The unprecedented economic growth in China over the past 30 years can be attributed
largely to the demographic dividend. That is, growth of the working age population
guarantees an adequate supply of labor; a decline in the dependence ratio (the ratio of the
dependent population to the working age population) helps to maintain a high savings
rate, which is the condition for capital formation; and an unlimited supply of labor prevents
return on capital from diminishing, which allows heavy investment to be the main source of
GDPgrowth (Cai and Zhao, 2012).
The demographic dividend is not derived from population size or the growth rate of the
population, but from a specific feature of the population age structure.
Simply put, an increase in the proportion of the working age population in the total population
and a decline in the dependence ratio provides a country an opportunity to have a high savings rate, heavy investment and rapid economic growth.
The country thus benefits from the demographic dividend. Over the period of fast growth,
few would consider the population age structure as a constraint of economic growth in
China.
However, the population age structure is ever-changing. As a result of population aging
the working age population stops growing and the dependence ratio no longer
decreases; eventually, the demographic dividend will cease to exist. Labor shortage,
diminishing return on capital and a decline in the savings rate will lead to a slowdown in
economic growth. This is what has occurred in China in recent years, particularly since
2004.
The potential GDP growth rate is determined by supply-side factors, including labor
capital and total factor productivity(TFP). In a growth accounting equation, holding constant
the labor force participation rate and the natural unemployment rate (i.e. the non-accelerated
inflation rate of unemployment , a reduction in the working age population will
directly reduce the potential GDP growth rate. In addition, the reduced supply of labor,
which causes diminishing returns to capital, and the increase in the dependence ratio,
which causes a decline in the savings rate, do not support the fast growth of capital
formation. Therefore, ceter paribus,the working age population in China will inevitably slow its economic growth.
Based on the data of the 6th National Census, the China Development Research Foundation
(CDRF, 2012) predicts the trend of the population age structure to change, and show that
the working age population, when assumed to be aged 15 to 59 years, started to decline in size in 2011, while the population dependence ratio calculated based on the working age
population (aged between 15 and 59 years) began shrinking in
the same year. This trend will not be reversed even if there is a moderate relaxation of the
one-child policy. Given that the population factor has had such far-reaching impacts on the
determinants of China’s economic growth, including labor supply, the savings rate, the
marginal return on capital and total factor productivity, such a change in the population
age structure is bound to reduce the potential GDP growth rate in China.
Based on the latest population data, the present paper simulates a decline in the average
potential GDP growth rate from 9.8 percent over the period from 1995 to 2009 to 7.2 percent
during the 12th Five-year Plan period (2011–2015) and 6.1 percent over the 13th Five-year
Plan period(2016–2020).Therefore,determining how to sustain economic growth is an important
challenge facing China.In light of the properties of the potential growth rate and the experiences
of China and the rest of the world, we make the following two suggestions.
First, the government should not seek an actual growth rate exceeding the potential
growth rate.
Second, the potential growth rate can be enhanced through the application of measures
to enlarge the supply of labor and capital, and to improve productivity. This requires
deepening reforms in various areas, such as the household registration system reform and
institutional reform.
By: Fang Cai,Yang Lu
Institute of Economics And Politics
Chinese Academy of Social Sciences
largely to the demographic dividend. That is, growth of the working age population
guarantees an adequate supply of labor; a decline in the dependence ratio (the ratio of the
dependent population to the working age population) helps to maintain a high savings
rate, which is the condition for capital formation; and an unlimited supply of labor prevents
return on capital from diminishing, which allows heavy investment to be the main source of
GDPgrowth (Cai and Zhao, 2012).
The demographic dividend is not derived from population size or the growth rate of the
population, but from a specific feature of the population age structure.
Simply put, an increase in the proportion of the working age population in the total population
and a decline in the dependence ratio provides a country an opportunity to have a high savings rate, heavy investment and rapid economic growth.
The country thus benefits from the demographic dividend. Over the period of fast growth,
few would consider the population age structure as a constraint of economic growth in
China.
However, the population age structure is ever-changing. As a result of population aging
the working age population stops growing and the dependence ratio no longer
decreases; eventually, the demographic dividend will cease to exist. Labor shortage,
diminishing return on capital and a decline in the savings rate will lead to a slowdown in
economic growth. This is what has occurred in China in recent years, particularly since
2004.
The potential GDP growth rate is determined by supply-side factors, including labor
capital and total factor productivity(TFP). In a growth accounting equation, holding constant
the labor force participation rate and the natural unemployment rate (i.e. the non-accelerated
inflation rate of unemployment , a reduction in the working age population will
directly reduce the potential GDP growth rate. In addition, the reduced supply of labor,
which causes diminishing returns to capital, and the increase in the dependence ratio,
which causes a decline in the savings rate, do not support the fast growth of capital
formation. Therefore, ceter paribus,the working age population in China will inevitably slow its economic growth.
Based on the data of the 6th National Census, the China Development Research Foundation
(CDRF, 2012) predicts the trend of the population age structure to change, and show that
the working age population, when assumed to be aged 15 to 59 years, started to decline in size in 2011, while the population dependence ratio calculated based on the working age
population (aged between 15 and 59 years) began shrinking in
the same year. This trend will not be reversed even if there is a moderate relaxation of the
one-child policy. Given that the population factor has had such far-reaching impacts on the
determinants of China’s economic growth, including labor supply, the savings rate, the
marginal return on capital and total factor productivity, such a change in the population
age structure is bound to reduce the potential GDP growth rate in China.
Based on the latest population data, the present paper simulates a decline in the average
potential GDP growth rate from 9.8 percent over the period from 1995 to 2009 to 7.2 percent
during the 12th Five-year Plan period (2011–2015) and 6.1 percent over the 13th Five-year
Plan period(2016–2020).Therefore,determining how to sustain economic growth is an important
challenge facing China.In light of the properties of the potential growth rate and the experiences
of China and the rest of the world, we make the following two suggestions.
First, the government should not seek an actual growth rate exceeding the potential
growth rate.
Second, the potential growth rate can be enhanced through the application of measures
to enlarge the supply of labor and capital, and to improve productivity. This requires
deepening reforms in various areas, such as the household registration system reform and
institutional reform.
By: Fang Cai,Yang Lu
Institute of Economics And Politics
Chinese Academy of Social Sciences
