Transition from Demographic Dividend to Reform Dividend: Simulation of China’s Potential Growth Rate

Lu Yang and Cai Fang
 
The Institute of Population and Labor Economics, Chinese Academy of Social Sciences, Beijing, China  
Chinese Academy of Social Sciences  
 
Abstract: Due to diminishing demographic dividend characterized by a falling working-  
age population and rising dependency ratio, China’s long-term potential growth rates  
will keep declining, likely to be a mere 6.6% during the 13th Five-Year Plan period  
(2016-2020). China’s economic growth sustainability hinges upon its transition from the  
previous dependence on demographic dividend to the future reform dividend. In the growth  
accounting equation, we have simulated various reform initiatives and arrived at the  
following findings. First, although both the labor participation rate and TFP can increase  
China’s potential growth rate, the former will only achieve a short-term growth effect,  
which will diminish in the long run. By contrast, the growth effect of TFP demonstrates the  
tendency of continuous increase. This further indicates that China’s economic growth will  
increasingly rely on TFP improvement instead of traditional factor input. Second, different  
from the diminishing growth effect of enrolment rate, training may play a pivotal role in  
human capital development to significantly enhance potential growth rates. Third, if all  
reform initiatives can achieve their expected effects, integrated reform dividends may reach  
one or two percentage points of China’s potential growth rate.  
Keywords: demographic dividend, reform dividend, potential growth rate, total factor  
productivity, labor participation rate  
JEL Classification Codes: O47, J21, C53

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