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Society & Culture

China Does not Lack the Demographic Dividend

Jul 03, 2012
  • Ye Tan

    Economist & Commentator
Some scholars have attributed the current slowdown in China’s economic growth and rise in national debt ratio to the disappearance of the demographic dividend and therefore advocated for the policy of increasing fertility. Not only is this a one-sided view, but it is also a misinterpretation of Chinese history. In fact, China's economic development process is the process of progression in work efficiency, not the size of labor force. For example, land contract in rural area increased production efficiency, and free workforce flow in the city increased business efficiency. Therefore, we shouldn’t allow our anxiety over the disappearance of demographic dividend and losses of business projects overshadow the importance of labor productivity and business efficiency. The lack of a highly skilled work force resulting in labor inefficiency is the real origin of the problem China faces today. A new national policy to provide large-scale and high-level career training to migrant workers may be the only real solution. 
China’s economy nearly collapsed at the peak of population growth during the 1950s to 1960s due to the constraints of the planned economy. The increase in population failed to create neither an effective labor force nor an effective consumer groups. In the mid 60s, large-scales of “Educated Youth” from urban areas were sent to the countryside. However, not only did the migration not fundamentally improve the efficiency of rural labor, , it resulted in devastating poverty for the rural areas that forced the implementation of the rural land reform. 
Mr Chen Zhiwu, a renowned economics professor from Yale has once proposed a question: “Why are Chinese people hard working but not rich?” The reason is the Chinese economic system has a fundamental flaw where resources are mismatched. The harder laborers work, the larger the inefficiency of the economy, leading to poverty and damage to the economy. 
Only when the system loosens the restrictions on citizens’ ability to both make and spend money, will the population’s size and work efficiency be sustainable. That is how China's economic efficiency was significantly improved after the market-oriented reforms in the early 1980s. The current hot social issues such as household registration, market monopoly and so on, can all be summed up into one sentence: failure to reform the system to align with the current economic situation restricts the efficiency of China’s economy. What China needs now is to break the shackles of the system and start a new round of reforms that would raise resource efficiency. China needs more professionals and highly skilled workers, instead of streams of unskilled and uneducated migrant workers from the countryside.  
But Chinese still lacks large-scale and effective professional training for most of its workforce. Providing professional and technical education to the current work force has not become part of national economic policy. A large number of educational resources are wasted on useless competitions for awards and inefficient program configuration. 
Large numbers of the new workers in china only have the working skills for lower-mid level occupations. Only 5% of China’s working population has a college degree or above, the figure is often above 40% in developed countries. Therefore labor cost rose sharply due to the acute shortage of the highly professional and skilled personnel. According to the announcement by American Chamber of Commerce on March 26, the result of the annual industry climate survey shows that 43 percent of U.S. Investors consider “unable to hire highly experienced management level employees” the biggest business challenge they currently face in China. 30 percent of respondents believed the same last year. 
For for each iPhone that’s been sold for 600 dollars, Apple took a share of $360. Hardware distributors in the U.S., Japan, Korea, and Taiwan made $187. Yet for the assembly line workers in China, the share is only $6.54. The sharp comparison demonstrated some facts that have been deliberately disregard: In the global industrial chain, the market rates the importance of product innovation and production plant very differently. If China continues to maintain the economic model of large-scale labor force plus low wages, then China will continuously fall into “the trap of the manufacturing shop.” For those who argue China is in danger of the middle-income trap, I admire their optimism.
As for the “Disappearance of the Demographic Dividend”, let us refer to a historical data: according to the research results by Prof. Cao Shuji, in the recent decade, the average annual growth rate of China's population is at .5 percent, compared to a decrease of .5 percent over the last decade. What does it mean to have growth rate of .5 percent? Looking back in history, the population growth in China’s Qing Dynasty was also at .5 percent. However, this growth rate resulted in an increase of the total population by 1.65 times in one century and 2.71 in two. Later generations have referred to the period as having “rapid” population growth.  Following 1949, the annual population growth rate in China has remained stable at about 2 percent for a few decades – “population explosion”. Therefore the current the situation can be closely compared to the Qing Dynasty. The population will continue to grow in China. 
The cause of the current slowdown in China’s economic growth and the rise in the debt ratio is clearly not due to disappearance of the demographic dividend, but an inefficiency of the labor force. Therefore, China should promote reeducation of unskilled labor and reduce institutional barriers that stymie human resources development.
Ye Tan is economist and commentator based in Shanghai.
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