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Population dividend is diminishing after 40 years

By Cai Fang | China Daily Global | Updated: 2019-03-15 09:49

China's population is expected to peak in 2029 with 1.44 billion people. That is based on a forecast cited by the recently published Green Book of Population and Labor (2019), edited by the Institute of Population and Labor Economics at the Chinese Academy of Social Sciences.

This means China's population will then enter an era of negative growth. Such a prediction should not surprise us too much.

Based on the international experience of population development, the demographic transition theory asserts that a country's fertility rate tends to follow a reverse U-shaped curve. In the early stages, population development is characterized by a low birthrate and a high death rate, and as a result, low growth rate. But as per capita income increases, the death rate first declines while the birthrate remains unchanged, so the growth rate rises. Eventually, the birthrate falls as economic and social developments move forward, and population development enters its highest stage, characterized by a low birthrate, a low death rate and low growth rate.

China is no exception. Its total fertility rate (the number of children a woman gives birth to in her lifetime) dropped from 2.5-3.0 in the late 1970s and early 1980s to 2.0 in the first half of the 1990s. As a result of the fertility rate falling below the replacement level of 2.1 - namely, the minimum level for the number of children to replace their parents - it is inevitable for the Chinese population to shift from a rise to a fall at a certain point in time.

Long before the expected total population peak, the working-age population between ages 15 and 59 in 2010 had already reached a turning point, from an increase to a decrease. Such a dramatic change in the population age structure has significant implications for China's economic growth.

For most of the reform period, the rapid growth of the working-age population relative to the nonworking-age population, which is also represented by the decline of the population dependency ratio, had helped the high-speed growth of the Chinese economy through a sufficient supply of labor, improvement of human capital, high savings rate, high return on investment and efficient reallocation of resources.

Therefore, economic growth during the period benefited from the population dividend.

The shrinking of the working-age population and increase of the dependency ratio, which began in 2010, in turn indicated the disappearance of the population dividend, resulting in an economic slowdown.

In general, economic growth is driven by the accumulation and allocation of factors of production, which include inputs of labor, human and physical capital, and the improvement of productivity.

As far as the Chinese economy is concerned, whereas the absolute amount of labor force becomes limited because of its dependence on the magnitude of the working-age population, labor reallocation -namely, from agriculture to nonagricultural sectors - can still transfer surplus laborers from agricultural engagement to nonagricultural employment, other factors can be better mobilized, and productivity can be enhanced.

Since all these new drivers of growth require further reform, the expected effects of the reform to strengthen the potential growth rate of the Chinese economy can be attributed to the reform dividend.

The first step in that reform is to exploit the potential of the population dividend. Household registration system reform is an area in which the reform dividend measured by an increase in the potential growth rate is most apparent.

The second step in the reform should be that of taking advantage of the talent dividend. Reform in the education system should aim to accumulate overall human capital by improving the quality of education at all levels.

A third step is to gain a dividend from supply-side structural reforms such as reducing the debt ratio, mitigating transaction costs facing enterprises and startups in obtaining resources, and creating a level playing field for markets.

These reforms will help accomplish the transformation of China's economic growth from an input-driven pattern to an innovation-driven one, replacing the population dividend with a reform dividend.

The author is vice-president of the Chinese Academy of Social Sciences and chairman of the National Institute for Global Strategy of the Chinese Academy of Social Sciences. The views do not necessarily reflect those of China Daily.

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