Getting Rich Before Getting Old or Vice Versa?

REGARDING China’s economic and social out- look， there are two contending views in the domestic and overseas academic world. One predicts that China will get affluent before becoming an aging society， and the other holds the opposite opinion. A comprehensive and dynamic analysis is needed before reaching a conclusion.

Complex Factors in Economic Growth

Total Factor Productivity （TFP） is the most accepted measurement through which to judge total inputs’ output productivity， that is， the ratio of total output to total inputs. TFP includes technological progress， organizational innovation， professionalism， etc. An increase of this index refl ects the progress of science and technology. High TFP rates and high contributions to the economy indicate that China’s socio-economic development mainly relies on technological advances rather than other factors.

Zhu Xiaodong， professor at the University of Toronto， released “Understanding China’s Growth： Past， Present， and Future” （Journal of Economic Perspectives， 2012）. His research shows that from 1952 to 1978， China’s annual TFP growth was -1.07 percent， and 3.16 percent between 1978 and 2007， and that the TFP’s contribution to GDP Per Capita was -72.03 percent from 1952 to 1978 and 77.89 percent from 1978 to 2007. These statistics reveal that China’s TFP growth has been the main source of its economic growth since opening-up and reform， and suggest that China will become affl uent before getting old.

But there are some assumptions when calculating TFP. For example， the production function is assumed to have constant elasticity of substitution. So this analysis ignores some important factors in economic development， such as the effects of scale， and the composite effect between economic factors. Human beings are the most vital factor in economic activities； they not only integrate labor， land， raw materials， capital goods， fund， technology， etc.， but also make optimal confi gurations to maximize productivity. Different combinations lead to different effi ciency. In order to track the source of economic development and economic growth， labor， labor costs and human resources should not be mixed up.

The Key Role of Comparative Advantages of Population in China’s Economic Growth

China’s economic growth mainly relies on people， technology and scale. Regarding the people involved in economic activities， China’s advantage comes from economies of scale. In 1982， the employment fi gure was 525 million， and in 2012 the fi gure jumped to 1.125 billion， with no rivals in either the developed or developing worlds. The table shows that in 1982， the employment rate among 20 to 44 year-olds was 90 to 94 percent， with 410 million 20 to 59 year-olds participating in economic activities. In 2012， the fi gure from a sample survey reached 700 million. There is a huge population of welleducated professionals and technicians. According to the 2012 China Statistical Yearbook， 6.75 million students graduated from secondary vocational schools with 21.1 million students still on the campus； 6.25 million students graduated from colleges with 23.9 million students still at school； and 486，500 postgraduates obtained diplomas while 1.72 million were still studying for one. These skilled workers are equal to the entire population of some developed countries， laying a solid foundation for China’s sustainable development and economic growth. This provides China with a comparative advantage that leads to suffi cient competition and lower labor costs， even lower than that in many developing countries.

Taking advantage of its large population is central to the success of China’s opening-up and reforms. But for the fi rst three decades since the reforms， the comparative advantage had been in unskilled workers providing cheap labor， with abundant options combining land resources， international capital inflows， and advanced equipment imported from abroad. But as time passes and the international division of labor changes， the advantage moves towards professionals graduated from secondary vocational schools， college graduates and postgraduates. They have enhanced China’s status in the international division of labor， and changed the pattern whereby most of China’s industries were at the low end of the industrial chain.

Family planning policies do not determine whether a society gets old before it becomes affl uent or vice versa. However， they are beneficial for the harmonious and balanced development of society and the stabilization of the family as well as optimizing population structure. Following the Wenchuan earthquake and other natural disasters， many families lost their only child， resulting in deep resentment against the one-child policy. China is now fi ne tuning its population policy in consideration of social， moral， and cultural factors instead of the change in demographic dividend.

The decline in China’s TFP growth has attracted attention from certain experts. This reveals that China’s economic development and economic growth， contrary to what the academic field has concluded， are not attributable to high TFP growth and technological progress. When confronted with social impact such as the financial crises in 1997 and 2008， China’s TFP growth turned negative. The figure in 1979， 1980 and 1981 was -1.321 percent， -1.483 percent and -3.384 percent respectively；-0.575 percent， -3.599 percent and -4.413 percent in 1986， 1989 and 1990； and in 1998， 1999 and 2009 the figure was -0.861 percent， -0.712 percent and -0.402 percent. （See Zhao Zhiyun and Yang Chaofeng， “The Calculation and Explanations of China’s TFP 1979-2009，”published in Research on Financial and Economic Issues， issue 9， 2011）.

Zhang Xiaoqiang， vice minister of the National Development and Reform Commission， remarked that China has invested more in technological research and development in the 21st century. In 2012， over RMB one trillion（1.98 percent of GDP） was invested in science and technology， but the rate of technology transfer was only 10 percent， much lower than the 40 percent of developed countries. China’s economic growth still relies on inputs of a large quantity of resources and investment. In 2012， China was consuming 50 percent of the world’s steel， cement and coal. Its import dependence on petroleum was 57 percent， copper 70 percent， and in this cycle， high consumption of resources led to air， water and land pollution.

Avoiding the Middle-income Trap to Reach Affluence

To get affluent before getting old depends on whether China can escape the middle-income trap. The East Asia Development Report of 2006 raised the concept of the middle-income trap， meaning that very few middle-income economies ascend to the rank of high-income countries. They usually fall into economic stagnation because they can neither compete with low-income countries for salary nor with better-off countries for cutting-edge technology and inventions. Some countries in Latin America and Southeast Asia typify the middle-income trap. Japan and South Korea， on the other hand， have made the successful transition to high-income countries. Singapore， Taiwan and Hong Kong have also avoided the middle-income trap.

Compared with developed countries， the influence of China’s aging population has become more and more significant. Between 1982 and 2012， the population of age 65 and above had surged from 49.9 million to 127 million， making up 4.9 percent and 9.4 percent of the total population respectively， an increase of 62.6 million， up 4.5 percentage points. In the same period， the population of age 65 and above in the U.S. increased from 26.8 million to 41.8 million， making up 11.58 percent and 16.9 percent of the total population respectively， an increase of 15 million， up 4.5 percentage points. But China is a new middle-income country， while the U.S. is already a high-income country.

Escaping the middle-income trap depends on China’s development mode and institutional improvements as well as making the best of people’s incentives and creativity. China should take advantage of the present situation to further its reforms and opening-up. It should straighten out its system and mechanisms to guarantee sustainable and healthy economic progress instead of being complacent with the praise from some Western media. On one hand， China should make the best of its comparative advantages， including its ability to provide auxiliary items for some industries， its huge domestic market as well as a large population of educated workers. On the other hand， China needs to hasten its restructuring and transform development modes to balance the relations between government （including the central government and local governments） and market to reach a well-regulated， healthy market order. It also has to accelerate its opening-up and reforms and establish a fair distribution system as well as make optimal configurations to maximize such factors as human resources， market factors， science and technology， land， and capital. Increasing input in science and technology， promoting transformation of scientific and technological progress into productive forces， and accelerating institutional innovation are also necessary. In short， by strengthening system construction and taking a suitable path for development towards an effective and fair economy and social system， China can become affluent before getting old.