China s Population 1 in 5 people in the world live in China. Population change = births deaths. Premodern population growth in China 0.4% per year.

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1 China s Population 1 in 5 people in the world live in China. Population change = births deaths. Premodern population growth in China 0.4% per year. At this rate, population doubles every 70/0.4=175 years. Premodern economic growth about the same as population growth=>very slight per capita GDP growth. Struggle for survival on subsistence income. Similar pattern observed around the world (Europe). Malthus ( ), "Population increases in a geometric ratio, while the means of subsistence increases in an arithmetic ratio." Hence, economics called the dismal science. From end of Roman Empire to 1500, there was almost no per capita output growth in the world. This period of stagnation is often called the Malthusian era. Malthus conclusion: unless you regulate family size, the misery of famine would always be present. Until 1750 the world was Malthusian. 1

2 Modernization: Fertility rates are high partly because of high infant mortality rates. Better maternal care and nutrition reduces infant mortality. Better agricultural productivity raises nutrition. Better sanitation improves health Death rate declines. These things lead to rising population growth rates. Population explosion in Europe in the 1800s. In China, population waxed and waned over ancient history but explosion didn t occur until the 1950s, after Communist revolution. Improvements in sanitation, better distribution of food, public health and sanitation raised population growth rate to 2% (doubling every 35 years). 2

3 Life Expectancy in China 1950: 41 years. 2000: 71 years (Endogenous) Fertility: 2011, fertility rate was Japan 1.4, Italy 1.4, Korea 1.2, USA 1.9. Individual choice to voluntarily reduce fertility (These societies aren t even replacing themselves). Hence, was China s one child policy necessary? 3

4 Population Policy Mao promoted population growth. Saw big population as advantage in terms of a big human labor force. Held this view until GLF Pilot program of urban family planning, promoting birth control on voluntary basis. Comprehensive initiative 1971, the later-longerfewer campaign. Marry later, longer space between children, fewer total children. Legal minimum age to marry increased. Directed both to urban and rural couples. Policy lasted until Fertility rate fell from 5.8 in 1970 to 2.7 in New worries about the post GLF baby boom generation getting married, entering child-bearing years. Hence, the one child policy hatched. Objective to target population at 1.2B in

5 Population Policy Coercive Policy Penalties imposed for women who have more than one child. Implementation strict in first 5 years. Additional children taxed. Urban people lost their jobs at SOEs (Marriage Encounter story) 1983: Mandatory IUDs for women with one child. Forced sterilization for couples with 2 or more, forced abortion for unauthorized conceptions. Implementation of policy delegated to local government. Local officials are evaluated in part on compliance with the policy. OCP is an example of why we might distrust centralization, government imposed policies (social, industrial, economic). OCP may seem to be a straightforward and obvious solution to the problem. Many horrible unintended consequences Heartbreaking abuse of human rights 5

6 Gradual Loosening of Policy By 1984 forced sterilization and abortions renounced by central government but sometimes local officials continue with and abuse. Non Han Chinese exempt Rural couples could have a second child if they faced hardship and first child was a girl. In country side, people have more than 1, births are hidden and babies are sent away to be raised by relatives. (Missing girls-no official records) For many years, if both husband and wife were products of one-child familes they can have 2 children November 2013: Couples can have two children if either parent was an only child. 6

7 Unintended Consequences: Sex Imbalance Natural birth ratio is 106:100 boys:girls. Why? Sex imbalance due to cultural preference for boys. Girls marry out of family, boys remain in village, and serve as old-age support. 7

8 Unintended Consequences China sex imbalance: See Table 7.2. In 1930s the birth ratio was120:100. In some areas of china today is 150:100. In 2000 census, 121:100. This is called the phenomenon of the missing girls. Where are the girls? Female infanticide. Selective sex abortions. Ultrasounds can detect sex in utero. Unreported female births. Girls hidden in other villages to live with relatives 8

9 Unintended Consequences: Sex Imbalance Bare branches. 30 million surplus men, mostly low income, who will never have the chance to marry. Girls subject to kidnapping, increased sex trafficking. 9

10 China s Population Policy 10 minute video on OCP (we watch this in class) 10

11 The Demographic Transition and the Global Economy Nelson C. Mark Alfred C. DeCrane Jr. Professor of Economics, University of Notre Dame and National Bureau of Economic Research (University of Notre Dame) The Demographic Transition and the Global Economy November 1, / 36

12 Overview 1 A profound global demographic transition. 2 Macroeconomic drivers 1 (Economic) Di erences across di erent age cohorts. 2 Young (children), Middle (working age), Old (retired age) (No o ense). 3 Changes in the following exert changes in macroeconomy 1 Proportions of age cohorts, 2 Family size 3 Dependency ratios, 4 Aging (University of Notre Dame) The Demographic Transition and the Global Economy November 1, / 36

13 Economic Consequences 1 Demographic changes are predictable, but typically ignored in macroeconomic analysis. 1 National saving rates, interest rates, asset values 2 Economic growth rate 3 Monetary policy e ectiveness 4 Viability of social security and medicare 2 Emphasis on global 1 Integrated financial markets 2 Trade, integrated global supply chains. 3 Plan of talk (interrupt any time) 1 Facts about demographic transition 2 Economic consequences 3 Case study: Japan (University of Notre Dame) The Demographic Transition and the Global Economy November 1, / 36

14 World Population in History (University of Notre Dame) The Demographic Transition and the Global Economy November 1, / 36

15 UK Survival Chances across the Ages (University of Notre Dame) The Demographic Transition and the Global Economy November 1, / 36

16 Child Mortality (University of Notre Dame) The Demographic Transition and the Global Economy November 1, / 36

17 Fertility Figure: Fertility (University of Notre Dame) The Demographic Transition and the Global Economy November 1, / 36

18 Fertility: China, India, USA, and Japan (University of Notre Dame) The Demographic Transition and the Global Economy November 1, / 36

19 Fertility in numbers (selected countries) Table: Fertility rates. (source: index mundi) Singapore 0.8 Hong Kong 1.17 South Korea 1.25 Poland 1.33 Italy 1.42 Germany 1.43 China 1.55 United States 2.05 Afghanistan 5.43 Niger 6.89 (University of Notre Dame) The Demographic Transition and the Global Economy November 1, / 36

20 Stylized Demographic Transition (University of Notre Dame) The Demographic Transition and the Global Economy November 1, / 36

21 Population and Growth (University of Notre Dame) The Demographic Transition and the Global Economy November 1, / 36

22 Population Trees 1 Percentage of population in each age group, by gender. 2 Historically looks like Christmas Tree 3 Current cohorts work their way up the tree, minus deaths 4 Look for bulges in trees. 1 Least developed bulging in children 2 China bulge in working age. 3 Japan bulging in retirees (University of Notre Dame) The Demographic Transition and the Global Economy November 1, / 36

23 Africa (University of Notre Dame) The Demographic Transition and the Global Economy November 1, / 36

24 Least Developed Countries (University of Notre Dame) The Demographic Transition and the Global Economy November 1, / 36

25 India (University of Notre Dame) The Demographic Transition and the Global Economy November 1, / 36

26 Indonesia (University of Notre Dame) The Demographic Transition and the Global Economy November 1, / 36

27 Latin America (University of Notre Dame) The Demographic Transition and the Global Economy November 1, / 36

28 China (University of Notre Dame) The Demographic Transition and the Global Economy November 1, / 36

29 Japan (University of Notre Dame) The Demographic Transition and the Global Economy November 1, / 36

30 Europe (University of Notre Dame) The Demographic Transition and the Global Economy November 1, / 36

31 USA Today (University of Notre Dame) The Demographic Transition and the Global Economy November 1, / 36

32 Figure: USA 1960 (University of Notre Dame) The Demographic Transition and the Global Economy November 1, / 36

33 World over Time (University of Notre Dame) The Demographic Transition and the Global Economy November 1, / 36

34 Where are the People? Asia! (University of Notre Dame) The Demographic Transition and the Global Economy November 1, / 36

35 What are we Transitioning to? 12 RANDMR World population in billions Developing regions Developed regions Year SOURCE: Population Reference Bureau, Human Population: Fundamentals of Growth, Population Growth, and Distribution, Available at Content/NavigationMenu/PRB/Educators/Human_Population/Population_Growth/ (University Population_Growth.htm. of Notre Dame) The Demographic Transition and the Global Economy November 1, / 36

36 Growth and Demographic Dividend 1 Growth: Working people spend money (an aggregate demand driver) 2 Dividend: As bulge works its way into working age, per capita GDP increases, due to fewer dependents. 1 Dividend lasts a long time (50-60 years) 2 What does country do with the surplus? 1 Invest in education, health, infrastructure, debt reduction, capital, technology, to create conditions for productive employment. Reap a second dividend. (East Asia?) 2 Squander? Slide backwards when bulge retires. (University of Notre Dame) The Demographic Transition and the Global Economy November 1, / 36

37 Aging and Growth Potential drag on growth. In US, 70% of GDP is private consumption expenditures 1 Older people don t spend as much 1 No work-related expenses (clothing, transportaiton commuting). 2 Downsized homes 3 Time to find bargains 4 Home production 2 Stress on pensions and social security tax burden on working aged (University of Notre Dame) The Demographic Transition and the Global Economy November 1, / 36

38 Life-Cycle Saving (University of Notre Dame) The Demographic Transition and the Global Economy November 1, / 36

39 China Saves! (University of Notre Dame) The Demographic Transition and the Global Economy November 1, / 36

40 7 Total Fertility Rate United States China 1 Japan Well known determinants of fertility: Inversely related to Income Fraction of people in non-agriculture Womens education level. Women in the workforce and opportunity cost of time. Children used to be investment (capital) goods. Are becoming consumption goods. Impact of GLF. High birth rates in 1960s were replacement births. Households postponed births because of GLF conditions now having children. Those who lost children were replacing them. By mid 1960s population growth rate was 3% (double every 23.3 years). 11

41 Workers per retiree (right axis) Children per parent (left axis) Figure 5. The Ratio of Children, Ages 0 19, to Parents, Ages (left axis) and the Number of Workers, Ages 20 63, Per Retiree, Ages 64+ (right axis) from 1950 to 2050 Source: United Nations World Population Prospects 2010 ( ) 12

42 Table 1 The Effect of the Number of Children on the Household s Saving Rate, 2007 Dependent variable: saving rate Explanatory variable (1) (2) Number of children (0.015***) (0.018**) Further restrictions None Omit HH with children age > 19 Observations 3,234 2,200 R Notes: Saving rate is defined as (Income-Consumption)/Income. The data is restricted to nuclear families. Additional controls include a quartic in income, age, age squared, and the natural log of education. Standard errors are reported in parentheses. *** Significant at the 1 percent level. ** Significant at the 5 percent level. * Significant at the 10 percent level. 13

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44 Curtis, Lugauer and Mark Quantitative model of overlapping generations model of finitely lived households. Life-cycle aspects incorporated include Caring for children in younger households (agechildren profile). Rising wages with experience (age-earnings profile). Retirement support from children and formal pensions Point of their paper: Exogenous reduction in family size explains a big part of household saving rate increase 15

45 Ages Ages Ages Demographic transitions 16

46 Household Saving Rate (left axis) Ratio of Parents to Children (right axis)

47 Sketch of Model People live for 85 years 0 to 19 don t make decisions. Eat what is provided by parents 20 to 49, have children living at home 50 to 63, empty nesters 64 to 85, retired. Draw income from pension and adult working children. Die at generations at different phases of life-cycle alive at each time period. 18

48 Sketch of model j is economic age. (j=1 is real age 20) Households earn exogenous wage, can consume for themselves and buy stuff for kids, and purchase assets (save). Lifetime utility maximization problem. Solve for optimal saving function for individual, then aggregate according to demographic data U t = + X29 j=0 X65 j=30 j j µ (n t+j ) c c t+j,j 1! c 1 t+j,j, 1 1! + c1 t+j,j 1!! c t,j = (1 ) w t +(1+r t ) a t,j a t+1,j+1 n t c c t,j, j 2 [0, 29]. c t,j = (1 ) w t +(1+r t ) a t,j a t+1,j+1, j 2 [30, 42]. c t,j = P t +(1+r t ) a t,j a t+1,j+1, j 2 [43, 65], Perfect foresight assumption. People can see past and future population/demographic breakdown, wage and interest rate To analyze saving/consumption decisions in 1955, must start with generation born in

49 Data Requirements for perfect foresight model with 65 overlapping generations. 20

50 Data 0.1 Only Demographic Change r =0.04 Smaller families allow for more saving. Fewer children to provide old age support means you need to save more. More workers earning money to save in the economy now 21

51 Data Complete Model Let wages and interest rate evolve 22

52 Chinese Economy Class meeting 12 Monday February 24, 2014 One Child Policy II Unintended Consequences Sex Imbalance Cameron et al. (Little Emperors) Wei and Zhang (Sex Imbalance)

53 Sex Imbalance and Competition in Marriage Market China s Bachelors: The Gender Imbalance China s leftover men pose potential social challenges. Dating/matchmaking service opportunities Economics and marriage. A house is required- China Take: 1

54 Wei and Zhang. Competitive Saving Motive Their argument is, people (parents) save to improve their relative standing in (children s) marriage market. Shouldn t families with daughters decrease saving (which would offset the increased saving of families with sons)? Maybe yes, because they can free-ride off of husband s saving. Maybe no because girls provide less support to retired parents (since they earn less and are supposed to have married away into somebody else s family) and maybe no because they don t want to lose bargaining power in the marriage. 2

55 Data: 122 rural counties and 70 cities. Finding that households with sons save more than those with daughters is not proof of this effect. There could be other reasons for this pattern. What would be compelling evidence? Take two households of sons identical in all respects except the one that lives in a high sex imbalance region saves more than the other who lives in a low sex imbalance region. How to make them identical? Control variables (for local income, social safety net, the age profile of the local population, and province and year fixed effects). 3

56 In China, sex ratio was close to normal in 1980 (106:100). In 2005, 120:100. Created 30 million surplus men (bare branches). Most from lowincome households that will never have the opportunity to marry Fig. 1. Sex ratio and saving rate. The sex ratio is defined as the ratio at birth 20 years earlier. See the note to table 12 for data sources. The saving rate is defined as the percentage of GDP-private and government consumption in total GDP, which is available from China Statistical Yearbook Both variables have been rescaled by subtracting the mean and dividing by the standard deviation. 4

57 What do people say they save for? TABLE 1 Why Do People Save? Self-Reports of the Most or the Second Most Important Reason for Savings (Percentage of Respondents) Three-Person Household Girl (1) Boy (2) Only Girls (3) Four-Person Household Boy and Girl (4) Only Boys (5) All Households (6) Total sample: Directly related to children Children s wedding Children s education Bequest to children Not directly related to children To build a house Retirement Medical expenses Others Source. Authors tabulation based on the Chinese Household Income Project (2002), available from 5

58 Saving for marriage. Cultural norm that groom s family pays for wedding, provide house or apartment for newleyweds. In Table 2, more housing wealth increases odds of son being married. Fig. 2. Time profile of household savings rate in relation to the timing of a wedding: evidence from 26 natural (three administrative) villages in Guizhou Province. Authors calculation based on surveys designed by one of the authors and conducted by IFPRI. 6

59 Rural results: Table 5. Main Results Hypothesis: Households with son should save more in regions with more unbalanced sex ratio, after controlling for family income and other characteristics. Look at saving of households with daughters. Do they save more because of retirement concerns or to preserve daughter s bargaining power, or does woman free-ride on husband s higher saving rate? Son (1) Full Sample Daughter (2) Local sex ratio (county level) 1.34**.17 (.52) (.55) Per capita income (log) 2.88** 2.49** (.63) (.45) Per capita income squared (log).15**.12** (.04) (.03) Child aged (.10) (.08) Child aged (.10) (.09) Child aged *.20* (.12) (.11) Household head age (.01) (.01) 7

60 Little Emperors/Spoiled Brats Anectotes of one child policy (OCP) A land of little emperors whose parents dote on them exclusively, raises concern about social skills, self-centeredness, cooperativeness. Employers include phrases like no single children need apply in job advertisments. 8

61 Unintended Consequences: Sex Imbalance Obesity China s Precious `Snowflakes : Little Emperor Parents: France 24 Report: Obesity: China s growing epidemic: Child Obesity in China 120 million: China s Obese Youth: Spoiled Brats Spoiled Chinese girl says her daddy will kill you Little Emperors marketing demographic target 9