[Zhang Monan] Demographic dividend: A loss not to worry about
Published : Feb 25, 2011 - 18:02
Updated : Feb 25, 2011 - 18:02
Labor shortage, previously felt in some of China’s economically developed regions, is becoming a reality in the rest of the country now. This became evident again when some inland provinces entered into a fierce battle with eastern and coastal areas for laborers shortly after lunar New Year. 

The supply of abundant and cheap labor, called “demographic dividend” by many, is considered one of the most important factors for China’s economic growth in the past three decades. The World Bank estimates that demographic advantage has contributed more than 30 percent to the country’s fast-growing economy.

The fast-changing demographics ― one such change is shortage of laborers ― highlight the need for the country to expedite its economic restructuring process and transformation of its economic development model.

The proportion of China’s working-age population to its total population has been increasing and that of teenagers and children declining since the introduction of reform and opening-up in 1978. Statistics show that China’s population dependency ratio, which measures the proportion of a country’s population that is too young or too old to work, fell from 62.6 percent in 1982 to 38 percent in 2007. It has been below 40 percent since 2005.

A study of the country’s economic development since the reform and opening-up shows that a drop of 1 percentage point in China’s population dependency ratio will increase its economic growth by a 0.115 percentage point. From 1982 to 2007, the decline in the ratio contributed about 25 to 30 percent to the country’s per capita GDP growth.

“Demographic dividend,” or abundant supply of laborers, has at one time or the other also benefited the economic development of some other countries and regions, especially East Asia. But no country can enjoy the “demographic dividend” forever. Most of the countries, developed and developing both, have faced (or will have to face) an aging population. According to a study conducted by UBS, China’s population growth is expected to decline from 2015, undermining its decades-long “demographic dividend.”

The gradual disappearance of “demographic dividend” in the traditional sense, or quantity-based “demographic dividend,” means economic growth cannot be sustained by increasing the input of the factors of production alone.

No wonder, many analysts say China is reaching the “Lewis Turning Point” after three decades of reform and opening-up.

The Lewis Turning Point is a time in a country’s development when surplus of cheap labor runs dry, forcing employers to increase wages and benefits of workers because of a dwindling factor market. Hence, China should make greater efforts to transform its economic growth model and change itself into a country that depends on the quality rather than the size of its population.

To expedite the economic and demographic transformation, authorities have to carry out some sweeping reforms in various fields, ranging from labor division and the country’s industrial and employment structures to savings, consumption, investment, income distribution and social security.

The availability of abundant and cheap labor for years helped many domestic enterprises overcome their lack of capital ― they began making large quantities of cheap and labor-intensive products for domestic as well as foreign markets. And their success helped them establish a solid foothold in the manufacturing sector and maintain sustained economic growth.

But China’s existing economic development model has also made many enterprises excessively dependent on the continuous supply (and increase) of labor and capital to bolster their growth. This shows China’s “demographic dividend” is not based on quality but quantity (size of its population and supply of cheap labor). A quality-based “demographic dividend” means a country can ensure sustained economic growth by improving the quality of its workforce and production efficiency.

In this sense, China should not worry excessively about losing its quantity-based “demographic dividend.” On the contrary, it should see it as an opportunity to promote its economic and social transformation.

It should attach utmost importance to the cultivation and development of its labor force and consider its construction as the fundamental driving force of its economic and social development. By doing so it can prevent its workers from entering the vicious circle of “low income, low education input and low income” that many of their predecessors were (and are) caught in.

The country should try to develop production and service sectors that will generate more jobs and use the labor force to the optimum level in the best possible way.

Besides, China should accelerate reform in other vital sectors such as education, employment and household registration (hukou) and pension to clear the institutional obstacles hampering the development of the country’s labor force. As a move toward this end, strong measures should be taken to deepen education reform to improve production efficiency in the country and maintain and increase the competitive advantage of domestic industries over their foreign counterparts.

Since China’s quantity-based “demographic dividend” has started its march toward history, the country should try to generate a quality-based “demographic dividend” by setting up a labor resources market, upgrading its industrial structure and promoting technological progress. Only by doing so can the country speed up the transformation of its economic growth model from extensive to intensive base. 

By Zhang Monan

Zhang Monan is a research scholar in economics with the State Information Center. ― Ed.

(China Daily/Asia News network)