China’s Economic Growth Prospects

China’s Economic Growth Prospects

From Demographic Dividend To Reform Dividend

Cai Fang

In this book Cai Fang explores the contribution of demographic transition to economic growth in China’s reform period, depicts the population factors causing the economic slowdown since the second decade of the twenty-first century, analyses the challenges facing its long-term sustainability when the demographic dividend is disappearing, and proposes important policy remedies. He suggests that in order to avoid the middle-income trap, China's economic growth has to transform from an inputs-driven pattern to a productivity-driven pattern, which requires eliminating several institutional obstacles.

Chapter 7: The new engine of economic growth

Cai Fang

Subjects: asian studies, asian economics, economics and finance, asian economics, labour economics


The new emerges out of the destruction of the old. (Han Yu [ad 768–824]) As a result of the decrease in the working-age population and an increase in the population dependency ratio, the demographic dividend enjoyed by the Chinese economy over the past 30 years began disappearing in 2010. It is worth noting that the end of the demographic dividend is always embodied in a reduction in the supply of production factors, especially a reduction of the absolute labor supply, a diminishing return on capital, and a decline of the TFP growth rate resulting from the slowed rate of rural-to-urban migration. As can be expected by the neoclassical theory of growth, when the traditional engine of growth stalls, the future growth of the Chinese economy is bound to rely on the enhancement of TFP: a new engine powered by technological innovation and improved allocation of resources. For a country in which the government is heavily involved in economic activities, however, the government tends to take action in response to the vanishing of its comparative advantages and the slowdown of the growth rate. One such response—often seen in countries that have experienced similar changes in their development stages—is to stimulate capital investment in the hopes of improving labor productivity through an increase in the capital–labor ratio. When such policies fail, these government efforts usually invite retaliation by the law of diminishing return on capital.

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