Time to tap the educational dividend

It is widely believed that the rapid growth of the Chinese economy in its reform period has benefited from the country's demographic dividend. In 1980-2010, China's working-age population aged between 15 and 59 grew at an annual rate of 1.8 percent. That helped China form what ancient Confucians considered the ideal population pattern in which the producers are many and the consumers few. It guaranteed adequate labor, improved human capital, high returns on capital investment, and resources reallocation (productivity), and therefore, unprecedented high growth. In the same period, the annual growth rate of gross domestic product was 10.1 percent.

Since 2010, the working-age population has declined, the population dependency ratio has increased, and as a result, economic growth has slowed. At this juncture, some scholars suggest that China can and should take advantage of its second demographic dividend. Before accepting the advice, however, we should first clarify what the second demographic dividend is and where we can find it.

Conventional wisdom regards the second demographic dividend as the favorable condition for high savings resulting from the decline of the dependency ratio. According to this view, in an aging society, if people recognize the necessity of saving for the rainy day as motivation and if there exists a fully funded pension system as a mechanism, a high savings rate can still be achieved. This explains how a second demographic dividend is created.

But it is not a low dependency ratio alone that will help China spur its economic growth after the window of working-age-population opportunity closes. By allowing capital investment to be coordinated with labor input, China was insulated from a diminishing return on capital during that high growth period. That is what the demographic dividend is all about. Therefore, finding ways to prevent a diminishing return on capital in an era without an unlimited supply of labor is the real challenge facing China in gaining another demographic dividend.

The first demographic dividend was basically a transitory advantage and it did not last as the driving force for economic growth. In a later stage of economic development, economic growth can no longer rely on the total size of the population and its age structure. Instead, future economic growth has to rely on sources that can be cultured and thus sustained. Economic theories and development experiences show that total factor productivity (TFP) and human capital are the most important, sustainable drivers of growth, and they are mutually conditional and supportive of one another.

By nature, TFP is an allocative efficiency, or gains from efficiently allocating production factors given their constant quantity. Since how well production factors are allocated depends on workers' skills and entrepreneurship, to increase TFP requires the improvement of human capital, which is a more demographic advantage. A large body of empirical studies shows that human capital, measured as years of schooling that workers attain on average, not only makes a direct and significant contribution to economic growth, but also makes an indirect contribution to economic growth by simultaneously improving TFP.

In addition to improving human capital through learning-by-doing, education is the major contributor of the overall accumulation of human capital. In addition, the foundation laid by various levels and types of education determines the effectiveness of learning-by-doing. Educational development is first embodied in the quantitative expansion of education, which is often measured as years of schooling. Educational development also has its qualitative dimension, the improvement of quality, however that needs to be based on the expansion of quantity. When the quality of education is set, the increase of years of schooling implies an overall enhancement of human capital, whereas the reverse is not necessarily true. The externality that characterizes education is the reason why quality of education should be improved through expansion of quantity.

Quality is a form of efficiency. In economic activities, efficiency improvement requires full competition and creative destruction－that is, letting efficient enterprises enter the market and inefficient ones exit it. However, different from material production, education is not only a means to supply production factors, but also to meet the goal of people's all-round development. For this reason, there can only be creation but not destruction in the process of education development. Incontrovertibly, schools cannot be bankrupted, nor students' learning process be interrupted.

Cultivating skills and talents requires expansion of education scale. That is, the efforts of increasing years of schooling for new entrants to the labor market are equivalent to the enhancement of both quantity and quality of education. The experience of China and other countries show that once the universality of nine-year compulsory education is completed, the window of opportunity for further increasing the years of schooling opens in pre-and post-compulsory education stages, which, in China's case, is preschool education and senior high school.

Prolonging compulsory education to include both preschool and senior high school will be economically and socially beneficial.

First, education that meets the demand of economic growth and social development in an era of rapid technological advancement has a high social rate of return. Studies show that the social rate of return for preschool education is the highest among all stages of education.

Second, the compulsory education stages are essential to block the intergenerational transmission of poverty. Surveys show that the existing gap in preschool education results in unequal starting point between rural and urban children, and that the lower enrollment of rural juveniles for senior high school and thus university is the root cause of social immobility.

Third, the government paying for those stages of education can relieve households' financial burden and reduce the costs of opportunity, therefore helping increase young parents' willingness to bear children, which is vital in a time of low fertility.

The author is vice-president of the Chinese Academy of Social Sciences and chairman of the National Institute for Global Strategy of the CASS.

The author contributed this article to China Watch exclusively. The views expressed do not necessarily reflect those of China Watch.

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