0%
investment)
Canada 2049-50
2045-46
2041-42
2037-38
2033-34
2029-30
2025-26
2021-22
2017-18
2013-14
2009-10
2005-06
per-person income growth and it is
widely recognised that this surge in
productivity was a result of economic
reforms introduced in the 1980s and
•
1990s.12 These reforms removed tariffs
-20%
resources (eg plant, equipment)
and subsidies, broke up monopolies,
which enable labour to produce
increased competition and also sought
more, for less effort
to improve work practices. They
State
- Interest
Commonwealth
- Interest
• workforce education and
skills
resulted in
direct productivity gains,
States - Principal
Commonwealth - Principal
such as better utilisation of labour and
• the effective organisation of the
capital, as these factors of production
Source:
PwC analysis
factors
of production (labour,
moved to sectors with higher returns
While t
hese a
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rojections a
nd n
ot f
orecasts t
hey a
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as land)
the fiscal consequences of an aging community and to lift productivity back to productivity
performance,
as measured
• relocation of production and
through
real
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the r
ates o
f i
mprovement A
ustralia s
aw i
n t
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nd 1
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increased
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exceeding
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the long-term average (Figure 11).
2001-02
as
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ocietal
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face a particular
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Figure 3: GFC type shock in 2016-17, primary balance,
fiscal position if there aGovernment,
re no significant changes in the community’s expectations Commonwealth
% of GDP
of government support for health, education and welfare and/or the structure 4%
and level of taxation. Percentage points, annual average
the GFC could
towards deeper
Figure 3).
Canada is ageing faster than most OECD countries. Figure 11: Change in the ratio of 65+ to the 16-­‐64 population OECD 2011-­‐
30 Note: OECD average based on 34 countries.
Sources: United Nations, 2010 Revision of the World Population Prospects; Statistics Canada.
While all advanced countries are expected to age over the coming decades, the Canadian population is
projected to age more rapidly than that of most other OECD countries, based on estimates of the United
Its TFR of 1.6 is a little lower than the OECD average and China’s which are both Nations.
at 1
.7. Over the next two decades, the ratio of elderly to working-age Canadians is projected to increase by 16
percentage points, close to 4 percentage points above the OECD average.
Five
OECD countries
Germany,
Netherlands
and
expected
As a other
consequence the (Slovenia,
share of Finland,
working age gthe
roup (15-­‐64) in South
the tKorea)
otal pare
opulation to
record
similar
or
larger
increases
in
their
elderly
to
working-age
ratio
over
the
same
period.
is projected to stabilize and then to fall. As a result, while Canada currently has a lower ratio of elderly to working-age population than most
other OECD countries, accelerated population aging in Canada is expected to push this ratio slightly
above the OECD average by 2030. This relatively rapid aging of the population means Canadians and their governments will have to deal
with the economic and public finance implications of population aging in a shorter period of time.
Raising fertility and immigration rates could help slow population aging but would
not prevent it
Share of the 65+ in total population
The Government has implemented and announced a number of important structural economic initiatives
to create an environment conducive to higher productivity and support the participation of Canadians in
the workforce, which should help offset some of the impacts of population aging.
Over time, population aging will dramatically reduce the share of the population
that
is 1
of2: working
Figure Working age
age group as a share of total population Share of the working aged (15 to 64) in total population
Source: Statistics Canada.
With the oldest members of the large baby boom generation now reaching retirement age, Canada is at
a demographic
tipping point.
While, like Australia, Canada and has had relatively strong immigration even a 2008
marked
a
record
high
share
populationto that
is of working
age.
doubling of net migration inwthe
ould not ofbthe
e sufficient prevent ageing. Similarly From
the
early
1920s
until
the
mid-1960s,
about
60
per
cent
of
Canadians
were
increasing the fertility rate (which could in any case be difficult) would ofnworking
ot have age. Over
pastethree
a the
major ffect. decades, the baby boomers have boosted this share to nearly 70 per cent.
Going forward, this share is expected to decline rapidly, returning close to its mid-1960s levels by 2030.
Figure 13: Raising Net Migration and Fertility – little impact share of 65+ in By
2030
the number of working-age Canadians for every senior will fall by
total population almost half
Ratio of working-age (15 to 64) population to population aged 65+
Sources: Statistics Canada; Department of Finance calculations.
Reasonable changes in the underlying determinants of population growth, such as immigration and
births, lcould
slow the
pace at C
which
thehpopulation
is s
expected
to age, butgrowth they would
Again ike Ahelp
ustralia, although anada as enjoyed trong economic for not
a prevent
[4]
developed c
ountry, i
t e
xpects n
evertheless t
o f
ace e
conomic a
nd f
iscal p
ressures it.
from ageing. even if the fertility rate were to rise to the replacement level of 2.1 or net immigration
For instance,
(immigrants plus returning emigrants minus emigrants) levels were doubled, the share of the elderly in
the total population would still increase sharply by 2050. By that time, the share of the elderly in the
total population would be reduced by a little more than 3 percentage points under the higher fertility
scenario, and by less than 2 percentage points under the higher net immigration scenario.
Furthermore, as illustrated below, raising the fertility rate to 2.1 or doubling net immigration levels
would both be challenging, given the low fertility rates in almost all OECD countries and given that
Unless there are significant increases in productivity and participation, ageing is expected to reduce both GDP growth (by one third from the long term average) and halve growth in per capita incomes (Department of Finance Canada Economic and Fiscal Implications of Canada’s Aging Population 2012) to 2050. In the absence of government action, the government debt burden would return to an upward trend within the next 10 years and reach close to 55 per cent of GDP by 2050–51. The Canadian government has acted to: • Provide increased incentives for workforce participation by older Canadians
• Increase the age at which Canadians can access the age pension
• Encourage greater productivity growth.
The European Union The EU has seen similar concerns – overlaid with the particular difficulties occasioned by the Euro crisis that has led to a sharp increase in government debt for some European economies. Similarly household saving is expected to decline with an increasing dependency ration. Overall GDP growth rates are expected to be impacted by 0.6% percentage points per annum through to 2020 and by 0.9% percentage points per annum from then until 2025 – this is a third to a half of European GDP growth rates in last quarter of the 20th century. (Moody’s EU Population Aging Fiscal Challenge October 2014). On the other hand public expenditure on long term care, pensions and health are expected to increase more rapidly than the rate of economic growth. In general terms this is expected to make the task of moving back to resilient fiscal positions more difficult for many EU economies. Social consequences An increase in the dependency ratio in the context of slower economic growth raises some obvious questions – who funds the living, health and long term care costs of the aged? In many developed countries with comprehensive state funded welfare systems it is projected to lead to budgetary stress. This is a problem faced by China, even though its welfare system is not deeply developed. While welfare support is not great, many people receive some level of pension. However, just as in Europe these pension systems are increasingly facing a problem of funding those who are becoming eligible. Pension funds in nearly half of the provinces in China are already reported to be running down capital and to have earnings so low that they will be unable to fund future growing eligibility (Zheng Bingwen, 2012). 5 5 Although Chinese officials assert that overall national balances are adequate to meet future liabilities (The Economist Paying for the Grey 5 April 2014). In countries with a greater reliance on private savings, within family care and intra-­‐family income transfers to support the aged, the stresses will fall on working age people, particularly women. This will be particularly complicated where there has been a high level of rural to urban, regional or international migration. Often this will leave rural areas with very high age structures and low incomes, exacerbating existing rural/urban income inequalities. It is suggested that aging has already, and will continue, to contribute to increasing income inequality in rural areas and between rural and urban areas (Hai Zhong The impact of population aging on income inequality in developing countries: Evidence from rural China China Economic Review Vol 22 Issue 1 March 2011). Where social welfare systems are regional rather than national in scope and where
home or institutional support for aged care is limited in rural areas these problems
will be deepened. As the OECD notes in relation to China: “… the conflict between
the massive flow of population and the current social welfare system based on the
household registration system has led to a series of social problems… the unfair
distribution of public service resources, and troubles with the social security system.
Most migrants have yet to enjoy equal rights in comparison with local residents in
terms of education, housing, and health care” (OECD The Silver and White Economy:
The Chinese Demographic Challenge in Fostering Resilient Economies OECD 2014).
This might limit the extent to which the elderly can relocate to be near their working
age children. Those elderly who are not supported by current programs or significant
assets will find it difficult to deal with poverty and negative shocks. (Yang Du and
Meiyan Wang Population Ageing, Domestic consumption and Future Economic
Growth in China ANU EPress 2011).
A consequence of family provision of aged care is likely to be constraints on further lifting female workforce participation – both limiting the participation responses that could reduce the impact on economic growth and perpetuating gender income disparities. A summary of global concerns In short the developed and advanced developing world is rapidly aging. This will have consequences for global and individual nation’s economic growth and engender social pressures. While there are country-­‐to-­‐country differences, which reflect policies and institutions, there are some broadly consistent themes associated with aging populations: • Lower absolute economic growth potential – as much as 1-­‐2 percentage points per annum • In some cases lower growth in, or possibly declining, per capita income • Lower savings as more households enter the period of dependency6 6 Income smoothing might lead to greater saving during working life times to support longer life expectancy and that linked with reductions in workforce growth this could lead to greater capital investment per worker. However, for •
•
•
•
•
Changes in the composition and possibly the level of household consumption to favour food and health expenditures rather than work related transport, housing and education. Pressures on public and family finances to support increased dependency ratios – through health expenditure, pensions and long term care of the infirm. Pressure to extend working lifetimes and to lift female workforce participation – however carer responsibilities usually assumed by women and the educational and skill levels of older people might well constrain the extent to which they are able to participate in the “new economy” Possible increase in income inequality, including inter-­‐generational, urban/rural and gender income inequality. Risks for older households who for one reason or another fall outside the social welfare network. Some of these changes could have a beneficial environmental impact in the short term – for example in the wake of the global financial crisis and the Euro crisis, EU greenhouse emissions fell – and the very long term. Similarly resource consumption might slow and less expenditure on work related transport should correlate with reduced pressures on urban air quality. However falling income expectations and competing demands on the budget from an aging community might diminish the public taste for environmental expenditure (including through regulatory requirements) and reduce the rate of replacement of inefficient, polluting capital plant and long-­‐lived consumer durables. The net effect on the environment and on the other dimensions of eco-­‐
civilisation will depend on how governments respond to these pressures by changing policy settings. It is therefore instructive to look at the sets of policy responses that have been implemented or proposed across societies facing the aging dilemma. Possible responses to the demographic transition: International experience The proposed, and in some cases implemented, responses to aging can be grouped under a number of headings: • Population -­‐ policies designed to boost NRR and/or immigration • Participation -­‐ policies aimed at lifting workforce participation, particularly by older people and women including through changes in age at which pensions and superannuation can be accessed. • Fiscal Sustainability -­‐ changes in tax and transfer payment levels and government expenditure to reduce deficits and government debt • Productivity – including tax mix changes, enhanced domestic and international competition, encouragement of labour market flexibility, reduction in regulatory constraints on the economy this to hold requires a range of assumptions which will not uniformly hold across the economies facing ageing. (Onder et al World Bank 2014) Population Fertility is delayed or suppressed when families, and mothers in particular, feel uncertainty about their economic future or when the opportunity cost of child bearing is high. Some analysts have linked reduced fertility across East Asian, European, Oceanic and North American economies with the impact of micro-­‐economic reform and technological change on the volatility of employment and the increasing need for education. (Peter McDonald Low Fertility and the State: the Efficacy of Policy in Population and Development Review Volume 32, Issue 3, September 2006, Pages: 485–510). However there are differences between Western European, Oceanic and North American economies (declining but slightly higher fertility) and some Central European and advanced Asian economies (declining and lower fertility). Explanatory factors could include differences in attitude to married women’s engagement in paid work and particularly the extent to which care for elders and children is regarded as a family responsibility (McDonald 2006). Negative societal attitudes to married women in the work force impact the opportunity cost of marriage and child bearing leading to both being delayed, particularly for women who have spent additional years in education. In societies where it is traditional for elder and child care to be a private family matter the overwhelming burden falls on women again reducing the incentive for fertility. Pro-­‐birth-­‐rate policies have been pursued in a number of European and English speaking OECD nations. Usually these take the form of either some direct financial support for families – baby “bonuses”, family benefit payments or tax concessions linked to the number of children – or through policies designed to allow mothers to access employment more easily such as childcare provision, subsidies or tax concessions. These are expensive and the resulting increase in fertility has been modest but perhaps of significance in the long run (McDonald 2006). These policies would be more expensive to apply, and might incur social resistance, in East Asian countries which do not traditionally have a well developed State based welfare and elder/child/family support system. For this reason some demographers believe that even more significant relaxation of the one child policy in China might have little effect on fertility, particularly in urban areas where it is already lower than rural areas and significantly negatively linked with workforce participation (Fang, Eggleston, Rizzo and Zeckerhauser Jobs and Kids: Female Employment and Fertility in China Harvard Kennedy School Faculty Research Working Paper Series 2012). Some countries have also lifted immigration, usually placing an emphasis on skills. This has long been a characteristic of Australia and the North American economies – each of which is a multicultural “melting pot” society with significant populations from around the world. Western Europe has more recently seen an influx of migration from Central and Eastern Europe, the Middle East and Africa. However, in many European countries this has resulted in considerable social tensions. While tentative steps have been taken to boost in-­‐migration in Japan and Korea these programs are very modest and have tended to focus on low skilled temporary immigrants. As China has developed it has seen some, but modest again, temporary immigration including from the Chinese diaspora in North America and Australia. Participation Efforts to boost participation have focussed on older people and women with children. The behavioural responses to aging are important. As healthy life expectancy has improved sharply beyond 65 part of the response could be for older workers to lift their workforce participation (lengthen their working lives). However, there are some constraints on these responses. First there are the incentives, or more likely disincentives, to work provided by formal and informal social systems – for example compulsory retirement laws, discrimination against the aged and aged pension eligibility ages that do not reflect increasing healthy lifespans. Second there are problems of structural unemployment and labour scarcity – for example if the aged are regionally concentrated in rural areas and occupations which are shedding labour and losing population. Third there is the relevance of the skills and educational levels of the elderly compared with the workforce more broadly and the growth areas of employment. “There are enormous differences between the labor force participation rates of older Americans depending on their level of schooling. People with limited education have low employment rates in old age. People with college and advanced degrees tend to remain in the workforce longer.” (Gary Burtless The Impact of Aging and Delayed Retirement on Workforce Productivity The Brookings Institute May 2013). In countries where educational standards have improved rapidly over recent decades, and where economies have moved from agriculture, to simple manufacturing and then on towards the high technology and services sectors the relatively lower skills of older workers might limit their workforce participation. This could be the case for China. Many, if not most, OECD member countries have taken tentative steps to increase the age at which retirement from the workforce takes place and to remove age discrimination in employment (for example compulsory age retirement schemes). Encouragement of flexible working practices such as part time work is also common. As noted earlier workers with higher educational levels are more likely to extend their working lifetimes. This probably reflects their attractiveness to employers, the greater opportunity cost of moving onto a retirement income and the lesser physical demands made by more sedentary occupations. China could particularly benefit from a lift in retirement ages that are low by world standards – 50 to 55 for women and 60 for men. It is understood that a progressive lift in these levels is under consideration in policy circles, but that it is deeply unpopular as it has been elsewhere (The Economist Paying for the Grey 5 April 2014). Similarly there is evidence that participation by women with children can be increased by policy choices:
“Some of the factors affecting female participation (like level of female education, overall labour market conditions or cultural attitudes) cannot rapidly be affected by policy reform. Others, however, can: • Flexible working-time arrangements: policies that remove distortions against
part-time work will boost female participation (although care has to be taken
not to allow this to create a segmented labour market).
• Taxation: in most OECD countries second earners in married couples
(typically women) are taxed more heavily than single individuals,
discouraging participation. Tax systems can also affect work-sharing decisions
among couples; usually working against greater balance.
• Support to families with young children, in particular in the form of parental
leaves (up to a duration of 20 weeks) and childcare subsidies are also
identified as raising female participation. Longer parental leaves and child
benefits, on the other hand, could depress it. • Other policies that impact positively on female participation are: avoiding
regulations that impede the growth of service sectors; immigration policies
(because they impact on the relative cost of child care); and welfare delivered
through make-work-pay schemes.” (F. Jaumotte (2004), Female Labour Force Participation: Past Trends and Main Determinants in OECD Countries, OECD Economics Department Working Papers, No. 376) China already has relatively high female labour force participation, particularly in the
Asian context. Over the period since 2000 the ratio of female to male earnings has
fallen, while female unemployment has increased relative to male unemployment.
While these movements might have suppressed some female workforce participation,
it is plausible that in a progressively liberalising economy China might not have as
much scope to increase female labour force participation as some of its Asian
neighbours – even though it might face less entrenched social conservatism in relation
to employment of married women.
Fiscal sustainability Fiscal sustainability of the government sector has become a significant issue through much of the OECD since the Global Financial Crisis. Japan, the US and most of the major EU countries have considerable levels of public debt. Lower future economic and government revenue growth and greater pressures on health, aged care and pension payments linked with the further aging of these communities is a concern across the OECD group (Korea, Norway, Australia and Canada are better placed than most others but still concerned). While the responses have varied widely they have generally involved a tightening of government spending and increases in tax, particularly some increases in consumption and income taxes. Besides slower or negative workforce growth government revenues have been hit by widespread (but generally legal) tax avoidance by major global corporations taking advantage of low tax shelters. This has been termed Base Erosion and Profit Shifting and is a high priority for the G20. Asian economies with the exception of Japan and India exited the Global Financial Crisis with a strong fiscal position. In the case of China, however, if the contingent liabilities of the state owned sector, particularly banks, are included the picture is less comforting. However there are likely to be progressively emerging stresses associated with population aging. “First, economic growth will tend to slow as countries reach higher income levels. Second, many Asian countries are aging fast, which will raise old-­‐age-­‐related spending dramatically, while tending to reduce economic dynamism. Third, financial repression is likely to diminish as financial markets develop, making debt management more challenging.” (Edes and Morgan Managing Fiscal Sustainability and Aging in Emerging Asia Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.10, No.2, July 2014). These factors are likely to cause China to consider the role of general taxation in its revenue – China raises less of its revenue from taxes than is typical and is more dependent on debt held by the Chinese banking sector. It will also focus attention on the management and efficiency of social welfare spending and in particular health spending . Healthy aging is important both to participation and to reducing the impact on health
expenditures. It is here that there is a clear link between pollution and health, and
hence mitigating the economic and social impacts of aging. Air pollution in particular
is having a “devastating impact on the health of Chinese elders reducing longevity
and shortening health expectancies” (Wen and Gu Air pollution shortens life
expectancy and health expectancy for older adults: the case of China Journal of
Gerontology Biological and Medical Science November 2012). While air pollution
health affects have been well estimated and documented it is likely that other forms of
water and soil pollution are similarly increasing the costs of aging and reducing
healthy aging. (OECD Environmental Outlook to 2050: The Consequences of
Inaction - ISBN 978-92-64-122161 © OECD 2012)
. Productivity Productivity is the last of the “3Ps” and it is amenable to a range of public policy initiatives. Which of these is most important will depend on the individual circumstances of countries. Policy responses taken or under discussion across the OECD include: • tax mix changes to move the burden of taxation from income generation – returns to labour and capital – toward rent (eg minerals rent taxes), consumption and land taxes. Consumption and land taxes cause fewer growth reducing changes in the real economy. Reductions in income tax can lift participation, encourage effort and reward investment in education. Reductions in profits taxes can encourage investment and •
•
•
capital deepening. (Denmark, New Zealand and Australia as well as a range of emerging European economies have either taken or are discussing changes of this nature with their citizens). enhanced domestic and international competition – the dropping or reduction of trade and investment barriers, the breaking up of monopolies, privatisation of a range of government enterprises and the introduction of effective competition law all can contribute significantly to economic growth and improve the allocation of resources, both labour and capital. encouragement of labour market flexibility – including more flexible working practices and hours, and the removal of unnecessary restraints on the movement of labour can improve labour productivity and increase participation. While regulation is necessary to deal with externalities and to protect public safety it can accrete into a very unwieldy constraint on corporate or individual economic activity. Similarly the suppression of price signals through regulatory intervention or the public subsidy of production or consumption of certain goods or services (for example energy costs, agricultural production) can distort the allocation of resources and reduce growth. Reduction in unnecessary or overlapping regulatory constraints and distorting subsidies can yield significant economic gains. (The United Kingdom and Australia provide contemporary examples). What issues need to be examined in ensuring responses contribute to an Eco-­‐civilisation for China? Eco-­‐civilisation is uniquely Chinese reconception of sustainable development. It has an emphasis on lifting living standards, on social harmony and opportunity and ecological harmony with repair of the environment. An aging community in which the workforce could shrink more rapidly than population as a whole will impact each of these. China will lose the boost to GDP and per capita income growth that flowed from the demographic dividend (augmented by high savings growth and sectoral – principally rural to urban -­‐ shifts). An increasing dependency ratio could reduce potential growth by 1 to 2 percentage points each year without effective policy responses. On top of this we could expect some economic and social disruption as the economy structure away from resource and energy intensive export sectors to domestic consumption and a greater role for the market in resource allocation. The impact on per capita incomes is less clear. From a positive viewpoint if savings are maintained capital deepening could lift productivity and help maintain per capita income growth. However, one of the explicit aims of government is to reduce savings to encourage consumption. Similarly, aging is likely to intensify income and consumption inequalities both within rural and urban communities and between rural and urban areas. It is also likely to increase demands on government for enhanced health and aged support services and therefore put additional pressure on budgets and the need for broadly based tax reform. One very important factor in reducing further pressures on the health system and prolonging healthy (potentially working) lives is dramatically improving air quality in particular and water and soil contamination, as well as reducing the rate of future warming with its attendant severe weather and heatwave risks. The medium term impact on the environment is uncertain. On the one hand lower production and consumption growth flowing from the impact of aging and changes in consumption patterns, other things being equal, should slow the increase in pollution loads placed on the environment. On the other lower growth, particularly if it results in lower per capita income growth, and aging could reduce the public support for environmental expenditures, tougher pollution controls and economic restructuring away from energy, resource and pollution intensive sectors. The responses to aging might be just as significant as the changes in population structure. To this point China has announced some significant policy shifts that might be designed to help reduce any impact from aging on the economy: • Some relaxation of the one child policy (particularly in urban areas and for parents who are themselves single children). The likely response is uncertain, but to the extent that the birth rate is lifted, in the medium term this could actually increase the dependency ratio. [Citation to be inserted] • An intensification of the reform of the economy – a greater role for pricing and the market in determining the allocation of resources, deepening of Free Trade arrangements with a number of countries, a reduced role for state sector enterprises particularly at the provincial and local level with a greater role for the private sector, a new emphasis on fair competition and a crack down on corruption. These reforms would likely support a shift from the emphasis on export oriented heavy and resource intensive manufacture toward consumption and the services sector that the government would wish to see. • A broadening and deepening of the social welfare system with some relaxation on internal migration. In addition there is an active discussion of a progressive increase in the ages at which age retirement can be accessed. However this has not yet been elevated to a more formal discussion with the Chinese people. Nevertheless it is clear that many people are continuing to work past their nominal retirement date as they continue to enjoy good health. These changes are proceeding alongside a renewed determination to tackle pollution, particularly air pollution, and a commitment to cap greenhouse emissions by 2030 followed by their progressive reduction.