Tuesday, October 4, 2016

China flexes toward consumption

I've got my first calc midterm today, so I'm just going to spend a bit of time online. In fact, I have another midterm on Thursday, then next week I have off but I'll have to spend it studying like nuts for 3 midterms when I get back, so I'll be quite busy for a bit.

Meanwhile, for those who said it could never happen....

Tim Taylor - China flexes toward consumption. Quote:

Nie and Palmer discuss the evidence from economic research on what caused China's consumption to fall so low, and whether the modest rise of the last few years seems likely to continue. They focus on a few factors that have been evolving over the decades: the age distribution and "dependency ratios" in China's population, the trend to urbanization, and China's housing boom since around 2000--which is about when the consumption/GDP ratio plummeted even lower. I'd summarize their story this way.

The "dependency ratio" refers to what share of the population is either too young or too old to work, as opposed to being working age. The dependency ratio and consumption tend to rise and fall together. Thus, the dramatic fall in birthrates in China as a result of economic growth (and greater education and incomes for women) along with the one-child policy meant a lower dependency ratio. Basically, fewer children means less consumption spending on children, and more saving.

China has seen a dramatic rise in urbanization. As Nie and Palmer write: "Over the past five decades, the share of China’s population living in urban areas has more than tripled, rising from 18 percent in 1960 to 56 percent in 2015." The common pattern is that people moving to urban areas in emergin economies increase both their production and their consumption, but they increase production by more, and so their rate of saving rises.

Nie and Palmer look at patterns of dependency ratios and urbanization across a "sample of 24 countries including most Asian countries and large developing countries." Based on the common patterns, they find that China's fall in consumption/GDP ratio from 1970-2000 is almost completely explained by changes in its dependency ratio and urbanization.

More at the link, read it.

I'd like to add that the reason consumption was so "low" a share was because investment in infrastructure and capital was so high. Which is why today Chinese megacities aren't ringed by massive slums.

It helps to actually know some economics.

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