China: the two-child policy and its possible effects on growth

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January 8th, 2016

China's medium to long-term growth prospects are suffering from a rather unusual phenomenon among the emerging economies: an ageing population as a consequence of a falling fertility rate and rising life expectancy. In order to delay this phenomenon, at its annual meeting in October the Chinese Communist Party proposed the suspension of the one-child policy introduced in the country between 1978 and 1980, allowing all couples to have two children if they want. How will this measure affect the country's economic growth in the medium term?

One initial element to take into account is the fact that China's sharp drop in fertility rate pre-dates the one-child policy and is due to other measures which, like this policy, promoted birth control. In particular the largest drop in the fertility rate, from 5.8 in 1970 to 2.7 in 1978,1 was encouraged by the «late, spare, few» campaign advising women to get married later, have fewer children and with more time in-between them.

Moreover, a second significant factor is that the one-child measure included important exceptions and was less restrictive than its name might suggest. Already in the early 1980s two or more children per couple were permitted in rural areas, which at that time held over 80% of the population. This figure fell slightly to 70% in the 1990s but it was not until the end of the first decade of the new millennium when it went below 50%. Similarly, as from 1986, the government allowed two children for a large number of households meeting certain requirements such as one of the parents being an only child. Nevertheless, in spite of these important exceptions the birth rate continued to fall, from 2.7 children per woman at the end of the 1970s to the current figure of 1.55, so that other factors beyond the single child limitation have been put forward as the reason for this continued decline, some of these being the high cost of bringing up a child especially in cities, the far-reaching cultural impact of birth policies and the rise in women's level of education.

To get an idea of the possible effect of suppressing the single child policy we can use two scenarios for the trend in China's population carried out by the United Nations.2 Specifically, the high scenario reflects the probable trend in the fertility rate caused by the suppression of this demographic measure: it assumes a rapid increase in the fertility rate which would place it slightly above two children per woman by 2020 and at 2.25 by 2050. On the other hand, the low scenario assumes that the fertility rate will continue to fall, reaching 1.25 by 2050, in line with a situation of the one-child restriction continuing. In spite of this big gap between one scenario and another, during 2015-2050 the labour force decreases in both cases as most of the workers during this period (over 85%) will be individuals born before 2015, their number reflecting the prolonged drop in the fertility rate to date. Any «extra babies» born as a result of ending the single child policy will not join the labour market until well into the 2030s.

By 2050, however, the estimated labour force in the high fertility scenario would be 133 million larger than the labour force in the low fertility scenario (861 million workers compared with 728 million) since almost 40% of the workers in 2050 would be individuals born after 2015 and therefore affected by the change in policy. If we assume that productivity remains equal in both scenarios, in 2050 real GDP in the high scenario would be about 18% higher than real GDP in the low scenario.

Lastly, it is important to note how the suppression of the one-child policy might also affect precautionary savings over the coming years. In less developed countries children play an essential role in looking after and maintaining their parents once they are old and, in China, the one-child policy resulted in a considerable rise in savings for precautionary reasons. The suppression of this policy is therefore likely to have the opposite effect, reducing precautionary savings and thereby boosting consumption.

In short, the numerous and far-reaching birth control policies implemented in China over the last 50 years have left a mark on the country that will still be seen for several decades to come. Nevertheless the suppression of the one-child policy is welcome, bringing with it significant economic advances in the medium term.

1. Gu, B. and Cai, Y. (2011), «Fertility prospects in China», United Nations.

2. United Nations, 2015 Revision of World Population Prospects.