The Second Demographic Dividend as a Driver of China's Growth

• Date: 01 September 2020
• Author: Fang Cai
• DOI: http://doi.org/10.1111/cwe.12350
• Published date: 01 September 2020

©2020 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 26–44, Vol. 28, No. 5, 2020

26

*Fang Cai, Senior Fellow, Chinese Academy of Social Sciences, China. Email: caifang@cass.org.cn.

The Second Demographic Dividend as a Driver of

China’s Growth

Fang Cai*

Abstract

As China’s demographic transition enters a new stage, the “fi rst demographic dividend” –

the economic advantage resulting from demographic changes in recent decades – is bound

to disappear permanently. China’s future development will be characterized by an aging

population. The “second demographic dividend” refers to new sources of economic growth

derived from this later population change. This paper reveals major constraints caused by

aging in China, which is characterized by a tendency to grow old before becoming rich. As

the population ages, human capital improvement slows, labor force participation declines

and consumption power reduces. This paper suggests taking advantage of a population

“echo effect” to improve human capital at all ages, to enhance workers’ ability to benefi t

from employment, and to improve the labor participation rate of the elderly, which in turn

would increase the income and social security of the aged. These measures are conducive

to future economic growth and to the cultivation of the second demographic dividend.

Key words: aging, demographic dividend, labor force participation, population echo effect

JEL codes: D04, J08, J11

I. Introduction

In much of the reform period since the late 1970s, China’s unprecedented economic

growth was accompanied by a favorable demographic transition. The period from

1980 to 2010 provided a population window of opportunity in which the working-age

population, aged between 15 and 59, grew at an annual rate of 1.8 percent, while the

dependent population in other age groups changed at an annual rate of −0.2 percent and

the annual real GDP growth rate was 10.1 percent (United Nations, 2019).

Reviewing the empirical studies that tried to identify the sources of Chinese growth

in the reform period of 1980−2010 (Cai and Zhao, 2012; Zhu, 2012), we find that the

major drivers of this growth were all related to population factors. That is, as some

institutional obstacles deterring the effi cient allocation of production factors, particularly

©2020 Institute of World Economics and Politics, Chinese Academy of Social Sciences

The Second Demographic Dividend as a Driver of China’s Growth 27

the labor force, were removed, the advantageous population age structure became a source

of economic growth, including employment expansion, human capital improvement, a

high savings rate, a high return on capital investment, and resource reallocation. China’s

unprecedented economic growth during the first three decades of reform was therefore

assisted by the demographic dividend.

However, the population age structure has changed since 2010, leading to negative

growth in the working-age population. As the result of labor shortage, reduction in

human capital improvement, diminishing returns to capital investment, and a narrowing

of opportunities for factor reallocation, the conventional demographic dividend has

been disappearing rapidly. In the period from 2012 to 2019, the average growth of GDP

declined to 7.0 percent.1

Such an economic slowdown, though, is an inevitable consequence of the

changes in the stage of economic development and the demographic transition.

Analyses of cross-nation data reveal that most upper middle-income countries, when

they are in their later stages, tend to experience a deceleration in economic growth

(Eichengreen et al., 2011, 2013). At this stage, the ways in which countries respond

to the economic slowdown, under the influence of government policies, determine

whether they can use new resources necessary for sustaining economic growth. As

different measures implemented by different countries will have different outcomes,

economic performance tends to diverge among countries. Those who failed to tackle

the challenges properly – and thus turned the slowdown into a long-lasting stagnation –

are considered to have fallen into the “middle-income trap” (Cai, 2019).

From this point of view, the focus of economic studies has partially shifted to

exploring new, more sustainable sources of growth as traditional sources vanish.

One such source that has been put forward, although not intensively investigated

on an empirical basis, is what has been called the “second demographic dividend.”

Considering China’s situation – namely, slowing economic growth coinciding with

a diminishing demographic dividend, researchers are keen to investigate the ways in

which such a resource can be developed.

However, two misunderstandings about the second demographic dividend may

potentially mislead policymaking. First, there are some who advocate population policy

change in the hope of reproducing a scenario of greater fertility and a growing working-

age population, as happened during the early demographic transition. Second, some

researchers, believing that a high savings rate is the key to the demographic dividend,

1Data are available from the National Bureau of Statistic of China website: http://data.stats.gov.cn/easyquery.

htm?cn=C01 (cited September 2019).