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The Impact of Declining Demographic Dividend and Socioeconomic Transformation

Jul 03 , 2012
  • Zhang Monan

    Senior Fellow, China Center for International Economic Exchanges

China’s rapid economic growth over the past decade is often contributed to demographic dividend. According to the data from the World Bank, the structural advantage of demographic dividend has contributed to more than 30% of China’s total economic growth. Recently, as demographic dividend starts to disappear, and low-end labor market is shrinking. These conditions will impact conventional profit model and future economic growth. If China maintains its current economic structure and relies its economic growth on exporting low-end manufactory goods, China will be trapped in low-end mass production with cheap labor and high cost of natural resources. In order to avoid this trap and promote future economic growth, China has to transform its current unsustainable demographic dividend structure into a more sustainable and quality-oriented structure.

 
Recently, China has started to experience labor shortage. The problem started to appear in eastern coastal cities, and it has soon spread into major inland cities and become a national concern. This trend has marked the end of “the Chinese golden age of labor surplus.”
 
Demographic dividend refers to a period of time with relatively low children and elderly dependence rate and abundant labor force. It is a period when the overall economy shows high labor force participation rate, high savings rate, and high labor allocation efficiency. It is also a period of decline in fertility rate and children’s dependency, a rise in proportional working-age population, and a relatively low ratio of the elderly population over total population.
 
Since the economic reforms of the 1980’s, China’s proportional labor force has increased every year, and its proportional youth population has declined from 62.6% in 1982 to 38.0% in 2007. Between 1980 and 2010, China has also experienced a declining birth rate from 20.19% in 1980 to 12.14% in 2010. This change has brought impacted Chinese economic growth, both positively and negatively. Since 2005, the population dependency ratio has remained below 40%. Studies have shown, for every 1% reduction in population dependency ratio, there will be a corresponding 0.115% increase in China’s economic growth rate. Between 1982 and 2007, decline in population dependency has promoted a total of 2.4% economic growth rate, contributing to roughly 25-30% of China’s GDP growth in these years. 
 
At present, China’s demographic dividend is disappearing. First, increasing aging population has become a big concern in Chinese society. The 6th Chinese National Census has shown an aging rate at 8.9%. By the year of 2050, the expected aging rate would be 30%, much higher than the expected global standard (20% by 2050), indicating a rapid growth in aging population. Second, the “Lewis turning point” is also emerging, indicating a decline in labor surplus in rural areas. According to the past national census, the number of migrant workers (who works outside of their hometown for six months and longer) increased by 6% between 2002 and 2006, yet this figure has gone down to 1.7% between 2006 and 2010. The overall growth rate of migrant workers has slowed down. According to the studies published by the Chinese Institute of Social Studies, between 2000 and 2013, China’s population dependency ratio is still growing at a relatively low growth rate. The year of 2013 is expected to be the turning point of Chinese population dependency rate. After 2013,the population dependency rate will start to decline, and the spillover effect of direct demographic dividend will decline correspondently. The expected rate of migrant worker growth rate in the next 10 years is 0.8-1%. More importantly, the Chinese per capita GDP is relatively low compare to other countries that have the same or similar demographic dividend conditions (including Japan, South Korea, Singapore etc.) The GDP per capita in these countries is around $20,000 to $30,000 per year, whereas the GDP per capita in China is only $10,000. Low per capita GDP indicates a possible decline in living conditions as the overall population age. Overall, China’s high economic growth rate is not sustainable under its current demographic dividend.
 
Over the past several years, China’s miraculous economic growth has heavily relied on the surplus of two major factors of production, namely labor surplus and capital surplus. It is widely acknowledged that China’s demographic dividend has remained at its initial stage, a stage relying on the quantity, instead of the quality, of its labor force. We can call this stage the stage of quantity-oriented demographic dividend. On the contrary, quality-oriented demographic dividend values the accumulation of human capital, human resources development, and improvement of total factor productivity of the labor force. In the model of quality-oriented demographic dividend, the profits of economic development can achieve sustainability by promoting and strengthening the formation of human capital.
 
From this perspective, experiencing a disappearing quantity-oriented demographic dividend is not horrific. On the contrary, it is a necessary and unavoidable process in China’s socioeconomic and structural transformation. Hence, putting in a larger context, we have to recognize the importance of human resources, and establish the primary status of human resources in socioeconomic development. Strategically, we should engage in improving the quality of human capital, and avoiding the vicious cycle of ‘low income-low education investment-low feasible capacity-low income.’ We should engage in developing the service sector, strengthening the work fields for sustainable jobs, and improving the overall quality of the labor force. More specifically, we should reform the education system, the employment system, the household registration system, and the pension system to reduce institutional barriers for human resources. To conclude, we should prepare ourselves for a decreasing quantity of labor force and aging population problems with more qualified labor force.
 
 
Zhang Monan is the Assistant Researcher at the Department of World Economics in the State Information Center.
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