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China must transcend its declining demographic dividend

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A baby looks from inside a vehicle stranded on a highway between Beijing and Hebei province, China that is closed due to smog on an extremely polluted day, 30 November 2015 (Photo: Reuters/Damir Sagolj).

In Brief

China’s unprecedented economic growth during the period of reform that began in the late 1970s has been accompanied by a dramatic demographic transition — namely, a rapid decline in the fertility rate.


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In the period 1978–2015, China realised a real growth rate of gross national income (GNI) of 9.6 per cent — the fastest speed anywhere in the world in that period. On the other hand, according to the United Nations, China’s total fertility rate (TFR) dropped from 2.5–3 in the late 1970s and early 1980s to a replacement level of 2 in the first half of the 1990s and has remained constant at about 1.5 since the second half of the 1990s.

The actual level of China’s TFR is debated. The results based directly on various censuses and 1 per cent population sampling surveys show an incredibly low TFR. For example, the rate was 1.22 according to the 2000 census, 1.34 according to a 2005 sampling survey, 1.19 in the 2010 census and 1.05 from a 2015 sampling survey. Even after data adjustment based on assumptions of statistical error, most scholars conclude that China’s TFR remains at 1.4 — a level lower than that published by the United Nations. The TFR increased moderately only after a relaxation of government policy allowed couples to have two children.

An unquestionable truth is that China’s TFR has stayed at a level significantly lower than the replacement level for a quarter of a century. Before it eventually brought about population ageing that is supposedly unfavourable to economic growth, this rapid demographic transition had helped form a population pattern that was characterised by a rapid increase in the working-age population and a decrease in the dependency ratio (the ratio of dependants to the working-age population). This is what economists call the ‘demographic dividend’. The contribution of the demographic dividend to economic growth has been recognised and documented in the economics literature. During most of its period of economic reform, China experienced a dual economy pattern of development that allowed China to harness its demographic dividend and transform potential growth into unprecedented economic growth. A favourable population structure thus helped China create the necessary conditions for high potential growth that was characterised by a high savings rate, sufficient supply of labour, rapid improvement of human capital and radical resource reallocation through labour mobility.

As the demographic transition enters a new stage, traditional sources of growth may be exhausted. The negative growth in the working-age and economically active populations has led to and is aggravating China’s labour shortage, which weakens the comparative advantage of China’s industry. The rapid increase in the capital–labour ratio has resulted in diminishing returns to capital. In addition, the slower growth of new entrants to the labour market has slowed the rate of human capital improvement. Finally, the ageing of the rural population has retarded urbanisation and thus diminished the momentum of labour reallocation in enhancing labour productivity.

All these changes point to the rapid disappearance of the demographic dividend and lead to a decline in the potential growth rate. China’s potential growth rate decreased from about 10 per cent in the period before 2010 to 7.6 per cent during the period of the Twelfth Five-Year Plan (2011–15) and 6.2 per cent during the Thirteenth Five-Year Plan (2016–20). The actual growth rate and the pace of its slowdown have so far followed this predicted trajectory.

China can tap into several policy measures to avoid falling into the so-called middle-income trap.

China needs to dig for the potential of its traditional growth sources. There is still huge potential for China to narrow the gap with developed countries in its share of agricultural labour. Pushing through the unfinished reform of the hukou system — that involves transforming migrants from guest workers to legitimate residents in urban areas — will greatly enhance labour participation in non-agricultural sectors and therefore the efficiency of resource allocation.

The gap in workers’ levels of human capital between China and the developed countries can also be narrowed by reforming the system of education and training to extend the average years of schooling and improve the quality of education. Reforms in a series of areas will create a better policy environment for small and medium-sized enterprises and strengthen competition to prevent diminishing returns to capital.

China can also exploit sustainable drivers of economic growth by improving TFP. As the capacity to reallocate resources between the agricultural and non-agricultural sectors shrinks, the reallocation of resources among non-agricultural industries and enterprises within narrowly defined industries will provide a new source of allocative efficiency — as long as there are differences in productivity among them. Reforms that aim to create a level playing field and a mechanism for ‘creative destruction’ — for example, in the financial sector and among SOEs — could create sustained sources of long term growth.

Beijing aims to achieve the ‘great rejuvenation’ of the Chinese nation and become a modernised country by 2050. The past 40 years of reform mark the halfway point to this final destination. Judging from past experiences and the potential of the reform dividend, reform and opening-up will remain immense sources of economic growth for China.

Cai Fang is Vice President at the Institute of Population and Labor Economics, Chinese Academy of Social Sciences, Beijing.

3 responses to “China must transcend its declining demographic dividend”

  1. There are a lot of good suggestions here. But not much about concrete policies aimed at encouraging young families to have more than one child. Are there enough family support services to encourage families with modest incomes to have a second child? Can they have enough fnancial security and hope for the future to have a second child?

  2. For all this talk about the fertility rate, why is it I am still hearing about the Earth’s population continuing to rise? In addition, if the fertility rate is bad in China, then why are the Chinese companies sending the jobs overseas or automating those jobs when their people still need jobs?

    • “For all this talk about the fertility rate, why is it I am still hearing about the Earth’s population continuing to rise?”

      Two reasons. First, the decline to sub-replacement levels in most countries is fairly recent (within the last three decades) and populations often continue to increase for some time after its TFR drops below replacement level (something like 2.1 in reality to adjust for infertility and early deaths) because 1. the demographic transition leads at that stage to a bulge in the share of females who are of childbearing age, and 2. the demographic transition usually is accompanied by a concomitant rise in life expectancy. However, in the case of China the population might fall more rapidly than the numbers take into account if one does not account for the sex ratio: there are currently 30 million and perhaps more men of marrying age in China who will never be able to marry a Chinese woman.

      Second, not all TFRs are yet below replacement rate (see India and Muslim countries) though they are approaching it (Latin America notably is just about over that hump) and in some places like sub-Saharan Africa there is little sign they are close to passing to that stage of demographic transition anytime in the foreseeable future.

      “[I]n addition, if the fertility rate is bad in China, then why are the Chinese companies sending the jobs overseas or automating those jobs when their people still need jobs?”

      For-profit companies exist to make profits. If automating or outsourcing labor cuts costs without cutting revenue it is the logical business choice, at least on paper. It may not be a very *social* choice but it makes financial sense in the abstract.

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