Making up for lost dividend

Updated: 2012-10-13 08:13

By Zhang Monan (China Daily)

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Making up for lost dividend

China should try to optimize resource allocation through tech-innovation to raise level of its manufacturing sector

China's economy is now at a turning point and it will gradually bid farewell to its decades-long dependence on savings-dominated low-price capital and re-adjust the values of its underrated factors of production. However, it faces major mid- and long-term challenges in adapting to an economic growth pattern that would not be dependent on the advantages of low costs. These challenges have gained in dimension because of China's slowing economy.

The underrated values of China's essential factors of production have been at the core of its economic growth model, its internal and external economic imbalances, as well as its low-grade industrial structure.

It is true that low labor, land and environmental costs, and a comparatively developed industrial auxiliary system have helped China avoid the otherwise negative effects of diminishing marginal return of capital and go into "value depression". But it is also true that China's waning "factor dividend" and advancement of the long-overdue resource pricing reform - which will inevitably result in the re-evaluation of the costs of its factors of production - will prompt changes within China's economic structure.

From the perspective of workforce, the environment and capital globalization, China's long "period of dividend" in primary factors is coming to an end. Because of changes in its demographics, especially its working-age population and government policies, the country has seen some changes in the workforce and previously high savings ratio. China's total factor productivity, too, is experiencing some delicate changes following the redistribution of its workforce.

That is not good news for a country whose demographic dividend is seen as one of the most important contributors to its "economic miracle".According to World Bank estimates, China's "structural advantage" arising from its demographic dividend has accounted for more than 30 percent of its economic development. With the nearly complete transformation of its demographic structure, however, this dividend is on the wane.

The proportion of China's working-age population to the total began declining in 2011. Statistics show that the proportion was 74.4 percent last year, a decline of 0.10 percentage points from 2010. That was expected, because last year China reached the "Lewis turning point" - the point at which a country's excess labor is fully absorbed into the modern sector and further capital accumulation means a subsequent increase in wages.

The country's aging population will further reduce its potential labor supply. The sixth national census, held in 2010, showed that the percentage of China's aging population to the total was 8.9, and it is expected to increase to 30 percent by 2050. The end of its "demographic dividend", including the reaching of the "Lewis turning point" indicates that China's urbanization will decelerate, slowing down the country's fast economic growth.

It is expected that on average China's urbanization ratio will be 0.8 to 1 percentage point year-on-year in the years ahead, much lower than the annual average of 1.35 to 1.45 percentage points during of the 9th Five-Year Plan (1996-2000) and 10th Five-Year Plan (2001-05) periods.

Compared with some developed countries, the waning of China's "demographic dividend" has caused more concerns because it is short of enough technological innovations to drive economic growth.

China is also expected to encounter a resource and environment bottleneck after the end of its demographic dividend. Its over-industrialization, excessive dependence on export and investment, as well as extensive economic growth model have seriously endangered its development sustainability which its limited resources, fragile environmental and ecology can maintain.

For decades, China's inexpensive resources have facilitated the mushrooming of the manufacturing sector, which unfortunately has also led to high-energy consumption and severe pollution.

Owing to the non-recyclable nature of most resources, no economic development model based on the depletion of resources can be sustainable. The environmental degradation, unstable supply of energy and water, and degenerating ecology China faces will restrain its economic growth in the long term.

From a global perspective, the era of cheap capital is also drawing to an end. The global financial crisis and the European sovereign debt crisis have not only sapped the spending capability of developed nations, but also caused a structural conflict between insufficient global demand and oversupply. Imbalances created because of excessive consumption, over-borrowing and high welfare have been corrected.

On the one hand, developed countries' deficits are expected to decline because of their dwindling demand and credit, and debt-restructuring and re-industrialization efforts. On the other, the feeble external demand and increasing risks created by rising exchange rates and trade protectionism have lowered the level of trade surplus of emerging nations.

The two factors combined will help global trade to strike a balance between income and expenditure. Besides, the changing global investment trends will also affect the movement of global capital and, like in the past, change the large-scale flow of capital into China.

Now that China is losing the advantage of low costs, as well as capital and demographic dividends it should try to optimize its resource allocation through technological innovation, accumulation of manpower capital and protection of intellectual property rights to expedite the transformation of its manufacturing sector from low-end to middle- and high-end.

The author is a researcher in economics at the State Information Center.

(China Daily 10/13/2012 page5)