Investing in Citizens

By+Wang+Jun

Amidst an aging population and a changing growth model， China is looking to human capital rather than labor to fuel its economic growth.

This years Central Economic Work Conference held from December 9 to 11 decided that “economic growth should rely more on human capital and technological progress.”Experts think this indicates that the Chinese Government will invest more time and resources into improving the quality of the countrys human capital， particularly in the education sector and the labor market.

As discussed at the conference， Chinas biggest comparative advantage used to be a cheap labor force， which made it easy for advanced foreign technologies and management experience to transform into productivity soon after being introduced into China. Now， with an aging population， China has a smaller surplus rural labor force， so it makes sense that the country should shift its growth model， emphasizing human capital and technological progress， as well as turning innovation into a new engine that drives the countrys development.

Disappearing dividend

According to a report of Economic Information Daily， studies of experts in demography and labor economics indicate the aging population and the disappearance of that demographic dividend are the inevitable outcome of economic and social development. Demographic changes in China have happened in three stages： The fertility rate falls， the working-age populations growth rate drops to zero and the existing population ages.

The accumulation and vast reserves of Chinas human resources have been crucial to high-speed growth in the past 30 years. The country， nicknamed “workshop of the world，”has long been backed by long-term abundant labor supplies. However， in the face of a demo- graphic dividend， the country is also likely to lose such an advantage in the next few years.

“In China， a labor shortage was first detected in 2004， and the working-age population decreased for the first time in 2012. The interval between these two turning points is very short. In the future， Chinas aging population track will be similar to those in developed countries， but it will progress much more quickly，” said Cai Fang， Vice President of the Chinese Academy of Social Sciences （CASS）， adding that although this factor will not cause economic stagnation， it is still likely to slow down the economic growth.

As its vast supplies of labor no longer exist， Chinas labor cost keeps increasing， making it unlikely that the labor-extensive and industrial-driven economic growth model continue. According to the Economic Operation and Forecast Early Warning System for China Light Industry， the average monthly wages of workers in southeast Chinas coastal areas equal about $500， while those in Indonesia and Viet Nam are only$300 and $250 respectively. Chinas low-end manufacturing industries are becoming less competitive in the international market.endprint

In the meantime， the structure of the working population reflects the deficiency of Chinas human capital. Yin Xingmin， a professor at the School of Economics of Fudan University， said the ratio of research and development （R&D） personnel among 1 million people can indicate the contribution of human capital to the innovation. A high ratio and its rapid growth can reflect a growing human capital density in a country. For instance， Finland is a country with a population of only 5 million， but among every million people in this country， 7，700 are engaged in R&D， the highest in the world. In China， only 1，071 out of a million are engaged in R&D， indicating that China has far from enough input in human resources for innovation.

Hu Chi， a researcher with the Research Center of State-owned Assets Supervision and Administration Commission of the State Council， said a strong solution for China involves strengthening human capital.

“The core of our economic transition involves transforming the economic growth model and changing the labor-driven economic growth to a human capital-driven one，” said Hu when interviewed by Economic Information Daily.

According to Hu， in the adjustment to the industrial structure， the country must change the focus from labor-intensive low-end manufacturing industries to high-end industries mainly driven by high technologies， and from the traditional model based on production to a modern one that stresses both production and services.

“This means that the economic growth must rely on human capital instead of labor，”Hu said. “Only when Chinas economic growth completes the transformation from being labor-driven to human capital-driven can the country regain the internal driving force for the economic growth and realize economic takeoff again.”

Investments wanted

Currently， in China， the number of laborers is decreasing while human capital keeps growing， in contrast to previous trends， in which both increased rapidly. Experts think China should emphasize human capital investment in the future to accelerate upgrading of industrial structure.

“Why is the proportion of R&D investment against the total GDP rising sharply？ It is not input by the government， but the companies themselves， because they have to improve their productivity， and the importance of human capital is hence recognized. From the brisk training market you can see such importance，” said Cao Yuanzheng， chief economist of Bank of China， who believes the most important thing for China to do to improve productivity is to make full use of human capital， which he sees as the core of invention.endprint

According to the China Human Capital Report 2014 compiled by the China Center for Human Capital and Labor Market Research （CHLR） under the Central University of Finance and Economics， the ratio of GDP against the total volume of human capital keeps rising in China， indicating the average productivity of human capital is rising. Li Haizheng， Director of CHLR， said the growth of human capital in China during recent years is not brought on by the increasing population， but promoted by education and other factors.

Chinas total volume of human capital had reached 812.1 trillion yuan （$132.7 trillion） in 2010， among the top of the world， but its per-capita human capital is still low， ranking 43rd among all the 122 economies on the list.

Since Chinas per-capita human capital is still low， it is particularly important for the government to invest more in human capital， especially in two aspects： educating more people to raise the labor force participation rate， and improving the labor market for better allocation of labor resources.

In the education sector， experts suggest extending compulsory education and continuing college enrollment expansion. Chen Yuyu， Director of the Institute of Economic Policy Research of Peking University， said China will grow to become a country that supplies well-educated and skillful laborers from one with just abundant supplies of poorly educated and less skillful laborers. Chen thinks to adapt to such a change， China must fundamentally reform its labor market.

“In China， the rate of college graduates aged 25-34 among the total population is lower than those of other countries， which requires the government to continue expanding investment in human capital， including extending basic education，” Chen said. “And the college enrollment expansion should not be slowed down just because of temporary difficulties and nearsightedness.”

Cai thinks that the essence of current employment policy must be changed. Under the present conditions， the most pressing problem is no longer the creation of more job opportunities but that skills of laborers cannot adapt to the changes of industrial structures.

According to Cai， since Chinas working-age population has peaked and is now decreasing， the government has to raise the labor force participation rate—a ratio between the labor force and the overall size of their cohort. Growing a larger， more educated population requires further expansion of college enrollment， because higher education can improve the quality of laborers and stimulate high school education.endprint

In the labor market， Cao suggests the government to improve the efficiency of labor resources allocation through various supporting policies. Cao said that urbanization is in essence the urbanization of people and that capital is no longer reflected in monetary capital but rather in human capital.

“Urbanization does not mean merely building houses or subways， while the improvement of human capital is the core of urbanization. To improve human capital， a country needs a complete set of systems， and soft infrastructure such as education， healthcare and culture will become more important，” said Cao.

In other words， boosting Chinas economic value requires a simple change in investment—an investment in its citizens and well-being， a win-win situation.

“Under new conditions， we must guide the change of investment into sectors conducive to accumulate human capital，”said Li Yang， Vice President of the CASS.“Investment meeting such a requirement should obviously be made in education， healthcare， social security and other sectors of social infrastructure.”endprint