Population Quality and Economic Growth: Development Considerations from Three Chinese Cities

This paper examines the relationship between population quality, captured by education and health indicators, and economic growth in three cities in China: Beijing, Lanzhou and Guiyang. The aim is to explore the impact, if... [ view full abstract ]

This paper examines the relationship between population quality, captured by education and health indicators, and economic growth in three cities in China: Beijing, Lanzhou and Guiyang. The aim is to explore the impact, if any, of various educational and public health policies which were introduced by the Chinese government from 2000 onwards. City level data from 1995 to 2015 is used to investigate the relationship and how it may differ across the selected cities. The theoretical model draws on the Solow Growth model. We hypothesize that improvements in educational levels and health levels of the population in all three target cities has a positive impact on real GDP per capita growth. This is in keeping with the views of Romer (1986, 1990) and others.

The relationship between changes in population quality and economic growth has been of interest to researchers over time. Compared with the total quantity of population, and its growth or decline over time, population quality is also identified  as a key element of ‘human capital’ in the Solow growth model that may independently or in conjunction with available capital increase economic growth in a region. Romer (1986, 1990) state that human capital affects growth in at least two ways: through increases in education and training with the potential to spillover to other individuals, making other workers more productive; and directly through better educated and trained workers that more productive, have more knowledge and make better use of firms’ capital investments. Hall (1999) and Klenow (1997) also state that a further central proposition of endogenous growth models is spillovers between human and physical capital where better-educated and trained workers make better use of firms’ capital investments. Overall, there appears to be consensus that the educational level of a population increases economic growth.

Xu (2005) and Song (2014) argue that there are two main perspectives on population quality. The first perspective is that population quality consists of two factors: health and education. The second perspective is that the content of population quality should also include morality to make it complete. A higher health level in a population is helpful to the wellbeing of the population.  Considering the working age population particularly, their productivity is enhanced allowing them pay more attention to their work.

This is in keeping with the views of Romer (1986, 1990). Given the city level data, the factor analysis is used to pick useful variables and then, two indexes are calculated to present the educational and healthy level of population in three cities in time-series estimation. The empirical results support the hypothesis. Further, as expected, fixed asset investment per capita has a strong and positive effect on economic growth. The real R&D expenditure has a weak but positive effect on economic growth. The paper concludes with some insights on Chinese educational and public health policies to improve economic growth.

In addition as motivation for this research, because of the rising value of the Chinese currency (RMB), labour costs of multinationals is higher in China than other countries in south-eastern Asia. Multinationals choose other countries with lower labour costs to build their factories (He, 2008). However, the Chinese government supported the development of innovation-based industries vigorously to reduce China’s dependence on foreign investment and technology. It is argued that high quality labour is needed to raise living standards in the Chinese economy (Huo, 2011). Education is well developed in some provinces of China, such as Gansu and Guizhou. In this paper, Lanzhou and Guiyang are the two less-developed target cities chosen to examine the effect of key national policies about education and health development.

Most literature examining population quality, find that educational and health levels have positive and significant effects on the regional economic growth. However, almost all of the literature focuses on testing the relationship between the population quality and economic growth with little or no consideration of the rationale and key policies targeting improvements in population quality. China has divided its development into five-year period and for each period the government publishes an official ‘Five Year Plan’. The plan includes the key development policies focussed on each aspect, such as education and public health. In addition, some policies specifically target certain areas or provinces, such as the provinces in the western area in China while some policies focus on all areas in China.

Policy analysis is helpful and effective in identifying how changes in population quality in China in recent years has resulted from published plans, and their effects on economic growth. Key policies in education and health are identified from recent five-year plans and their main targets are highlighted. We expect that government policies may have different effects in different areas, which is one consideration of our research.  To examine and evaluate the impact of education and public health policies in China, cities in less-developed areas are selected and compared to outcomes in Beijing.  

Compared with previous literature, this paper mainly focuses on analyzing the key policies that the Chinese government published from 2001 to 2015 targeting improvement in the educational development and health level of the population. Detailed city level data is used to evaluate the efficiency of policy in this paper which is a distinction of this research relative to other research.

One of the main contributions of this research is the creation of two indexes to represent i) the educational level and ii) health level of the population. Many detailed indicators of educational level and healthy level are collected, following those used in prior research and given data availability at city level for China. Factor analysis is used to identify a set of variables from the many education and health variables published to be included in the empirical analysis.  With factor analysis as the basis, sets of useful indicators are assembled to create indexes of public health and education, following the approach in Zhang and Yu (2013). The empirical method is based on time-series analyses from 1995 to 2015 to estimate the effects of population quality changes, driven by education and public health policy, on economic growth in all three cities.

The empirical results support the general positive impacts hypothesized. Furthermore, as expected, fixed asset investment (measuring capital per capita) also has a strong and positive effect on economic growth. Real R&D expenditure has a relatively weaker but positive effect on economic growth. The effectiveness of education and public health policies in the different cities is evaluated. The paper concludes with some insights on Chinese educational and public health policies to further improve economic growth.

We observe that the growth rate of several relevant indicators for Lanzhou and Guiyang is much higher than Beijing. However, gaps of for indicators between Lanzhou, Guiyang and Beijing, such as the real investment in education per capita, remains large. Large gaps between the less developed and developed areas for some indicators reflect the difficulty in implementing necessary policies, such as increasing financial support in education and public health for less developed areas. This phenomenon is reflected too in gaps in measured economic growth between the developed and less developed areas in China: substantial gaps remain.

Most policies identified from our review of the five-year plans appear to have had significant effects based on the indicators assembled here for Lanzhou and Guiyang i.e. improvements in education and public health outcomes are evident in those cities. For example, policies focusing on higher education and vocational education development had effects on the institution numbers, admission numbers and the proportion of students in the population. A higher education level of the population seems to have had a significant effect on the regional economic growth based on the results from the literature and our research. For public health, the policies focusing on developing medical facilities and medical personnel also generated increases in bed numbers and medical personnel in Lanzhou and Guiyang that is helpful in creating a better public health environment to improve population quality.

References

He, H. Li, Q. (2008) China is breaking the ‘world factory’ away, Shanghai Financial News, CN:31-0101, 9^th, May, 2008 (in Chinese).

Hall, R.E. and Jones, C.I (1999) Why Do Some Countries Produce So Much More Output per Worker Than Others? Quarterly Journal of Economics, 14 (1), February, pp.83-116

Klenow, P. and Rodriguez-Clare, A. (1997) The Neoclassical Revival in Growth Economics: Has it Gone Too Far? NBER Macro Annual, National Bureau of Economic Research, Cambridge, Massachusetts. 

Romer, P.M. (1986) Increasing Returns and Long-Run Growth, Journal of Political Economy, 94, pp.1002-1037

Romer, P.M. (1990) Human Capital and Growth: Theory and Evidence, Carnegie-Rochester Conference Series in Public Policy: Unit Roots, Investment Measures and Other Essays, 32, pp.251-285.

Song D.N. (2014) Research about Population Quality and Economic Growth (in Chinese)

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Zhang, X.P. and Yu, J.X. (2013) Empirical Analysis on the Relation between Population Quality and Economic Growth of Our Country, Northwest Population, No.2, 2014, Vol. 35 (in Chinese)。