An Encyclopaedia on Chinese History, Literature and Art

Human Capital in China

Feb 20, 2023 © Lara Tönneßen
1. Introduction: The origin and importance of human capital for the economy
2. Theoretic classification: China’s current human capital
3. Analysis: Influences on China’s human capital development
3.1. Economic reforms and policies
3.2. Cultural Influence: Confucianism and intrinsic motivation
4. Outlook: Challenges and opportunities
4.1. Availability of human capital
4.2. Capitalization of human capital
4.3. Human capital differences between rural and urban areas
5. Conclusion

1. Introduction: The origin and importance of human capital for the economy

The economic idea of human capital originated in the 18th century when Adam Smith defined it as "the acquired and useful abilities of all the inhabitants or members of a society" (Smith 1776). Its importance came clear with the development of the human capital theory in 1962 by Gary Becker and Jacob Mincer. They argued that workers have a certain human capital that can be influenced through education and training and is as important to the economy as physical capital (Becker & Mincer 1964, as cited in Sweetland 1996). In more recent years, this concept has been expanded to the influence of other factors like the overall quality of life, health, and infrastructural aspects that impact the ability to access and maintain human capital. The concept of human capital is growing more significant as the world moves towards a knowledge-based economy, with highly skilled labourers becoming increasingly important and scarce.

Over the past century, China’s economy has accelerated and so the question of planning for human capital becomes more relevant for China as well. The following article will give an overview of influencing factors like economic growth, reforms, and investments and their influence on China’s human capital, as well as an outlook on the factors that will play a role in its future development.

2. Theoretic classification: China’s current human capital

As mentioned above, human capital development is largely dependent on education and training, however, there are multiple approaches to its measurement. The introduction of the Human Capital Index by the World Bank in 2018 allows certain comparability of a country’s human capital. It indicates the average human capital that can be expected by the age of 18 based on achieved productivity relative to full potential and combines health and education aspects. In 2020, China’s score of 0.65 put it above the global average of 0.56 and into the upper second quartile. This is significantly higher in comparison to the remaining East Asia and Pacific regions as well as other upper-middle-income countries (World Bank 2020). Another approach to human capital measurement is an analysis of the education system. When the Chinese People’s Republic was founded in 1949, the country had a poor education system, with a secondary school enrollment rate of merely 6%. However, the country’s policies changed beginning in 1978, with several reforms and restructures of the education system. Since that, China has implemented regulations such as the 9-year compulsory education and dropped school fees in 2007/08 (Wang 2019). Additionally, Chinese investments in its learning facilities and technologies have a year-on-year growth of 19% on average, amounting to about 10% of its GDP (OECD 2016; UNESCO 2022, as cited in World Bank 2022a). Nowadays, the quality of the Chinese education system has adapted to the standards of the industrialized countries, as seen in the following data.

According to the Human Capital Index the average years of schooling for a Chinese child, places it in the upper quartile globally, with 13.1 years (World Bank 2020a). Moreover, the enrollment rates in primary and secondary education have increased significantly over the past decades and compare to those of OECD countries. For example, the net primary enrollment rate has increased from 89% in 1997 to 99.94% in 2019, in comparison to an OECD average of 97% in 2018 (UNESCO 2022, as cited in World Bank 2020b). In terms of higher education, China had a tertiary enrollment rate of 58% in 2020, a significant increase from 1% in 1980. This number continues to grow and is above average for the East Asia & Pacific region (51%) yet below the OECD average of 77% (UNESCO 2022, as cited in World Bank 2022b). Following this increase, the share of the population with tertiary education amounts to 18.5% in 2020 and continues to rise, however, it still falls behind the OECD average of 39.9% (OECD 2022a; this includes the percentage of 25-64-year-olds with tertiary education). The improvements in the education system have led to an increase in the overall quality and level of education, as well as the availability of high human capital. Recent investments have targeted equality in access to education and human capital development, because although there is a good education system in urban areas, regional disparities persist, especially compared to rural areas. To conclude, the average level of educational attainment and consequently the average human capital in China has increased significantly over the past decades and placed it above the world and regional average. While China still falls behind in tertiary education compared to OECD standards, its high enrollment rates signal an upward trend.

Besides the country’s educational advancements, one can trace its rapid human capital development back to other influencing factors such as economic change and cultural influences.

3. Analysis: Influences on China’s human capital development

3.1. Economic reforms and policies

According to the human capital theory, the development of economic and human capital favour each other. A better economy increases the capacity to invest in better education, which leads to higher human capital and the availability of a skilled labour force resulting in an upward spiral. This trend began in China after 1978 when Deng Xiaoping initiated a series of economic reforms, promoting foreign trade and investments leading to fast growth of the Chinese economy. These policies and structural changes benefit the inflow of foreign companies with technological and managerial knowledge and promote the growth of human capital through learning effects. As a result, the Chinese economy shifted away from the status as the “factory of the world” towards that of a leader in human-capital-intensive structures like the high-tech economy (Chow 2004).

This is reflected in the development of the growth of the GDP over the past 30 years as well as the real per-capita income growth from 981.4 USD in 1990 to about 17,200 USD in 2020 (World Bank 2022c; World Bank 2022d).

Besides that, China has become a popular target for foreign direct investments and a new market for international companies and was thus allowed easy access to foreign company knowledge (OECD, 2022b). This shift in the economy can also be seen in the sectorial contribution to the GDP, as well as the distribution of the labour force, with increased dominance of the tertiary sector (National Bureau of Statistics of China 2021). In addition to the increase in human capital through knowledge transfer, economic growth has also ensured the availability of monetary capital for investments. China has promoted investments in innovation over the past decades and made it a part of its economic plan to become an established high-tech leader. Its monetary investments in research and development have reached 2.4% of the GDP in 2020 (EU: 2.2%, OECD 2.7%) and are growing at an average rate of 9% (OECD, 2022c). Besides that, its digital economy, including software, high-tech, and FinTech made up 30% of the GDP in 2019, with a software sector growth of 15% in 2020, contributing more than 1 trillion USD (CBBC, 2021). The growth of these sectors shows human capital growth, capitalization, and increasing demand simultaneously.

Secondly, China increased investments in the overall quality of life for the population, for example, the health system and infrastructural improvements, which are also measured in the Human Development Index with an increase from 0.499 to 0.768 between 1990 and 2021 (World average 2021: 0.732) (United Nations Development Programme 2022). The relevance of these improvements derives from access to education and employment, as well as the maintenance of developed human capital through health.

3.2.Cultural Influence: Confucianism and intrinsic motivation

Besides the political influence on human capital development, one can identify a cultural aspect in the intrinsic motivation of individuals to invest in high human capital. In Confucianism, education is considered the highest virtue and remains a prominent theme in writings and studies. The importance of education has moulded into the values and mentality of the Chinese population, giving it an important role in child upbringing and personal motivation (Tan 2017). Moreover, the cultural importance of Confucianism goes so far that it is said to have influenced Deng Xiaoping’s reforms since he shared the belief that for the growth and development of a country, the education system is of the highest importance (Prosekov 2018).

In conclusion, many factors have influenced the increase in Chinese human capital. The overall increase in the standard of life and improvements in the education system interact and benefit each other, allowing for an acceleration of overall progress. Besides that, the cultural aspects cannot be neglected, Confucianism has shaped the Chinese strive for educational attainment and has reached as far as to shape political reforms.

4. Outlook: Challenges and opportunities

4.1.Availability of human capital

As illustrated before, China is still making progress in the average human capital attained by its population. On the other hand, the country will also be forced to overcome some challenges in the next decades, one of them being the availability of human capital. Like in many other industrialised countries, the demographic structure of the population has drastically changed not the least because of the one-child policy employed in China between 1979 and 2015 (Zhang 2017). This can be seen in the number of children per mother declining from 5.81 in 1950 to 1.18 in 2022. The average age of the population in China changed from 22.2 in 1950, with a record low of 20.5 in 1979 to 38.5 years in 2022. The growth rate of China’s population has decreased from 14% in 1979 to 0% in 2022 (United Nations 2022).

This change can be interpreted in two ways. Research has found a quantity-quality trade-off in form of the only-child effect, which means higher spending on education and educational attainment and future earnings. However, this effect is controversial in China, as a causal relationship could not be proven (Zinabou et. al. 2021; Huang 2017). In terms of society, this change results in the decline of the working-age share in the population and therefore a lack of skilled workers and eventually an economic slowdown (Bairoliya & Miller 2021). The Chinese government has in part implemented useful strategies to tackle these problems, for example, the shift from a one-child policy towards benefits for families with more children, encouragement to pursue a high level of education to increase individual human capital, and strategies to attract highly skilled workforce from abroad, such as the Thousand Talents program (Qianren jihua 千人计划; The National People's Congress of the People's Republic of China 2021; Centre for China and Globalization 2017).

4.2 Capitalization of human capital

Another threat to the advancement of the Chinese economy is the high-tech/low productivity trap. This means that while a government spends large sums on innovation and education and the employment in these sectors grows, its productivity growth is in decline. This can be seen in China, where labour force productivity still falls behind that of other developed countries and intensifies with a declining working-age population. The results can be an economic slowdown. In order to oppose this tendency, a country can further invest in human capital while advancing innovation to increase productivity. At the same time, policies like the adoption of foreign technologies and management skills can increase total factor productivity and further increase human capital to make the best of the available human capital (Brandt et. al. 2020).

4.3 Human capital differences between rural and urban areas

Another challenge, which derives from the geographic structure of the country, is the growing disparity between the development of urban and rural areas. These can be seen in the discrepancies in income and quality of life and go along with lower access to education as well as job opportunities and migration (National Bureau of Statistics of China 2022). Currently, the east coast is highly developed and offers excellent education as well as career opportunities, while the less developed regions fall behind. This can lead to differences in the standard of life, the availability of human capital, and overall economic growth and rural exodus, further aggravating this problem. To improve this, the government has started different initiatives as part of their economic plans, such as the Education Modernization Plan 2035 (Zhongguo jiaoyu xiandaihua 中国教育现代化2035), which strives to increase educational equality and transform school environments in terms of equipment and buildings, or the rural vitalization to modernize rural areas (The State Council 2021; Zhu 2019). The goal is to match the quality of education and job opportunities in rural areas to urban areas and to tackle the problems mentioned above.

5. Conclusion

China has certainly experienced excessive growth in its human capital over the course of the past century. This growth was nurtured by a mixture of the appropriate policies and reforms as well as investments into important institutions, thus creating economic and human capital growth. As a result, the change in China’s economic structure, global position, and the rise in quality of life were substantial. However, it is important for China to further increase human capital and labour productivity to oppose the current challenges and further develop into an innovative society rich in human capital.

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