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Unformatted text preview: 4 Demographic transition: implications
for growth Cai Fang and Dewen Wang China will need to maintain an annual GDP growth rate of 7.2 per cent to meet
ofﬁcial ambitions to raise the general prosperity of Chinese society, with GDP in
2020 predicted to be four times the level in 2000. Achievement of this goal would
mean that China had sustained a high rate of annual economic growth for more than
40 years. This would not be unique. Economies in Asia, such as Korea, Malaysia,
Singapore, Thailand and Hong Kong all sustained economic growth of more than 7
per cent per annum between 1960 and 2000 (Table 4.1). Growth patterns in the
Japanese economy over the past 40 years, however, offer an alternative model.
Between the early 1950s and mid 1970s, the Japanese economy grew quickly and
overtook many industrial economies. High rates of economic growth in the 1980s
were the product of an unsustainable ‘bubble economy’; growth has stagnated
since the bubble burst in the 1990sThe annual growth rate in Japan was 5.3 per
cent between 1960 and 1990 but only 1.5 per cent during the 1990s. What factors stimulate sustainable economic growth and what are the reasons for
low growth rates? The literature is extensive. Growth economists considera range
of factors to explain economic growth, such as the domestic and international
economic and political environment, improving education and public health standards,
the implementation of family—planning and labour market policies, and policy support
for greater international trade and savings (Barro 1997; Bloom et al. 2002).
Demographic factors, especiallythe population and age structures, affect economic
development. The reduction of high fertility rates creates opportunities for economic
growth when accompanied by education, health and labour—market policies (Bloom
et al. 2002). Sustained, rapid economic growth in East Asia demonstrates that 34 Demographic transition developing economies can move swiftly to bridge the income gap with industrial
economies. Recent studies indicate these successes can be attributed to a
considerable extent to the demographic transition that occurred in East Asian
economies (Bloom and Williamson 1997; Williamson 1997). Demographic transitions in East Asian economies began in the 19405 and 1950s.
Prior to 1970, economic growth potential was limited, income per capita was low
and accompanied by a high childdependence ratio. The average per capita GDP
growth rate was estimated at only two per cent. As a result of the demographic
transition, the proportion of the working population to the total population increased,
while the population dependence ratios declined (Table 4.1 ). These population
trends favoured the labour supply and savings rate and provided an additional
source of economic growth~the demographic dividend. According to Williamson
(1997), between 1970 and 1995, East Asian economies grew at average annual
rate of 6.1 per cent, 4.1 percentage points above the steady state growth rate.
Demographic transition contributed 1.5 to 2.0 percentage points to the steady
state growth rate, accounting for onequarter to one—third of the actual growth rate
and onethird to one—half of the steady state growth rate during the period. As the demographic transition progresses, the aging of the population reduces
the productiveness of the population and reduces the demographic dividend. Japan
completed the demographic transition first in East Asia and now has the most
rapidly aging population among developed economies. Some researchers (Hewitt
2003) attribute the sustained stagnation of the Japanese economy to its rapidly Table 4.1 Growth rates and dependence ratios in East Asia China Japan Korea Hong Kong Singapore Thailand Malaysia
GDP growth Rate (per cent) 1960—70 2.7 9.4 7.4 8.9 8.5 7.0 5.9
1970~80 6.3 4.5 7.5 9.4 8.9 6.9 7.9
1980—90 9.4 4.1 8.7 6.5 7.4 7.9 6.0
1990—2000 10.1 1.5 6.3 4.6 7.7 4,6 7.2
1960—2000 7.8 5.3 7.9 7.8 8.7 7.1 7.1
Average dependence ratios (per cent) 1960—70 79.2 49.1 84.7 75.3 81.8 95.1 95.4
1970—80 75.3 47.1 71.2 57.0 59.0 89.1 84.1
1980~90 56.9 46.3 52.4 44.8 41.9 66.1 72.3
1990—2000 53.3 49.0 45.5 45.1 43.6 54,9 71.7
1960—2000 65.0 46.8 62.4 54.6 55.8 74.9 79.3 Source: The World Bank, 2003. World Bank Online Database. Available online at http://
devdata.worldbank.org/dataonline/. 35 The China Boom and its Discontents aging population and inadequate pension system.The dependence ratio in Japan
declined much earlier than in other East Asian economies and then rose again,
suggesting that, as the population aged, Japan lost an additional source of
economic growth (Table 4.1). With the implementation of familyplanning programs, China has undergone
demographic transition more rapidly than most industrial economies. Challenging
questions currently face Chinese scholars and policymakers. First, will China
become an aging society before it becomes wealthy (Jackson and Howe 2004)?
Second, how can China sustain the demographic dividend through policy
adjustments? Third, through what other sources can China generate a demographic
dividend? This chapter attempts to answer these questions by identifying the
turning point where the demographic dividend becomes the demographic debt,
analysing the mechanisms by which the demographic transition affects economic
growth, and estimating the contribution of the population factor to economic growth. Demographic transition, demographic dividend and sources of
growth A variety of theoretical models is used to illustrate the relationship between
population and economic growth. These models also indirectly influence the
orientation of policymakers. Prolonged debates have not produced a
consensus.Observation reveals a conflict between the facts and theoretical
assertions (Hodgson 1988). Population should be acknowledged as a factor
affecting the conditions of economic growth, but the nature of population‘s impact
on economic growth is uncertain, although its inﬂuence is certainly not independent
(Kelley 1988). One shortcoming in conventional economic theories of growth is
that theories consider population change as a steady process—that is, they only
focus on the magnitude and growth of population, while neglecting changes in the
age structure during the demographic transition (Williamson 1997). The process of demographic transition is characterised by a time differential,
as the decline ofthe birth rate and mortality moves through three phases, from a
high dependence ratio of children to a high proportion ofworking population and
ﬁnally a high dependence ratio of the aged. Different age groups within the population
have different consumption patterns, savings behaviour and labour participation,
and therefore different age groups will have specific effects on economic growth.
A high proportion of aged population and/or children increases the burden on
society of dependents and reduces productive, therefore negatively affecting 36 Demographic transition economic growth. Similarly, when the working population is relatively larger. the
population structure is more productive because the labour supply and savings
rates are larger. The demographic dividend is created in these circumstances (Bloom
et al. 2002). A developing economy or region with a productive population structure
can take full advantage of the potential demographic dividend. The demographic
dividend provides an additional source of economic growth. Changes in the population
structure during the demographic transition have both a direct and indirect impact
on economic growth. The first impact is through the effects of labour supply on growth. The growth of
the working population may not keep pace with the growth of the total population
during the process of demographic transition. The demographic transition changes
particular segments of the population as it passes through the three phases.
While the working population grows more slowly relative to the total population,
the population must assume a greater economic burden for dependents. In contrast,
faster growth of the working population relative to the total population is
accompanied by a declining economic burden on the population. Without economies
of scale, the production process and factors of production could be substituted for
one another and changes in the labour supply would have little effect on longrun
growth. However, the division of labour creates economies of scale and a decreasing
labour supply will weaken the effects of the division of labour and reduce total
output and income per capita. Even assuming the unchanged productivity of labour,
any reduction in the magnitude of labour supply will cause a proportional reduction
in total output. The second effect is the impact of changes in the population structure on the
relative shares of consumption and savings in national income (Kelly 1973).
Demographic transition is a prolonged process, encompassing the full lifespan of
individuals or even several generations. Over an individual‘s lifespan, savings will
increase upon entering the workforce and decrease in retirement. Thus, the national
savings rate and overall national capital formation will rise as the working population
increases. As the population ages, public investment expenditure increases with
the provision of pensions and medical care. As the proportion of nonproductive
expenses in total income increases, the proportion of public investment in
productive investment declines. Decline in the levels of private savings and public
investment reduces the growth of total output and income per capita. Peterson
(1999) summarises six negative effects of an aging population for society. Feldstein
(1995) ﬁnds an increase in social security expenses crowds out 60 per cent of 37 The China Boom and its Discontents private savings. Another study (Pench 2000) demonstrates that shocks from the
labour supply and public finances will negatively affect economic growth rates in
the European Union and Japan by 0.5 percentage points and the United States by
0.25 percentage points. In China, the demographic transition began to occur as early as the 1950s. Its
first effect was a dramatic decline in the mortality rate. ln 1950, the mortality rate
in China was 19 per 1,000, whereas the birth rate was 37 per 1,000.The natural
rate of population growth was a high 19 perthousand. In the following two decades,
with the exception of 1960, the mortality rate continued to decline and was
accompanied with a more slowly declining birth rate. As a result, the natural rate
of population growth increased, a trend which continued until its peak in the 1960s
The introduction of familyplanning programs and the effects of socioeconomic
factors combined to alter population trends, and the birth rate began to decline
gradually in the 1970s. Since the 19803, the birth rate and natural growth rate of
population have declined significantly as a result of economic and social reforms
and the adoption of strict state familyplanning policies in urban and rural areas. The structure of age within the population changes as the demographic transition
moves through the three consecutive phasesThe proportion of children in China’s
total population has declined and the proportion of working population increased,
while the proportion of the aged population has not increased signiﬁcantly. ln the
period between 1953, when first National Census was conducted, and 2000, when
the ﬁfth National Census was conducted, the proportion of children (0—14 years old)
dropped from 36.3 per cent to 22.9 per cent, the proportion of working population
(15—64 years old) increased from 59.3 per cent to 70.2 per cent, and the proportion
of the aged population (65 years old and above) increased from 4.4 per cent to 7 per
cent (National Bureau of Statistics 2001 ), Changes in the population structure have
reduced population dependence, in terms of both child and overall dependence,
and enhanced the productiveness of the population (Figure 4.1). The result has
been strong labour supply and high savings rates, deﬁned as the ratio of ﬁxed
asset value to total GDP, and potentially an additional source of economic growth—
the socalled demographic dividend. Given the potential economic advantages from the age structure of a population,
high labourforce participation and employment allow the productive use of human
resources engendered by the population structure. in the period from 1978 to
2002, the size of the economically active population steadily increased and the
labourforce participation rate reached 70~86 per cent (Figure 4.2)—higher than 38 Demographic transition Figure 4.1 Changes in the population dependence and savings rate 90 DAged—dependence ratio
Youthdependence ratio
DSavings rate 60 Per cent 30 O
1949 1959 1969 1979 1989 1999 Source: National Bureau of Statistics (NBS), various issues. China Population Statistic
Yearbook, China Statistics Press, Beijing. most economies around the world. Despite changes in sectors of the economy
and ownership structures, economic growth has driven employment growth in
urban and rural areas.With favourable labour endowments and increasing expanded
opportunities for employment, economic growth in China has been supported by
an ample supply of low—cost labour, enabling the transformation of an advantageous
population structure into a comparative advantage in labourintensive industries.
The growth of the economically active population and employment has produced
an economic surplus and helped China establish a high savings rate. The savings
has remained more than 30 per cent and peaked at 44 per cent in 1993 (Figure
4.1), primarily because of the decline in the total dependence ratio under the
development of markets for production factors, which has lessened the social
burdens of dependents and enhanced the productiveness ofthe population. The demographic transition and savings rate Although there is little evidence of an absolute positive correlation between the
savings rate and income levels, a critical minimum savings rate is an important 39 The China Boom and its Discontents Figure 4.2 Economically active population, employment, and labour
force participation  economically active population , Cem loyment
800 — labgrforce participation rate T 100
700 P 90
v 80
A600 — c
.5 ’ 70 S
= ‘ U
V o.
g 400 ' ‘ 50 g
L; 300 4° 5
g » 30
IL 200 «
20
100 , ,0
0 t r O 1978 1982 1986 1990 1994 1998 2002 Note: Labour force participation rate is the ratio of economically active population to working
population; working population is calculated based on China Population Statistic Yearbook.
Source: National Bureau of Statistics (NBS), various issues. China Population Statistic
Yearbook, China Statistics Press, Beijing. factor for developing economies to take off and a sustained high level of savings
is necessary for longterm growth. The general level of income per capita and
growth rate are preconditions to obtain the minimum savings rate. Savings rates
in high and middleincome countries are generally greater than those in low—income
countries (Table 4.2) because households at subsistence level have little surplus
income for savings. Savings rates tend to be higher when incomes are rising.
During their economic takeoff, East Asian economies such as Japan, South
Korea, Thailand, Malaysia, Singapore and Hong Kong had high savings rates,
which offer a good explanation for their economic performance. Savings rates in
East Asian economies were significantly higher than both the world and developed
economy averages (Table 4.2). For example, the savings rate in Japan was more
than 35 per cent in the 19605, while savings rates in Hong Kong, Korea, Thailand
and Malaysia were 20 to 30 per cent in the 1970s and continued to increase
during the subsequent two decades. As the Japanese economy and population
matured, the savings rate dropped gradually during the 1980s and economic growth
slowed in the 19903. 40 Demographic transition Table 4.2 Comparison of international savings rate (per cent) 1960—69 1970—79 1980—89 1990—99 2000~02
World average 24.5 25.3 23.4 23.1 21.6
Highincome countries 25.6 25.5 23.1 22.8 20.6
Middleincome ocuntries  25.3 25.7 25.3 26.1
Lowincome countries 11.3 17.3 19.6 20.7 20.0
OECD countries 12.9 25.4 22.9 22.6 20.4
United States 19.9 19.6 17.8 17.0 154
Japan 353 35.6 31.8 30.7 26.9
European Union  24.8 21.4 22.6 22.4
East Asia region  27.8 31.6 36.4 35.8
China  30.5 34.7 40.9 41.1
Hong Kong 22.5 30.8 33.5 32.4 31.0
Korea 8.7 22.3 31.0 35.1 293
Thailand 18.7 22.3 26.5 35.3 31.1
Malaysia 21.9 27.1 30.2 40.7 43.8
Singapore 4.0 28.6 41.7 48.2 45.6 Sources: World Bank, 2003. World Bank Online Database. Available online at http://
devdata.worldbank.org/dataonline/. The savings rate in China has continued to rise since the 1950s, with the largest
fluctuation in the period between the Great Leap Forward and the Cultural Revolution.
With the initiation of economic reforms in the late 1970s, income per capita has
substantially increased and the savings rate has also steadily risen (Figure 4.3).
The high savings rate has been viewed as a key factor contributing to rapid
economic growth since the reforms. While most debates about the savings rate
focus on government efforts to mobilise savings and capital market development,
whether household savings and consumption behaviour has an impact on national
savings and the extent of the impact has not been extensively discussed in the
existing literature. As the Chinese economy continues to undertake market
liberalisation and the structure of the population changes, the effects of the
demographic transition on individual saving behaviour will have important
implications for policymakers. In addition to factors such as income level, the real interest rate, resident location
in rural or urban areas, the mobility and maturity of the capital market and
macroeconomic policies, demographic characteristics such as household size,
household savings, consumption behaviour and population dependence have
recently been included in models to explain the savings rate in the Chinese economy.
Shi et al. (2002) constructed a model that explains the impact ofthe demographic 41 The China Boom and its Discontents Figure 4.3 Trends of savings rate and per capita GDP Savings rate — Trend of SR ‘ per capita GDP index 50 W T 2000
45 e f" 1800 a
C 40 r + 1600 2
C <94
8 ~ 1400 8
g; 1200 f:
g r 1000 ‘5
E . o
g 20 a / ~ 800 g
E 15 + ,f’ w 600 5%
m i 0
‘0 10 w/ ~ 400 :3
5 " W.M»\..,.,,,.mw/“'*""‘““""’ ~ 200 E
O~)r//ll)’l)r»l’ s) arm/1‘. 1‘ r l 1 ~17 0 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 Source: National Bureau of Statistics (NBS), various issues. China Population Statistic
Yearbook, China Statistics Press, Beijing. transition on China’s savings rate by employing variables such as the real interest
rate, childdependence ratio, ageddependence ratio, and economic growth rate and
time trends. Using a time—series dataset from 1958 to 1998, a cointegration regression
was run, which showed that both the child and ageddependence ratios were
negatively correlated with the savings rate. However, the results are sensitive to the
dataset. Left (1969, 1971 ) ran a crosssection regression using data from 74 countries
in 1964 and found variables such as per capita income, economic growth rate,
childdependence ratio, aged—dependence ratio and total dependence ratio have a
signiﬁcant effect on the national savings rate. Ram’s (1982) further study used
crosssection data of 128 countries in 1977 with similar ﬁndings. Following Leff’s (1969, 1971 ) model, this paper examines the impact of the Chinese
demographic transition on the savings rate using a provincial panel data set. The
data was collected in China's population censuses in 1982, 1990 and 2000, population
sampling over 13 years (1987, 1989, 1991—99, 2001 and 2002), comprehensive
statistical data and The Provincial Data in 50 years of People’s Republic of China
(1999) and China Statistical Yearbooks (2000—03) (all published by the National
Bureau of Statistics). The variables are deﬁned and generated as follows—the savings 42 Demographic transition rate is the share of gross capital formation in GDP; per capita income equates to
per capita GDP at 1952 constant prices; the economic growth rate is a fiveyear
arithmetic average to eliminate the inﬂuence of annual economic fluctuations; the
childdependence ratio is the percentage of population—aged 0—1 4 years to population
aged 15—64 years; the ageddependence ratio is the percentage of population aged
65 years and abOVe to population aged 15—64 years; the total dependence ratio is
the summation of childdependence ratio and ageddependence ratio. The regression results of equations (1) and (2) in Table 4.3 are based on the
Ordinary Least Square method (OLS). Except for the variable of per capita income,
the coefﬁcients for other variables including economic growth, the child—dependence
ratio, the ageddependence ratio and total dependence ratio, are all signiﬁcant at the
statistical level of 1 per cent or 5 per cent, and directions are consistent with theoretical
expectation. Heteroscedastic tests of regression equations (1) and (2) show the
values of 953 are 7.01 and 3.74 respectively; pvalues for rejecting constant variances
are 0.008 and 0.05 respectively, indicating the existence of heteroscasticity, When a regression equation has a heteroscedastic issue, the estimated
coefficients are unbiased and consistent, but the statistical values of the regression
equation, like the tvalue and Fvalue, are inefficient. To overcome the problem,
the Feasible Generalised Least Square method (FGLS) was run to generate
equations (3) and (4). The significant difference between the results from the two
methods is that the coefficients for variables of per capita income in the new
equations reached the one per cent signiﬁcance level, and the direction is consistent
with theoretical expectations. The coefficients for variables of economic growth
and dependence ratio are also significant, but the absolute values are less than
equations (1 ) and (2). The eastern region of China was chosen as a reference group. In all regression
equations, coefficients for the central region dummy variable reached the one per
cent significance level, but coefficients for the western region dummy variable
were insignificant, Earlier economic reforms and liberalisation in the eastern region
attracted a greater inflow of foreign capital and investment, which quickened
economic growth there relative to other regions. Financial transfers from the central
government contributed to savings and investment in the western region, but the
absence of preferential policies has led to a low savings rate in the central region
when other variables are held constant, Apart from the regional dummy variables, the coefficient for other variables in
Table 4.3 is values for the elasticity of savings rate. Absolute values for the elasticity
ofthe child—dependence ratio, ageddependence ratio and total dependence ratio
are greater than for per capita income and economic growth, indicating the
demographic age structure has an important effect on the savings rate. 43 The China Boom and its Discontents Table 4 .3 Regression results of the demographic transition on savings rate Variables OLS Method FGLS Method
(1) (2) (3) (4)
ln(per capita GDP) 0.013 0.015 0.044 0.040
(0.89) (1.05) (3.44)” (3.52)”
in(average growth rate of
GDP in the previous ﬁve years) 0127 0.092 0.058 0.054
(3.03)“ (2.23)* (2.41)* (253?
in(chiId—dependence ratio) ——0.186 —0.109
(3.25)“ (2.48)“
in(aged—dependence ratio) —0216 —0.1 13
(3.74)“ (2.59)”
ln(total dependence ratio) 70.25 —0.154
(2.99)” (2.97)”
Central region dummy —0.216 —0.186 —0.178 —O.159
(7.25)” (6.64)” (9.90)“ (10.73)“
Western region dummy »0.035 0.009 —0.037 ~0.006
(1.02) (0.28) (1.50) (0.33)
Intercept 4.622 4.377 3.749 3.734
(15.21)” (13.24)” (16.57)” (15.70)“
R2 0.38 0.36
Observations 426 426 426 426 Note: (1) Variables of year dummy are deleted for simplicity; (2) Absolute values of tstatistics in
parentheses in equations (1) and (2); Absolute values of zstatistics in parentheses in equations
(3) and (4); ‘ signiﬁcant at 5 per cent level; " signiﬁcant at 1 per cent level. Source: Authors’ calculations. These results support Leff’s (1969) findings. Although the coefficients for all
variables are signiﬁcant and the directions consistent with theoretical expectations,
the absolute values for coefficients differ in magnitude with Leff’s results. Based
on cross—country data, Leff(1969) reported the values of the elasticity of savings
rate of per capita income, economic growth rates, childdependence ratio, aged—
dependence ratio and total dependence ratio were 0.160, 0.025, —1.352,—0.399,
and —1.489 respectively. The absolute values of coefficients for China are less
than Leff‘s results. The greater variability in the crosscountry dataset is the main
reason for the difference between the magnitudes of the coefficients in Leff‘s
results and this study. However, the provincial dataset used in this study has an
advantage in that it effectively eliminates the unobserved effects of policies and
institutions. These possible effects cannot be eliminated from a cross—country
dataset. Another possible reason for the difference is the introduction of a year
dummy variable into regression equations to control for temporary shocks on the 44 Demographic transition savings rate. The coefficients of year dummy are significant with a range from
0.13 to 0.39, which may absorb some effects of other variables. Based on the values of elasticity in equation (3), the average contribution of
explanatory variables to the savings rate was calculated. The contribution of per
capita income is 17 per cent. Of that, economic growth rates comprise 0.3 per
cent, the child—dependence ratio 4.9 per cent, the ageddependence ratio —5.1 per
cent and total dependence ratio 5.1 per cent.There is a mutually opposing trend
between the child—dependence ratio and ageddependence ratio; the effects of
each ratio counteract the other. n assuming the childdependence ratio and ageddependence ratio affect the
savings rate in the same way, equation (4) defines the relationships appropriately
for further discussion. The contribution of total dependence ratio to savings rate
was calculated as approximately 5.0 per cent. Dividing the contribution ofthe total
dependence ratio into two components—namely, the contribution of childdependence
ratio and aged—dependence ratio—allows the relative changes to be examined. From
1982 to 2002, the total dependence ratio dropped by 33.3 per cent, ofwhich ~1 7.2
percentage points can be attributed to the decrease of child—dependence ratio and
017.2 percentage points to the increase of aged—dependence ratio. Therefore, the
contribution of the childdependence ratio to the savings rate is 6.0 per cent and the
contribution of the ageddependence ratio to the savings rate is —0.9 per cent. From the discussion of the results summarised in Table 4.3, we can draw some
conclusions. First, per capita income and economic growth rates are two important
determinants of the savings rate. Second, the demographic transition has a
significant impact on the savings rate. The decrease of child—dependence ratio
reflects the reduction of both the economic burden on the working—age population
and consumption expenditures forthe national income, contributing to an increase
in the savings rate. However, this effect is offset by the increase in the aged—
dependence ratio as the population ages. Finally, dummy variables denoting regional
policies and institutions have a significant role in explaining the savings rate. Effects of demographic transition on growth The steady—state growth of income per labour is theoretically determined by a
series of variables that includes physical and human capital, technological
advances, natural resources endowment, policies and institutions.This is
illustrated as y* = Xﬁ .Where y* is the steadystate growth of income per unit of
labour; X is a vector representing the initial conditional and structural variables,
and [3 represents the marginal effects of the variables. In this standardised
conditional convergence model, the factor of demographic transition is often 45 The China Boom and its Discontents excluded. However, ifthe variable of demographic transition is incorporated into
the above steadystate growth equation, the following mathematical equation
reveals that the demographic structure variable does have an impact on
economic growth. ~_Y_Y*L_ L_ 1 _ 1
y N L N yN y(L+L*D)/L yl+D Where Yis Gross Domestic Product (GDP), L is the number of labourforce, N
is the number of total population, Dis the total dependence ratio, yis GDP per
labour using the number of labour force as denominator and i is per capita
GDP Applying logarithm manipulation to both sides of the formula, the growth
rate of per capita GDP equals the growth rate of GDP per labour minus the
logarithmic value of total dependence plus one, expressed as The formula introduces the variable of demographic transition, demonstrating
that the increase (decrease) of total dependence ratio has a negative (positive)
impact on the growth of per capita income.The conditional convergence theory
asserts that the growth of per capita GDP is a function of initial conditional
variables and economic, policy and institutional structural variables. The
demographic structure should be included as one ofthe structural variables
determining long—run growth of per capita income. The regression equation can
be expressed as g} = ,80 + A lnGDP78 + ,82 lnLifeSZ + ,83Invest + ,B4Open + ﬂsGov + ﬂéD+ e where GDP78 represents the initial per capita GDP, Life82 represents the initial
life expectancy, Investrepresents the investment rate, Open represents the share
of trade in GDP, Govrepresents the share of government consumption in GDP, D
represents the total dependence ratio, [3,. represents parameters and e is the error
term. According to these theoretical assumptions, B2, B3, B4 are positive, while [3,, [35, [56
are negative. After controlling for structural variables, the growth of per capita GDP
is negatively correlated with the initial level of per capita GDP, which implies that it
is possible for low—income regions to catch up with more advanced regions. Life
expectancy is a proxy for the human capital stock variable. A longer life expectancy
equates with a high stock of human capital, and is expected to have a positive 46 Demographic transition effect on economic growth.1 Investment is the sole means to increase physical
capital stock. A higher investment rate can induce more rapid economic growth.
Trade has been viewed as an important engine of economic growth. The share of
trade in GDP was selected as an indicator of economic openness that indicates the
level of regional market development and integration into the international market.
Government intervention is generally assumed to have a negative impact on long
run economic growth.The share of government consumption in GDP is used as a
proxy variable for government intervention. The total dependence ratio represents
changes in the demographic structure, which can affect economic growth through
the labour supply, savings rate and technological advances. These are negatively
correlated with economic growth. The dataset is from the same source used in in the previous section. Assuming
that the longrun economic growth rate is the same as the steady—state economic
growth rate is the most common method used. The effects of initial conditional
variables and structural variables (Barro 1997, Bloom and Williamson 1997, Demerger
et al 2002) on the long—run economic growth rate are examined. Given data availability,
two periods of time were selected—1 982 to 1990 and 1990 to 2000 forthe regressions.
There were two considerations; first, three population censuses conducted in 1982,
1990 and 2000 can provide the necessary detailed information about total population
and age structure at a provincial level, and, second, the two periods of time have a
close interval, 8 years and 10 years. Pooled data on a provincial level from the two
time periods can substantially increase the sample observations and thus improve
the efﬁciency and precision of regression estimation. Dependent and explanatory variables are defined as follows. Per capita GDP
growth rates are the provincial arithmetic average in each period of time. lnitial per
capita GDP is the logarithmic value of provincial per capita GDP in 1978. Investment,
share of government consumption and openness ratios are also the provincial average
values in each time period . The total dependence ratios are the average of provincial
ratios in the same period of time. Because of the unavailability of data for Tibet,
Hainan, Chongqing and Ningxia before 1990, there are 27 sample observations in
the period between 1982 and 1990, while there are 28 in the period between 1990
and 2000. Equations (1 ) and (2) are derived from regressions from the data from each period,
while equations (3) and (4) are from regressions from the pooled data (Table 4.4).
Equations (3) and (4) are more signiﬁcant. in equation (4), equation (3) was expanded
by introducing a time period dummy variable, but the coefﬁcient was insigniﬁcant.
Therefore the results from equation (3) are used for further analysis. The good fit
(R2) of the equation (3) indicates the regression equation can explain about 57 per 47 The China Boom and its Discontents cent of the variation in the economic growth rate. The coefficients for variables of
the initial per capita GDP, investment ratio, openness, and total dependence ratio
are all signiﬁcant at the 5 per cent or 1 per cent levels. The coefﬁcient for the
variable of life expectancy is close to the 10 per cent signiﬁcant level, but the share
of government consumption is insignificant. The coefﬁcients for all variables have
the expected signs. This study also focuses on the impact of the demographic transition on economic
growth. In equation (3), the marginal effect of total dependence ratio is —O.115,
implying an increase in the total dependence ratio of 1 percentage point will cause
a decrease in economic growth of 0.115 percentage points. From 1982 to 2000,
China‘s total dependence ratio dropped by 20.1 percentage points, contributing the
equivalent of 2.3 percentage points to the growth rate. The average growth rate
during the same period was 8.6 per cent.That is, about onequarter ofthe growth
rate in per capita GDP can be attributed to the decline in the total dependence ratio during the period. Table 4.4 Regression results of economic growth versus demographic transition (OLS) 1982—90 1990—2000 1982—2000 1982—2000 in (per capita GDP in 1978) —3.239 —2.933 —3.234 —2.801
(3.53)” (3.20)” (5.64)” (4.09)” n(Life expectancy in 1982) —7.01 25.87 10.783 13.004 (0.84) (3.25)” (1.84) (2.11)* Investment ratio 0.065 0.086 0.077 0.079
(1.62) (2.38)* (2.63)* (2.71)“ Share of government consumption 0.059 ~0.272 —0.067 —0.114 (0.55) (2.15)* (0.85) (1.29) Openness 0.088 0.021 0.039 0.033
(3.29)” (1.89) (4.03)” (3.12)” Total dependence rate —0.158 —0.031 —0.115 ——0.072 (2.25)* (0.41) (2.87)” (1.33) Time period dummy 0.745 (1.15) intercept 61.629 —80.654 —14.126 ~28.075 (1.55) (2.22)* (0.54) (0.98) R7 0.48 0.69 0.57 0.58
Observations 27 28 55 55 Note: Absolute values of t statistics are in parentheses; * represents significance at 5 per cent;
** represents significance at 1 per cent.
Source: Authors’ calculations. 48 Demographic transition Figure 4.4 Predicted childdependence ratio, aged population
dependence ratio and rate of population ageing 70 DAgeddependence ratio
60 Youthdependence ratio
El proportion of aged 65+ 50 ' ‘g 40 0 h 6 o. Source: Authors’ own calculations, as based on data provided by China Center for Population
and Development Studies. Conclusion and policy implications China has had the potential to take advantage of the demographic dividend since
the mid 1960s, but reforms were necessary to take advantage of the potential
sources of economic growth. Since the reforms, the decline of the total dependence
rate has contributed 5 per cent to the increase in the savings rate and onequarter of
GDP growth. However, the increase in the working population will slow by about
2015, and the size of the aging population will increase (Figure 4.4). Recent predictions
suggest the total dependence rate in China will further decline from 42.6 per cent in
2000 to 39.4 per cent in 2015, and the 3.2 percentage point drop in total dependence
rate will add 0.4 percentage points to annual GDP growthThe demographic dividend
will have contributed onethird of the annual economic growth rate before the turning
point is reached in 2015, when the demographic dividend becomes a demographic
debt. Most industrial countries have benefited from the demographic dividend, but
this extra source of growth eventually ceases as the demographic transition is completed. 49 The China Boom and its Discontents Fulling using the economic potential of its advantageous population structure will
not only sustain economic growth, but also enable China to prepare for a rapidly
aging population.The next 10 years are a critical period for China, to simultaneously
reap the demographic dividend and promote alternative sources of economic growth.
China has undertaken a demographic transition quickly—experience with
unprecedented fast growth suggests the pace and direction of the demographic
transition can be guided by appropriate government policies. The adjustment of
population policies is needed to prevent the Chinese population from aging too
rapidly. Industrial economy experience suggests the use of a favourable population
structure as an extra source of growth can be replaced by other factors, such as
fuller employment, improved education and health levels and more efficient
institutional environments for economic activities. Models of longterm economic growth assume the workage population will remain
fully employed and unemployment is only a phenomenon of the shortterm business
cycle. That is, stable labour force participation rates and full employment of the
workage population are assumed for regression analysis. If unemployment becomes
a longterm problem for a high proportion ofthe economically active population, the
total dependence rate will not reﬂect the actual population burden and the contribution
of the potential demographic dividend will be less than the regression results would
indicate. Since the late 1990s, radical reform of stateowned enterprises has caused
massive unemployment and a fall in labour force participation in China. Increasingly,
levels of employment and the economically active population have lagged behind
increases in the size of the working population.Therefore a demographic dividend
still exists. While economic growth is a precondition for full employment, maximum
employment per se is a source of economic growth. The more effectively labour
resources are utilised, the longer the demographic dividend is maintained and the
advantageous development conditions, from low labour costs and high savings
rates, can be maintained. These conditions will require further reforms in a variety of
areas, including the elimination of institutional barriers that deter labour mobility and
the marketbased determination of wages. While the greatest advantage of the demographic dividend in China has been the
size of the labour force, this advantage will soon be lost. The accumulation of
human capital through increasing returns has been fuelled by the enormous size of
the labour force until now. The Chinese government faces two contemporary
challenges. First, the reallocation of public investment in education is critical for
improving education levels throughout the country. Second, it must promote the
development of a more efficient labour market that encourages individuals and 50 Demographic transition families to accumulate human capital through investment in education because
returns to human capital can only be generated in the labour market. The population structure will continue to age on average in the coming decades.
China will need to establish a sustainable pension system and make some critical
policy adjustments to safeguard society in this process. First, the transition from
the payasyougo system to a fully funded pension system must be immediately
implemented. This transition will require setting up individual accounts for workers
who entered the labour market after 1997, the year in which pension system reform
began. Second, the government needs to undertake a variety of policy adjustments
and public education programs to make society better informed and prepared for an
aging populationThird, improving labour market efﬁciency is a critical condition for
transformation of the pension system. Creating more work opportunities in the labour
market and raising the retirement age will reduce the dependence of older people on
social pensions by prolonging the number of years in the workforce. Including rural
tourban migrant workers in the pension system will also enhance the total premium
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