POPULATION AGEING, HUMAN CAPITAL ACCUMULATION AND ECONOMIC GROWTH IN CHINA

Abstract

This paper uses a Computable General Equilibrium model to explore the macroeconomic impact of growth in the human capital stock for a given ageing profile of the population in China, during the first half of this century. It examines whether the projected reduction in the total dependency ratio for the period 2000 to the 2030s can be exploited for energetic human capital formation. Policy simulations show that accelerating human capital formation raises both total output and per capita real income dramatically. Public expenditure on education is, therefore, welfare enhancing, mitigating the adverse effects of population ageing while laying the foundation for supporting China's rapidly increasing elderly population. The basic policy message is that China should significantly increase investment in human capital. The long implementation lags of such policies and the rapidly growing proportion of the elderly population suggest that this investment should be undertaken without delay.

Keywords:

• population ageing
• human capital formation
• economic growth
• China

The author wishes to thank Peter Dixon, Yinhua Mai, Yew-Kwang Ng, Dietrich Fausten and two anonymous referees for their very useful comments.

Notes

1. A systematic evaluation of the macroeconomic effects of three alternative population policies for the twenty-first century shows that relaxation of the current population policy in China may stimulate GDP growth rate but affect the growth rate of per capita real consumption adversely (Peng 2005). The reasons for the failure of per capita real consumption to improve with aggregate output include: first, higher population growth requires higher exports which deteriorate the terms of trade; second, higher fertility regime impinges negatively on per capita output and consumption by reducing the per capita availability of the fixed factor (land); third, higher demand for investment in housing, transportation and other living infrastructure to accommodate the increased rate of population growth crowds out consumption.

2. See Zheng and Fan (1999) for details of the original PRCGEM and Peng (2005) for details of the modified version of PRCGEM.

3. α, β and η are 0.49, 0.49 and 0.02, respectively, in 2000 in China.

4. The literature on long-run forecasts of China's human capital stock is quite limited. The very important work in this field is Cao and Lutz (2004). Since their research does not forecast the graduation rates of different education levels and, furthermore, does not distinguish between junior and senior secondary education, it is difficult to calculate the average years of schooling based on their projected result.

5. Two other studies (Ahuja & Filmer 1995; Barro & Lee 2000) come up with reasonable findings, but I did not report the result because both studies use different age ranges.

6. See Peng (2005) for the detailed discussion on the change of national saving rate from 2000 to 2050.

7. See Back of the Envelope analysis for detailed explanation for the low growth of physical capital stock in Peng (2005).

8. The assumption of a fixed capital–investment ratio ties the growth path of investment rigidly to physical capital formation (Table 4).

9. Higgins and Williamson (1997), Bloom and Williamson (1998), and Higgins (1998).

10. Policy simulation shows that, with the extra investment demand induced by additional human capital formation, China still maintains capital outflows and domestic saving is still sufficient to meet domestic investment demand.

11. Another reason for the lower growth of per capita real consumption is that faster growth of exports causes the terms of trade to decline.