Cai Fang

　　The absolute number of China’s working-age population (aging 15-59) has been shrinking since 2012, and this trend of negative growth will continue. It is anticipated that some 30 million people of working-age will be lost between 2010 and 2020. 2012 saw no apparent employment shocks with a growth rate lower than 8%, and this shows that a fundamental change has taken place in the relationship between supply and demand.

　　Since the beginning of the opening up and reform, the favorable demographic trend has changed to a demographic dividend through higher employment, which contributed remarkably to economic growth. However, some impetus of economic growth will become disadvantageous when the dividend is cashed out, and this will lead to the corresponding lowering in potential growth rate. According to calculations, China’s potential GDP growth rate will go down to 7.2% in the 12th Five-Year Plan period (2011-2015) and 6.1% in the 13th Five-Year Plan period respectively from 10.5% in the 11th Five-Year Plan period. The substantial reduction in potential growth rate is directly related to the decreasing trend in the working-age population, and this certainly implies the reduction of the demographic dividend.

　　Three points need to be clarified about the slowing-down. Firstly, we should not be excessively worrying about it. China’s GDP could double by 2020 on the basis of the 2010 figures, a target made at the18th National Congress of the CPC, as long as the annual growth rate is kept at 6.9%. Deceleration provides space for China to step up the transformation of the economic development pattern. Secondly, if economic growth is set to exceed the potential growth rate, which is possible by stimulating demand, it will result in a series of problems like inflation, excess capacity, deviation from comparative advantage, etc. We should be aware that “Haste Makes Waste”. Thirdly, the right way to tackle the problem is to improve the potential growth rate by deepening reforms in related areas.

　　The potential growth rate can be raised by increasing elements like labor or capital and by changing production mode. Studies found that between 2011 and 2020, if the urban labor force participation rate is increased by 1 percent, the potential growth rate will improve by 0.88 percent; if TFP (Total Factor Productivity) is increased by 1 percent, the potential growth rate will improve by 0.99 percent.

　　To augment the potential labor force participation rate, we have to stabilize the employment of transferred rural labor forces in cities and towns through the promotion of the urbanization of migrant workers. At present, there are 160 million migrant workers who haven’t obtained permanent urban residential registration and lack access to parts of public services. Therefore, their employment in cities and towns is not stable and they may return to their hometown before retiring. If this situation is changed, the overall labor force participation rate will be improved significantly. The increase of the TFP growth rate can also be achieved by transferring labor forces from agriculture to non-agricultural industries. Compared with other countries in the same development phase, the proportion of agricultural laborers in China is still high. The transfer of rural surplus labor can still make resources reallocation more efficient and effective, which in turn will contribute to increasing TFP.

　　Moreover, resource reallocation efficiency can be achieved in another way, that is by creating a more level competitive environment and allowing essential factors of production to move freely between industries, departments and enterprises, therefore, allowing the elimination of inefficient enterprises from the market and letting the efficient ones expand. Some studies show that in a mature market economy, the contribution made by the reallocation of resources through free movement and competition of enterprises accounts for about 30%-50% of the TFP increase. To explore this source of productivity is an important measure to increase the potential growth rate, in that the transfer of rural labor force is slowing down.

　　The artical was first published in Chinese, and translated by Du Mei.

　　Editor: Du Mei