Avoid Middle Income TrapChallenges and policy options in China Xuejin ZUO, Shanghai Academy of Social SciencesRegional Forum: Journey to and From the Middle Income Status:The Challenges for Public Sector ManagersJointly organized by the AFDC, PRC and APCoPShanghai, April 25, 2014

After decades of high growth, Chinas economic growth rate is slowing down, from around 10 percent to below 8 percent (7.8 percent in 2012, 7.7 percent in 2013) . Further decline is projected by many studies. Slower growth leads to concerns on whether China would fall into middle income trap.The concerns come from two major facts:Demographic changes and the phasing out of the demographic bonus; The government interference into the microeconomic activities causing inefficient allocation of resources and the related risks.

Demographic Changes in ChinaChinas population has been experiencing a long-term change featured by very low fertility (below 1.5) and projected negative growth rate prolonged life expectancyprogressive aging of the population.

The 2010 Census DataThe sixth population census data reveal that in 2011, the total population in Chinas mainland was 1.34 billionincreasing by 5.84% over 2000-2010.

The Sixth Population CensusThe sixth population census reports that in Chinas mainland the total population amounted to 1.34 billion, grew by 5.84 percent in the last decade, averaging 0.57 percent per annum, below 0.5 percent since 2010. The data reveal the trend of low growth rate and rapid aging of the population.

The Sixth Population Census -2The young population aged 0-14 accounted for 16.60% of the total, declined by 6.29 percentage point as compared to the fifth census in 2000; The elderly 60 and older accounted for 13.26%, increased by 2.93 percent, the elderly 65 and older accounted for 8.87%increased by 1.91 percentage points. A simple comparison of data from the past censuses clearly show a long trend of population aging.

Total size and age structure of the population as reported by census

Growth, births and deaths,1949-2010

Chart1

362016

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37.817.820

371720

371423

37.9713.1824.79

32.612.2820.32

31.911.420.5

34.0310.823.23

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18.0214.243.78

37.0110.0226.99

43.3710.0433.33

39.1411.527.64

37.889.528.38

35.058.8326.22

33.968.4325.53

35.598.2127.38

34.118.0326.08

33.437.625.83

30.657.3223.33

29.777.6122.16

27.937.0420.89

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19.917.2512.66

18.936.8712.06

18.256.2512

17.826.2111.61

18.216.3411.87

20.916.3614.55

22.286.615.68

20.196.913.29

19.96.8213.08

21.046.7814.26

22.436.8615.57

23.336.7216.61

22.376.6415.73

21.586.5415.04

21.066.6714.39

19.686.712.98

18.246.6411.6

18.096.6411.45

17.76.4911.21

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16.986.5610.42

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201020104.6900519951

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194936201654167

195037181955196

195137.817.82056300

195237172057482

195337142358796

195437.9713.1824.7960266

195532.612.2820.3261465

195631.911.420.562828

195734.0310.823.2364653

195829.2211.9817.2465994

195924.7814.5910.1967207

196020.8625.43-4.5766207

196118.0214.243.7865859

196237.0110.0226.9967295

196343.3710.0433.3369172

196439.1411.527.6470499

196537.889.528.3872538

196635.058.8326.2274542

196733.968.4325.5376368

196835.598.2127.3878534

196934.118.0326.0880671

197033.437.625.8382671

197130.657.3223.3385229

197229.777.6122.1687177

197327.937.0420.8989211

197424.827.3417.4890859

197523.017.3215.6992420

197619.917.2512.6693717

197718.936.8712.0694974

197818.256.251296259

197917.826.2111.6197542

198018.216.3411.8798705

198120.916.3614.55100072

198222.286.615.68101654

198320.196.913.29103008

198419.96.8213.08104357

198521.046.7814.26105851

198622.436.8615.57107507

198723.336.7216.61109300

198822.376.6415.73111026

198921.586.5415.04112704

199021.066.6714.39114333

199119.686.712.98115823

199218.246.6411.6117171

199318.096.6411.45118517

199417.76.4911.21119850

199517.126.5710.55121121

199616.986.5610.42122389

199716.576.5110.06123626

199815.646.59.14124761

199914.646.468.18125786

200014.036.457.58126743

200113.386.436.95127627

200212.866.416.45128453

200312.416.46.01129227

200412.296.425.87129988

200512.46.515.89130756

200612.096.815.28131448

200712.16.935.17132129

200812.147.065.08132802

200912.137.085.05133474

20104.69134100

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Total population as projected by UN: Medium VariantUN World Population Prospects (the 2010 Revision) projects that Chinas population will start to decline in 2026 at the peak of below 1.4 billion.At the end of this century, Chinas total population will shrink to 941 million.

Low VariantAccording to the low variantChinas population will start to decline in 2017 at the peak of 1.36 billion, falling to merely 506 million at the end of this century, smaller than in 1949.Either variant projects that turning point of chinas population from positive to negative growth will occur in the next 5 to 14 years.

Chinas Projected Total Population, 2010-2100 (million)

Assumption on FertilityThe main cause of population decline is low fertility. I did not show you the high variants, only because its fertility assumption seems too high.

Assumption on Total Fertility Rate (TFR), 2010-2100

Chinas TFR might be lower than the medium-variant assumptionThe UN medium variant assumes that Chinas TFR would increase from 1.51 in 2015-20 to 2.01 in 2100 might overstate the future fertility, if compared with the real changes in the above-mentioned neighboring countries/regions. By analyzing the data from the 6th Census Guo Zhiang (2012) found that the Chinas real fertility were below 1.5 in the past decade, and even below 1.4 for some years.

Based on the trend of the future fertility change, the real growth of Chinas population might between the low- and medium-variant projections; that is, Chinas total population will be between 500 million to 900 million at the end of this century, or about 40% to 70% of the total at the end of 20th century.

Changes in Age Structure: Working-age PopulationChinas working-age population aged 15-64 declined by 3.45 million in 2012. It is the beginning of a long-term trend. The UN median variant projects that Chinas working-age population will increase from 971 million in 2010 to 996 million in 2015, falling gradually thereafter to 526 million in 2100. After 2075, the working-age population will account for just over 55% of the total. The low variant reports that Chinas working-age population will shrink to 258 million in 2100. After 2075, the working-age population will account for merely half of the total population.

Chinas Working-Age Population (aged 15-64), 2010-2100 (million)

Chinas Population Elderly 65+, 2010-2100 (million)

Chinas Population Elderly 65+, 2010-2100 (% of total)

International Comparison: Total Population (UN medium variants)

International Comparison: Growth Rate (UN medium variants)

International Comparison: Percent 65+ (UN medium variants)

Economic Impacts of Demographic ChangesIncreased scarcity of labor supply and costs, the consequent change in comparative advantage of the economy. Population aging and its effects on saving/investment rate. On financing of social security system. On innovation. Discussions on Chinas falling potential growth rate.

Related Policy Issues Inadequate investment on human capitalLocal governments prefer more seeable hardware investment than human capital investment. Fiscal spendings on education has remained at low level (4 percent of GDP in 2012)Inequal distribution of such spendings between rural and urban areas, and between primary/secondary and tertiary education.

Issues on Shallow Urbanization or Half-UrbanizationBy the end of 2013, Chinas peasant workers totaled 268.94 million, of which majority were worker in cities. These peasanat workers in cities was statistically accounted as urban, however, do not get the equal rights as urban citizens in employment, social security, eduation and health care. In 2013, there were over 60 million rural children left at home villages by their migrant parents, and 35.81 million non-registered migrant children in cities. Neither left-behind children or migrant children get adequate investment in their education, health care and even parental love.

Short-Term Employment of Peasant WorkersLabor contract law and social insurance law mandates that the employer assign permanent contracts with workers after two terms of contracts. However, none of the peasant workers got such permanent contracts. The key is to create institutional arrangement which prevent welfare losses of workers in the process of mobility. The reforms in pension and health care are most important.

the role of the governemntThe active involvement of the local government in economic growth, esp in the allocation of factors such as capital and land. Chinas transition from industrialization to post-industrialization requires the transition of the role of the government.

Chinas land institution

Overuse of land by the local governments Local governments heavy reliance on revenues derived from land sales.

Financial depression and risksHigh concentration ratio of financial secorFast growth of local governments debts

The development of SMEs201318591161824

10181151122114GDP

Policy Suggestions1. Invest more in human capital

1220100-1416.6%

Promote the more efficient use of labor

Reform the land institution for better use of land

Reform the financial sectors

Improve business environment g

Further relax of fertility control policy

Questions and Comments are welcome!Thank you