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Demographics in China and India: different characteristics, and challenges

23 January 2014

China’s old age dependency ratio of about 11% today, is expected to rise to 24% by 2030, by which point there will be more over-60s than under-15s, and to 40% by 2050. In other words, the 10 workers that support each older citizen today will have dwindled to 2.5.

The working age population fell for the first time in 2012 for example, and will have dropped by 8 million, or the size of London, between 2012-2014. This trend will gather momentum in the next 30 years, and underpins the rise in wages and salaries in China, and draws attention to the inadequacy of Chinese public social spending, which is just 7% of GDP, compared with 16-17%, for example, in Brazil and Russia. China is focused on a number of measures to broaden social security and healthcare coverage, as was made clear in the comprehensive reform plans announced at the end of last year.

Many of these reform proposals were slogans rather than detailed plans, and I think that some of the more politically sensitive plans will either be diluted or run up against vested interests and fail to be implemented, or only weakly. Social security changes, as well as financial reforms, though, I fully expect to figure prominently. There were a couple of demographic reforms that also caught the eye.

The one child policy is going to be eased so that second children will be allowed for couples, where one partner rather than both was a single parent. Officially, China expect about 1-2m additional babies to be born each year for the next few years, but you might well ask why? China’s fertility rate is 1.6, and higher than a lot of places that never had a OCP, and the reasons that Chinese fertility rates have fallen are identical to those for other women in other countries. In major Chinese agglomerations, where income per head is the same as in Portugal, the fertility rate is just 0.8.

The other important demographic proposal, which is closely associated with the broad macro challenges of boosting consumption, strengthening the social safety net, and reforming local government, concerns the hukou, or alien registration system. China plans to liberalise this system, which sustains roughly 200 million migrants as second class citizens without access to schooling, adequate housing and healthcare for example, first in smaller towns and cities. But it’s hard to reform the system properly without land and private property rights reform in the countryside, and its the bigger cities where hukou matters most, and it’s precisely here where resistance by urban residents and local governments is strongest.

So expect to see periodic coverage of these two initiatives, but I don’t think either of them will be game changers, as things stand.

India is altogether different. The population is expected to overtake China by 2025, India still has a fertility rate of 2.73, and in the next 15 years, its working age population will grow by about 225m – almost as much as the entire working age population of Western Europe today. Its population of over-60s will double to 15% of the population by 2040, but this is still only where China is today and where the rich world was in 1970.

India’s rural sector is still home to 70% of the population and provides over 55% of jobs. But there is a much weaker tendency for people to leave for an urban life, not least because job opportunities are not that great. Poverty and relatively low educational attainment mean that far too many people are ill equipped for productivity-enhancing work. The recorded unemployment rate of 7% for example, masks a 27% incidence of poverty in persons employed in any capacity, not just full time workers.

There’s no question about the optimism deriving from India’s demographics coupled with its prowess in churning out scientists, engineers and IT and healthcare professionals. India produces  60% of the world’s vaccines and is on course to make about $4.5bn from them by 2017. But if existing widespread poverty and underemployment are allowed to fester in an environment of excessive bureaucracy and corruption, this optimism could dissipate.

As it is, India’s 10% growth a few years ago has collapsed into a struggle to maintain growth of 4-5%, and job creation momentum is fading. One local credit rating agency thinks non-farm job creation will be 25% lower in the next seven years than in the last seven years – and much less than the 10-12m needed each year to absorb new entrants to the labour force. The main reason for the jobs crisis is that India lacks employment-intensive manufacturing, its labour laws are complex and burdensome, and the state has failed to supply public goods, including education and infrastructure, and remove unnecessary regulations and subsidies that suppress employment. These weaknesses speak to what one Indian author has called the ‘degradation of our state institutions’. National elections in a few months time will come at a crucial time for India’s economic and political development, and investors and others will doubtless scrutinise the outcome closely.