The two-child policy: will it help Chinese economic growth or ageing?

Marcus Roberts
December 1, 2016
Reproduced with Permission

You probably remember the change in China's one child policy to a two child policy at the start of 2016.After thirty-odd years of trying to reduce the number of children that its subjects have, the Chinese Communist Party reversed course to try and increase its fertility rates. As we discussed at the time, this is a good thing in that Chinese people now have more freedom to determine their family size, but it is still a policy that assumes that the Party is able to have the final say in how big the Chinese family will be.

The driving concerns behind this change in family policy were a rapidly ageing population and the end of the "demographic dividend" (the growth in per capita income as a country's fertility rate declines and the proportion of working-aged people in the population increases). But, according to Jane Golley, a researcher at the Australian National University, writing in the Hong Kong Free Press , the gains from the two child policy are likely to be modest. She concludes that:

"China's two-child policy could contribute to higher rates of GDP growth (with a modest increase in domestic consumption) and it would reduce the proportion of the aged in China in the decades ahead, our research shows. But these impacts would be small - less than 0.5% per year of GDP growth and a reduction in aged dependency of 0.03 percentage points."

The trouble for the Communist Party is that it must continue to give economic growth and development to its people to keep it in power. People might forgive a dictatorship in return for material gains, but that arrangement will start to creak and break down if the material gains stop. And if the GDP growth does not keep pace with population growth, then GDP per capita will actually decline - the country might be getting richer but each person will actually be getting poorer. Golley predicts that GDP per capita would be 21 per cent (!) lower by 2050 under the two child policy than it would have been under the one child policy. She states:

"higher fertility rates would increase young people's dependency on their families and subsequently decrease the proportion of working-aged people in the population. According to our projections, this would substantially decrease per capita income."

Although she thinks that the two child policy should be retained, Golley does not think that it is a magic bullet for China's economic slowdown or its ageing problem. Instead, the Chinese Government should be focussing on increasing labour productivity and labour force participation rates, such as by increasing the retirement age, and reforming education, welfare and hukou (household registration) systems.

Once again the challenges facing the Chinese Communist Party due to its ageing population are largely of its own making. After over thirty years of propaganda telling people not to have more than one child and a generation that has grown up not knowing what a brother, sister, aunt, uncle or cousin is, it is hard to see how quickly the low Chinese fertility rate will climb in the years ahead as the family policy is relaxed. If it doesn't, then the Chinese population will continue to grow older and family structures will continue to break down. If the fertility rate does start to rise then the economic benefits may not be enough to sustain the Chinese people's continued tolerance of the Party's dictatorship. Perhaps it's time to build another island in the South China Sea and stir up some foreign trouble…