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«ENVIRONMENT AND DEVELOPMENT The Changing Wealth of Nations ENVIRONMENT AND DEVELOPMENT A fundamental element of sustainable development is ...»

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Construction of human capital measures is an important step in assessing the contribution of human capital to economic growth. To date, such studies have used only partial measurement of human capital, having to do with education characteristics, for example.1 Additional benefits from human capital measures include the provision of useful information for policy makers, such as data that can be used to assess how the education policies of central and local governments affect the accumulation of human capital. This is especially important given the long-term nature of human capital investment. For example, since the early 1980s there has been a remarkable increase in the educational attainment of the Chinese population.

In 1982 the largest population group was concentrated in the “no schooling” category. By 2007 the largest category was “junior middle school,” equivalent to seven to nine years of schooling.

This chapter summarizes an estimate of China’s human capital stock from 1985 to 2007 by Li et al. (2009). Their work contributes to the objectives of this book in two ways: it provides an in-depth case study of an important asset, human capital, and how it has changed over time, and it provides an example of asset valuation derived entirely from country-specific data.


Li and colleagues use the Jorgenson-Fraumeni (J-F) lifetime income method to estimate human capital in China. While there are several alternative approaches to estimating human capital,2 the J-F method is the most widely used, particularly in the growth literature. It has an advantage because of its sound theoretical foundation, and the data needed for estimation are relatively easy to obtain (Jorgenson and Fraumeni 1989, 1992a, 1992b).

Under the J-F approach, an individual’s human capital stock is equal to the discounted present value of all future incomes he or she is expected to generate. Human capital accumulates through formal education as well as on-the-job training. Using data for wage rates and labor market participation cross-classified by gender, age, rural-urban location, and educational attainment, the expected lifetime earnings for each individual can be estimated.

Annex 6.1 provides a brief summary of the methodology as applied to China.

Annex 6.2 explains how the original figures from Li et al.

(2009) were recast to be consistent with the methodology of the World Bank wealth accounts reported in this book.

Stocks of Human Capital in China China’s total real human capital increased rapidly between 1985 and 2007, from $11,709 billion to $21,960 billion (in 2005 prices; see table 6.1). Average annual growth in this period was 2.9 percent. Growth actually declined between 1985 and 1994, but it accelerated to 9.6 percent in the period that followed. Growth in human capital overall was slower than economic growth; over the same period, gross domestic product (GDP) grew at an average annual rate of 9.3 percent. As a result, the ratio of human capital to GDP fell from 11 in 1985 to 7 in 2007.

However, human capital has grown much faster in China than in other countries. For example, in 1970–2000 the annual average growth of human capital in Canada was 1.7 percent per year (Gu and Wong 2009).

Like other countries, China has much more human capital than physical capital, but physical capital has been growing much faster than human capital since 1985. Important unanswered questions for China are whether investment has been overly weighted toward physical capital relative to human capital and how to determine optimal relative values of human and physical capital for sustainable economic growth.

Growth of human capital is attributable to several factors. Part of the growth is due to the increase in China’s population, from 1.02 billion in 1982 to 1.32 billion in 2007 (figure 6.1). There has also been a rapid increase in the urban share of total population, from 21 percent in 1982 to 45 percent in 2007; this is important because urban dwellers have higher per capita human capital than rural dwellers.

A large part of the increase in human capital, however, is due to an increase in


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educational attainment and the resulting increases in labor productivity and

earnings. Five categories of educational attainment are identified:

■ No schooling ■ Primary school (grades 1–6) ■ Junior middle school (grades 7–9) ■ Senior middle school (grades 10–12)

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Source: Based on Li et al. 2009.

The two categories with the least schooling saw their combined share of population fall dramatically, from roughly 75 percent in 1982 to 45 percent in 2007, while the three categories with more schooling increased from 25 percent to 55 percent over the same period (figure 6.2). The population with no schooling at all was cut by half, from 402 million in 1982 to 201 million in 2000, where it remained to 2007; this represents a decline from nearly 40 percent of the population to just 15 percent. The population with only a primary school education increased in absolute numbers, but its share of the population fell from 35 percent to 30 percent. Junior middle school registered the largest growth among all education levels: the number of junior middle school graduates increased from 181 million in 1982 to 471 million in 2007, roughly doubling their share of

total population. But the most rapid growth was seen among college graduates:

starting from a very low base of around 6 million in 1982, the number increased more than twelvefold by 2007 to more than 76 million.

Human Capital by Rural-Urban Location and by Gender Table 6.2 shows total real human capital separately for the urban and rural populations. In 1985, rural China held more human capital ($6,935 billion) than urban China ($4,774 billion). This continued until 1993, when accumulation of human capital in urban areas overtook rural human capital. While human capital


FIGURE 6.2 Population of China by Educational Attainment, 1982–2007 population (millions)

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Source: Based on Li et al. 2009.

increased in both urban and rural China, urban human capital grew very fast and by 2007 the situation was reversed: human capital in urban areas is now 73 percent higher than in rural areas.

A major factor in the rising urban-rural human capital gap is simply the growth in the urban population due to migration. The share of the urban population more than doubled, from 21 percent in 1982 to 45 percent in 2007.

Rapid economic growth and the transition toward a market-oriented economy have provided opportunities for human capital to realize much higher returns throughout the Chinese economy, but especially in urban areas. The other major reason for the shift in human capital from rural to urban areas is the education gap. In urban areas, the population with education at college level or above accounted for 2.5 percent of the population in 1985 and increased to 13 percent by 2007. But in rural areas, the corresponding figures remained well below 1 percent even by 2007.

Human capital increased for both males and females, but more slowly for females than for males. As a result, the gender disparity in human capital, already established in 1985, increased slightly by 2007. While females accounted for 44 percent of total human capital in 1985, their share decreased to 41 percent in

2007. Gaps can be the result of differential population growth, demographic changes, rural-urban migration, trends in educational attainment, differential rates of return to education and on-the-job training, and so on.

In comparison to other countries, China’s total human capital is quite large, more than that of any country except the United States. But this is due to its very


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large population. China’s per capita human capital is still relatively low. Per capita real human capital increased 62 percent, from $12,171 in 1985 to $19,687 in 2007 (table 6.3). All of the growth occurred in the period after 1994, when human capital increased at an annual rate of 9.2 percent. Therefore, although population growth contributed significantly to the total human capital accumulation before 1994, per capita human capital growth was the primary driving force after 1995.

The substantial increase in educational attainment during 1985–2007 contributed significantly to the growth in both total and per capita real human capital.

Changes in per capita human capital are much more uniform for each population group compared to the changes in total human capital reported in table

6.2. In 2007, total male human capital was about 41 percent higher than total female human capital, but on a per capita basis they are similar: female per


capita human capital is nearly 78 percent of male per capita human capital.

The gender gap appears to have widened over time, as per capita female human capital was 87 percent of male human capital in 1985. Most of the gender gap in total human capital can be attributed to differences in the size of the working population, returns to schooling and work experience, and gender differences in mandatory retirement age. (Retirement age is 55 for females but 60 for males under Chinese labor law; thus, men have an extra five years in which to generate income, increasing their human capital.) Although total urban human capital was lower than rural human capital in 1985, this gap reflects the very small urban population at that time. On a per capita basis, urban human capital was greater than rural, a gap that has decreased only slightly since then. The advantage of urban per capita human capital combined with the large migration from rural to urban areas shifted total human capital to urban areas by 2007.

Comparison with World Bank Estimates of Human Capital In constructing global wealth accounts, the World Bank must use data readily available for all countries; often the same or slightly modified parameters are applied to many countries because of a lack of country-specific information.

Naturally, when a country applies wealth accounting, using country-specific data instead of global parameters, the results may differ from the World Bank estimates.

The estimated value of human capital in China reported in table 6.1, $17,251 billion in 2005, is 44 percent higher than the World Bank estimate of $12,007 billion.3 There is a fundamental difference between the two approaches to measuring human capital: the World Bank uses the residual approach, while Li and colleagues use the J-F lifetime earning approach. But these different approaches need not produce significantly different results if consistent assumptions are made in both cases. Norway constructed human capital accounts using both approaches and found them to be very similar (Graeker 2008).

Why does the estimated value of human capital from the China case study differ from the World Bank estimate? The difference is explained by assumptions about a key parameter, the growth of future earnings—that is, the return to human capital.4 The case study authors based their assumptions on an analysis of growth in earnings over the past 30 years. Li et al. (2009) found that the average annual growth rate of real earnings was 4.1 percent in rural areas and 6.0 percent in urban areas and predicted that these growth rates for human capital will continue in the future. In the World Bank wealth accounts, the growth rate is 4 percent in all countries. Since most of China’s human capital is in urban areas, the higher growth rate assumed in the Li case study will result in much higher human capital than the estimate in the World Bank wealth accounts. The human


capital accounts for China demonstrate the importance of implementing wealth accounting at the national level, using country-specific information.

Summing Up Both total and per capita human capital have grown rapidly in China since 1995, especially in urban areas. The main driver of this growth has been increases in educational attainment and in opportunities provided by a market-driven economy, rather than population growth. A gender gap exists for total human capital, and on a per capita basis the difference between male and female human capital has increased somewhat since 1985. A large urban-rural gap has developed as well, mainly because of urbanization and large-scale migration from the rural areas to the cities. Reducing the urban-rural disparity will require more investment in rural human capital.

Global evidence presented in this book indicates that the share of human capital in total wealth increases as national income increases. Assessing the optimal investment in different capital assets is essential to ensuring China’s long-term sustainable development. The human capital accounts provide critical information that can inform growth analysis and investment strategy in China.


Annex 6.1: Methodology—Jorgenson-Fraumeni Lifetime Income Approach Jorgenson and Fraumeni estimate human capital using a lifetime income approach (1989, 1992a, 1992b). In principle, human capital includes both market and nonmarket components, but for China only market human capital was estimated because of data limitations. Lifetime income is estimated for the population based upon current education levels and income and expected future survival, education, income, and real wage growth rates. All estimated future income is discounted to the present to create estimates of human capital for a particular year.

Jorgenson and Fraumeni separated an individual’s lifetime into five stages.

Stage 1. No school and no work:

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where the subscripts y, s, a, and e denote, respectively, year, sex, age, and educational attainment, respectively; mi stands for lifetime market labor income per capita; and sr is the survival rate, defined as the probability of becoming one year older, G is the real income growth rate, and R is the discount rate.

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