Population and the challenge of Chinese growth

Author: Cai Fang, CASS

In 1980, when the one-child policy was officially introduced, it was clear that it would be a ‘one-generation policy’ only.

At the time the government declared that in 30 years’ time, when the pressure of population growth had eased, population policy might change. The need to ease population pressure meant that a significant decline in fertility had to be achieved. The one-child policy was a policy that required huge effort to implement, and whose benefits would not be evident for many years.

Thirty years on, the Chinese government is confronted with another problem in redoubling its long-term efforts to raise the potential growth rate of the Chinese economy. The workforce has already begun to shrink. Confronted by a decline in the supply of labour, lifting economic efficiency through the reallocation of resources to lift output is now the major challenge.

In 2010, exactly 30 years after the one-child policy came into force, China conducted its 6th National Population Census. Based on these figures scholars have calculated that, on average, Chinese women give birth 1.8 times in their lifetime. It is debatable whether raw census data can be effectively used to estimate total fertility rate (TFR), so most people prefer to believe that the fertility rate is as low as 1.4. This is not only lower than the average of less developed countries (excluding the least developed countries), but also lower than the average level of developed countries. A fertility rate of 1.4 puts China among countries with the lowest fertility.

Over time, low fertility has caused China’s population age structure to change dramatically. According to the census, people between the ages of 15 and 59 (the core working age population) began to decrease in absolute number in 2010; it is predicted that this age group will fall by 29.3 million between 2010 and 2020. This fall implies a decline in labour supply.

At the same time, Chinese economic growth continues to generate a strong demand for labour. In the period 2001 to 2011, for instance, total urban employment (urban resident employees plus migrant workers) increased by 115 million. Even if this number is cut in half in the next decade, it will still be much higher than the new supply of labour constrained by the decline in the working age population. In the future as in the past, it will be rural-to-urban migrants — not new local entrants to the labour force — who will meet the demand for labour caused by economic growth.

Since 2004 the shrinking supply of — and increasing demand for — labour has led to wide labour shortage and rapid inflation of wages. This fits the pattern Arthur Lewis described in the 1950s, so 2004 is now widely recognised as the year of the Lewis turning point in China.

Labour shortage is a recurrent phenomenon, and this has caused the pattern and trend of Chinese economic growth to change. In the years when China could reap the demographic dividend prior to the turning point, the decline in the dependence ratio (the ratio of dependent to working age population) ensured adequate supply of labour and a high savings rate. At the same time, labour migration from agriculture to industry and the service sectors improved efficiency in resources reallocation, a significant source of productivity growth. Following the turning point, access to new labour supply is becoming limited, return on capital is diminishing, and the improvement of productivity is slowing down. As a result, the force driving economic growth is weakening.

Beneath the surface of increase in labour costs, a decrease in investment profitability and slow-down in the improvement of productivity, lies the problem of a reduction of China’s potential growth rate. The potential annual GDP growth rate has fallen from 9.8 per cent in 1995–2009, to 7.2 per cent in 2011–15 (under the Twelfth Five-Year Plan), and is expected to be 6.1 per cent in 2016–20 (under the Thirteenth Five-Year Plan).

There are reasons to be optimistic about China’s future growth: the potential growth rate can be lifted by creating a better environment for supply of the production factors and a lift in productivity. For example, hukou reform aiming at accepting migrant workers as urban residents with full access to public services will expand and stabilise labour supply; education deepening will enlarge the contribution of human capital to economic growth; eliminating obstacles preventing factors of production from moving among regions, sectors and enterprises will bring increased efficiency in resources reallocation.

The government must refrain from adopting industrial policies, regional development strategies and macroeconomic stimulus plans for the sake of maintaining the previous growth rate, because policy tools that aim to achieve a rate of growth higher than the potential rate will usually cause distortion of factor prices, deviation of industrial structure from where comparative advantage is strong, inflation, overcapacity and the protection of inefficient sectors and enterprises.

The government’s ‘visible hands’ — its various policy measures — usually have immediate effects on GDP growth. By contrast, reforms aiming at raising the potential GDP rate in the long run require more effort and more patience and time. It is therefore extremely important for the Chinese government to resist the temptation to employ policy measures that distort prices and waste resources to stimulate short term growth, and to make long-term efforts to raise the future potential growth rate instead.

Cai Fang is Director and Professor at the Institute of Population and Labor Economics, Chinese Academy of Social Sciences, Beijing. 

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