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.