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Home Publications Blogs Beat the Press Tyler Cowen Goes Off the Track on China's Aging

Tyler Cowen Goes Off the Track on China's Aging

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Sunday, 23 June 2013 08:20

Tyler Cowen has an interesting piece on the problems facing developing countries going forward. As he notes, these will be different in the future than they were in the past. However the piece is strange due to one of the items it mentions, the aging of the population, and one it leaves out, intellectual property claims. (Btw, Cowen references a column by Dani Rodrick as raising the issue of new problems confronting developing countries. Rodrick does not mention aging in his list of concerns.)

On the former point, Cowen seems determined to apply the Peter Peterson financed obsession with cutting Social Security and Medicare to the whole world. He gives us the bad news:

"It is less well known that fertility rates in much of the Middle East and North Africa are also falling rapidly. In Iran, for example, it is now estimated at 1.86 per woman, which over time would mean that families are not replenishing themselves. And shrinking and older populations, of course, limit future economic growth."

Wow, back when I learned economics we cared about per capita income, not growth per se. Most people would think that Denmark is better off than Bangladesh, even though Bangladesh has a far higher GDP. Fewer people means fewer demands on resources of all types and less greenhouse gas emissions. I suppose Cowen is worried that the beaches will be less crowded and there will be smaller traffic jams. That prospect is not likely to be a major concern for most people in the developing world.

Cowen also gives us the bad news about China:

"Finally, many lower-income countries will be old before they are rich. China’s population, for example, is aging rapidly, given the government’s one-child policy and the decline in birthrates that accompanies rising income."

Let's think about this one for a moment. China has seen unprecedented growth in per capita income over the last three decades. Per capita GDP has risen by a factor of 13. This swamps the growth in almost every other developing country. While aging can impose some burden on the working population, it will not prevent both workers and retirees from enjoying much higher living standards than they did in the recent past.

To see this point, let's compare China to another widely touted developing country, Mexico. Mexico has benefited from being part of NAFTA over the last two decades. As a result, Mexico's per capita income has increased by just over 30 percent since 1983.

Now let's construct a simple hypothetical. Suppose that wages of both Chinese and Mexican workers rose in step with per capita income over the last three decades.

In our "before-tax" scenario we can envision either that there are no taxes, or simply that the tax burden has not changed over this period. In this case we can see that a 25 year-old just starting work would enjoy a wage that is 1381 percent higher than their parents would have back in 1983 in China. In Mexico the gain would be just under 31 percent.

Now let's take account of the devastating impact of aging. Let's assume that China in 2013 has just two workers for every retiree. Suppose that we tax each worker an amount equal to 30 percent of their wages to support the retired population. This would provide retirees with very generous benefits equal to 85.7 percent of the average wage. Let's assume there is no increase in the taxes needed to support the retired population in Mexico over this period.

btp-2013-06-23

In this case the average worker in China will enjoy an after-tax wage that 966.6 percent higher than her parents' starting wage. Mexico's workers would have the same gain of 30.8 percent. And Tyler Cowen is worried about China!

Note also that this is an extreme example. China had retirees in 1983 and its ratio of workers to retirees is still well above 2 to 1, so the increase in taxes implied by the actual aging of its population would be far less than what is assumed in this chart. And of course Mexico has also seen aging of its population.

The point here should be straightforward, plausible differences in growth rates will swamp the impact of aging on the well-being of the population. Note also that these numbers do not take account of environmental impacts (not good over this period in either country). If a country is able to improve the quality of its environment because of a more slowly growing or shrinking population this will be a gain that will be mostly missed in standard GDP accounts.

If Cowen's concern about aging seems ill-founded, his failure to comment on intellectual property claims in striking. The wealthy countries, led by the United States, are hoping to extract large amounts of money from the developing world in the decades ahead through patent and copyright related fees. The extent to which the developing world is prepared to honor strong protections in these areas will likely have an important impact on their ability to develop. These flows can be seen as equivalent to foreign aid from the developing world to the rich.

In this respect there was recently an important patent case before the Indian Supreme Court in which the court held that it would not honor a patent involving a minor tweak on an already existing drug. If India and other developing countries follow a path where they limit the extent of patents and copyrights it will provide them much greater opportunities to develop both by reducing the flow of wealth out of the country and by limiting the extent to which rich country monopolies will pose legal barriers to the development of domestic industry. Any serious discussion of development prospects must take patent and copyright rules into account.

 

Note: Here's the source for the data on Mexico and China. I deflated the numbers using the GDP deflator for the U.S. (btw, the line about Mexico benefitting from NAFTA was a joke. Thirty percent per capita GDP growth over three decades is pathetic for a developing country.

Comments (12)Add Comment
...
written by RZ0, June 23, 2013 10:30
I've been skeptical of Mr. Cowen's brilliance ever since I read "The Great Stagnation" on my telephone.
I used its search function to learn he used the word "computer" exactly five times.
...
written by Bring back the 1950s, June 23, 2013 10:55
"Wow, back when I learned economics we cared about per capita income, not growth per se. Most people would think that Denmark is better off than Bangladesh, even though Bangladesh has a far higher GDP. Fewer people means fewer demands on resources of all types and less greenhouse gas emissions. I suppose Cowen is worried that the beaches will be less crowded and there will be smaller traffic jams. That prospect is not likely to be a major concern for most people in the developing world."

That's great about China but it's more salient for the US where the Gang of 8 is close to dramatically increasing immigration in the middle of mass unemployment and inequality. Why not give the same treatment to former GOP governor Haley Barbour for spouting
It's not inevitable- choices are made
written by Jennifer, June 23, 2013 10:57
The most striking part of the piece to me was his overall description of the development of poorer countries, how they "might never become like us". There was "something special" about how the 20th century was able to create a middle-class through manufacturing. Now, as in the US, the countries that have recently developed are in a "more stratified world" and the "wealthy produce their public goods . . in gated communities" and there are "large pockets of poverty".
What is happening in these countries is exactly what is happening in the US-the 1% is extracting more wealth at the expense of everybody else. The idea that "governments may need to rethink what they accomplish-and how" can be taken two ways. Clearly, Cowen thinks this means the government will be able to do less. But of course it was government policies themselves-such as IP protection, historically low tax rates etc.--that created that wealth. So it follows that changes in government policies could redistribute the wealth as well.
...
written by Bring back the 1950s, June 23, 2013 11:02
"Wow, back when I learned economics we cared about per capita income, not growth per se. Most people would think that Denmark is better off than Bangladesh, even though Bangladesh has a far higher GDP. Fewer people means fewer demands on resources of all types and less greenhouse gas emissions. I suppose Cowen is worried that the beaches will be less crowded and there will be smaller traffic jams. That prospect is not likely to be a major concern for most people in the developing world."

That's great about China but it's more salient for the US where the Gang of 8 is close to dramatically increasing immigration in the middle of mass unemployment and inequality. Why not give the same treatment to former GOP governor Haley Barbour for spouting similar nonsense that Haley Barbour said a few days ago while rallying with Jeb Bush for higher immigration?

"GDP growth is simply productivity multiplied by the number of workers. Now I wasn’t a math major, but I can figure out that if the number of workers stays the same as it has under this administration it’s very hard to get the GDP to go up."

I agree with you that Denmark is a nicer place than Bengladesh. If we want to live in a middle class country instead of a third world country then Step 1A should be to stop this crowd.

Another Hoot from Libertarians: Tyler Cown Pines for Labor Productivity of Past Era
written by Last Mover, June 23, 2013 11:42
Way back when there was only labor and land as the two primary factors of production. Physical capital and technology had not arrived yet beyond crude slow changing levels.

That's when children were regarded as an investment good rather than a consumption good. The larger the family the more likely it would survive. Children and young adults were even insured in that context.

The ancient model still applies in narrow circumstances where pockets of isolated populations still eek out a living off the land despite the march of civilization. But it's rare. Most of the time it's about way too many people crowding out each other for increasingly scarce resources.

It is odd indeed that an economist of any stripe, including Tyler Cowen, would lament the decline of population growth as if musing over the lack of labor available as a factor input before the industrial revolution came along.

The only other explanation appears to be some kind of appeal to paleoconservative values that stress the preservation of heritage and tradition through population growth over all else, including economic efficiency.

Is Tyler Cowen thinking that large families can somehow scale up their size into a lean, mean survival machine of a bygone era, like so many pairs of feet available to pump those manual water pumps in an agricultural field from the past? And this would serve to fend off an aging population imploding on itself as well?
...
written by bobs, June 23, 2013 12:48
>> Bangladesh has a far higher GDP

Not even close. Bangladesh GDP = $112 billion (2011)
Denmark GDP = $330 billion (2011).

Per capita, of course, Denmark dwarfs Bangladesh -- by a factor of 30.
...
written by bobs, June 23, 2013 12:57
Dean Baker's overall point, of course, is entirely valid. (He just picked the wrong countries.)
...
written by Alan, June 23, 2013 3:19
"Not even close. Bangladesh GDP = $112 billion (2011)
Denmark GDP = $330 billion (2011). "

Dean Baker is using nominal GDP figures. You're using PPP figure. Since most people think in nominal terms (and we're comparing a single year) I think his choice is O.
...
written by bobs, June 23, 2013 3:35
Alan: You mean the other way around. He is using PPP instead? Maybe. Not sure why he picked Bangladesh and not say India...

My comment was just minor nitpicking anyway. Sorry for the distraction.
IMF % change in living standards?
written by Layne, June 23, 2013 5:33
What's the citation for the IMF living standard % change since 1983 (for China and Mexico)?

Are those inflation-adjusted?

Seoul, LA, La Paz, & Dhaka
written by winstongator, June 23, 2013 8:41
In any case, we should be prepared for the possibility that, while Seoul now looks a fair amount like Los Angeles, perhaps La Paz, Accra and Dhaka will never look much like Seoul.


How can you write that and also write about the problems of low birthrates.
South Korea's birthrate was the world's lowest in 2009.[140] If this continues, its population is expected to decrease by 13% to 42.3 million in 2050.
South Korea's fertility rate has been below 2 since 1984.
immigration>NAFTA>per capita
written by Madmamie, June 24, 2013 12:38
" Mexico has benefited from being part of NAFTA over the last two decades. As a result, Mexico's per capita income has increased by just over 30 percent since 1983."

OK, so NAFTA was a GOOD thing even if it impoverished farmers and cottage industries,increase corruption and create major pollution in the poorer country and (say some) push the newly impoverished to immigrate to the US?
Many economists and politicians are saying that it wasn't - not for them, not for us. Which is it? Because the effects of NAFTA in Mexico will surely be a determining factor in its future growth and wealth distribution. And how can we still use per capita as a basis for discussion when we know that the distribution is so skewed, in both developed and developing countries?

I wish we could have a clear, open national debate on the subject of trade agreements. Trade agreements,like bank regulations for example :-/ are considered to be the domain of wonky political/economical civil servants who have our best interests at heart.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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