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China I: One Child Policy May Come Back To Haunt

International | Jun 13 2006

By Greg Peel

China’s One Child policy was introduced in 1979 by then Communist Party Leader Deng Xiaoping, who became famous for other population control measures using, for example, tanks. It was a simple concept back then intended to ensure China could continue to feed itself.

City-dwellers were allowed only the one child, while rural-dwellers were allowed two as long as there was a gap. The policy led to much abortion, as well as the murder of female infants who were deemed less favourable than a male who would ultimately be a bread-winner. One estimate suggests the population of China would have been 1.6 billion at the end of the twentieth century, instead of 1.27 billion. There are now some 60 million more males in China than females.

As late as 2000 Chinese officials were calling the policy a great success, and were calling for even more vigilance. What they weren’t to appreciate in the early stages of China’s great economic emergence is what affect it might have down the track. Within the next decade, China’s hitherto abundant labour force will begin to contract.

Australian National University researchers Rod Tyers and Jane Golley have been analysing the situation. They note the two key drivers of China’s economic growth have been the abundance of productive labour and an increasingly secure investment environment. Population policy will now set China apart from other developing Asian economies where relative labour abundance will increase, as will relative capital returns. If there is no change in population policy, there will have to be more stringent improvements in the investment environment in order to secure global foreign investment.

As China attempts to move away from its state-owned economy to a market-driven economy the present Communist party is aware that reform of the weak financial system is essential. The cost of local funds in China is some 40% higher than funds in the US due to the risk premium resultant from a segmented and incomplete financial system, as well as political instability and the concerns over the efficacy of the legal system.

A move away from a state-run system is also occurring demographically, where less state influence is being placed on demographic transition. What the implementers of the One Child Policy would never have anticipated is that a new China would have faced declining fertility rates anyway, just as every other economy has, when urbanisation, female education, increased labour force participation and lower infant mortality served to curb the need and/or desire for more children.

Demographic change has a profound effect on economic performance. Faster population growth should yield stronger GDP growth, but with lower per capita income growth. Demographic make-up will determine the division of household disposable income between consumption and saving.

According to the UN, China’s population will age dramatically over the next 25 years, with the percentage of over-60s expected to double by 2030. Over the same period, the percentage of working population (15-59) will fall by a tenth. GDP growth will suffer as a consequence. Since the dependent population is likely to live on accumulated wealth, the average savings rate must fall.

China is now realistically considering a 1.5 child policy (that will be an interesting one to police – the wisdom of Solomon may be needed) or even a two-child policy. The fall in GDP growth as a result of a falling workforce growth only serves to highlight the need for rapid financial reforms and a reduction of the current risk premium in order to encourage the levels of foreign investment needed to keep the economy rolling.

It may yet all become academic. So heavily polluted is China that population growth of any sort could be a fading pipedream.

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