An actuary recently visited this economist's dinner table, a fortuitous development. Earlier this month, I was confronted with a question at an Ottawa client briefing about how long China's experience of modernization – with growth near to 10 per cent – could be sustained. Yes, there is a link between these two conversations; bear with me while I explain.
Our model of China's economic explosion is based on Simon Kuznets's work describing the process of modernization. Moving 15 million or 20 million people a year off the farms and into the urban/industrial sector, increasing productivity of each them sixfold as result of the migration and re-employment, generates six to eight percentage points of gross domestic product growth for China each year. The question I was asked in Ottawa was for an estimate of how long this process can continue. I blithely answered that with 650 million people left on the farm to move into the modernized sector, we have at least 30 years to go.
Of course, the answer is more complicated than that. The dinner with our actuary friend reminds me that things other than migration affect the population of rural and urban areas. The farm and the cities each have different birth and death rates. In the cities, with a much younger population, births exceed deaths and the population would grow naturally even without migration. On the farm, with an older population nowadays – migration has plucked a lot of young people off the farm into the cities – the natural net of births and deaths is a decrease. A better calculation of the expected tenure of modernization must take account of net births and deaths in both places.
Also, there still will have to be some people left in agricultural employment at the limit of modernization. Someone has to grow the food to feed the rest of the nation. In the United States, the 2010 census recorded 16 per cent of the population living in rural areas, but the U.S. Bureau of Labor Statistics reports that only 1.6 per cent of the population is employed in agriculture. The gap between these two numbers is because many people who are not directly farmers or agricultural workers – teachers, accountants, policemen, doctors, grocers, retailers, even some economists and financiers – live in the country, either by choice or to support local farmers. Of course, the U.S. census likely undercounts the number of actual farm workers, because undocumented workers tend to avoid the census taker.
In China, there are probably fewer supporting jobs in the farmlands, and fewer people missed by the census taker. Suppose farmers in China are one-tenth as productive as those in the United States: Then 16 per cent of the population would have to work on the farms to feed the rest of the nation. Add in non-farmer support workers, and let us arbitrarily say that modernization will have to stop when China's rural population falls to 25 per cent of the nation.
So, inspired by my dinner guest, I put together a little spreadsheet model incorporating births and deaths estimates, and ran it out for a century. Real actuaries would scoff at this little spreadsheet, but I am boldly going to propose my results as indicative, or at least informative, of where present trends are going.
I estimate, based on the experience of the past five years, that net birth and deaths will add 1.5 per cent a year to urban populations, but reduce the rural population by 0.5 per cent a year. I figure those rates imply net migration of just under 12 million persons a year. You can run that model out for five decades until the rural population declines to 25 per cent of the national population, just around the time the population hits two billion. As an alternative, were the net births/death rate on the farm only minus 0.2 per cent, and the growth rate for urban areas 1.2 per cent, the 25-per-cent barrier would not be hit for seven decades, when the population breaks through 2.2 billion.
Comments from real actuaries are welcome. For the moment, I am content to opine that the process of moving people from farms to cities, and reaping productivity gains from that migration, has many decades – between five and eight, on top of the three already experienced – left to go. That fits with Mr. Kuznets's historical research, which showed the process ran for five to 12 decades across the two-dozen economies he documented, starting with England's modernization in the 18th century through Japan and Russia in the 20th century. Bingo!
Carl Weinberg is the founder and chief economist of High Frequency Economics, an independent economic research firm based in Valhalla, N.Y. www.hifreqecon.com