Freakonomics – demographics, savings, and US growth…

4 Aug

graphs

In recent years China’s position as a global creditor nation has become more pronounced.  However, one might have expected the opposite – a fast growing economy should attract massive investment due to the returns associated with its rapid expansion.  The upshot would be to turn said country (China in this case) into a debtor nation

How did the Chinese economy escape its fate?  Simply put, the propensity to save (on a private, company, and governmental level) surpassed the investment requirements, resulting in a huge surplus.  China has used its surplus to purchased foreign assets.

In a recent paper Ma Guonan (Bank for International Settlements) and Zhou Haiwen (State Administration of Foreign Exchange) explain the phenomenon in terms of demographics (see graphs).

They explain that the one-child policy has lead to an increase in China’s ratio of workforce to child-dependence.

1. Less children = less expenses for workers = more personal savings
2. Falling dependency = growing workforce = fewer wage increases = increased company profits = increased corporate savings
3. Lower dependency = less governmental welfare spending = greater government savings

Nonetheless – the green line on the right hand graph indicates an increasing dependency of senior citizens.  Perhaps China will one day become a debtor as its population ages.

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