Measurement of Reform Dividend and Priority Areas for Reform

In contrast to other research findings, we argue that the disappearance of the demographic dividend, characterized by a declining working age population and an increasing population dependency ratio, is the main cause of China’s declining potential growth rate. Therefore, as China’s demographic dividend gradually disappears, the reform dividend will become a key driver of China’s economic growth. By simulating possible reform areas within the growth calculation equation, we have the following findings: (1) Both the increase in labor force participation rate and TFP can boost the potential growth rate, but the effects are different in the short and long term (i.e., the labor force participation rate has a stronger short-term effect and a decreasing long-term effect; while the TFP has a monotonically increasing effect on growth. It reveals that China’s economic growth will rely more on TFP increases rather than traditional factor inputs. (2) Unlike the diminishing effect of increasing education rates on growth, increasing human capital by means of training can significantly boost the potential growth rate. If each employee has the opportunity for one-year training and further studies after every 10 years of service, China’s potential growth rate will increase by 0.3 to 0.4 percentage points. (3) By relaxing its population fertility policy, China will increase its long-term potential growth rate while improving its demographic structure. (4) Comprehensive reforms will result in an average of 1–2 percentage points of future reform dividend for China.