Will China's New Population Policy Achieve Its Intended Effect?

The demographic dividend question is no longer as simple as it once was.

One of the world’s most controversial population policies has finally been laid to rest. After nearly 40  years of mandating that couples were to have only one child, the Chinese government has now allowed for couples to have up to three children. These moves have been taken in order to deal with the ageing of the population and its effects on economic growth, consequences of the previous one-child policy. 

The restrictions placed on the number of children per couple resulted in low rates of population and workforce growth. Furthermore, the relative increase in the share of the old compared to the young increased transfer payments such as pensions, impacting the finances of the state.

An increase in births, it is argued, would ease some of these constraints on the Chinese economy.

On the other hand, nobody can expect this policy move to translate into immediate economic benefits. It will take years before the increased population would come of age to be inducted into the workforce; longer still, if the need is for highly skilled workers. If the aim is to increase the workforce, immigration provides an efficient way in order to boost growth within a shorter time period. Low population growth does not represent an economic constraint, but a political one determined by a certain imagination of what a nation should be.

People push trolleys loaded with grocery items as others wait to enter a supermarket, amidst the spread of the coronavirus disease (COVID-19) in Mumbai, India, April 14, 2021. Photo: Reuters/Niharika Kulkarni

Link between population and growth

Countries with high and low birth rates face a similar problem: that of a high dependent-to-worker ratio. In an economy with high birth rates – such as many developing countries – a working couple would have to take care of a large number of children. In countries with low birth rates – characterising developed economies – the couple would have to care for two sets of elderly parents. In both economies, a large share of the couple’s earnings would be spent in caring for dependents, with little left for productive savings and investment.

As birth rates begin to fall with increased incomes and public health interventions, the share of productive workers to that of dependents would increase. The large birth cohort of previous years would now be productive workers, and would have fewer children than previous generations. The burden of parental care would be spread over many siblings. Each representative couple would now have a larger share of discretionary income to spend and save, boosting growth and investment. 

This window, called the demographic dividend, is one in which productivity and living standards can – theoretically – display significant growth. The one-child policy in China ushered in a demographic dividend by limiting the share of dependents for each family. But now, as single children born under this policy come of age, the profile of dependents changes from young children to elderly parents, with an increase in the dependent-to-worker ratio.

This increase has several implications. For one, it implies a large share of spending in the economy goes towards elderly care, limiting the ability of couples to save and productively invest. Two, the state would have to spend larger sums on pensions relative to newly-produced output. And three, it implies a reduction not just in new entrants to the workforce, but in new consumers and hence future demand.

These recent policy shifts, therefore, should be seen in the context of the economy’s transition from an export-driven one to a consumer-driven one. Reduced birth rates imply a reduced workforce and reduced markets for new goods. The need to stave off the effects of ageing on the workforce has also meant an increase in the retirement age – which would ensure productive workers contribute to output for longer and limit the increase in pension payments – a move that has drawn some resistance

This is not a problem unique to China. The global fertility rate has been falling, with several countries such as Japan and Spain expected to experience a halving of their population by 2100. The idea that a reduction in population would negatively impact economic growth is expressed in the theory of “secular stagnation”, first expressed by Alvin Hansen in the 1930s and more recently by Larry Summers. Several countries like Italy have unveiled policies to incentivise young couples to birth more children. 

Will population increase?

It must be made clear at the outset that a reduction in the dependent-to-worker ratio does not necessarily imply high growth rates. A large number of potential workers would do nothing for the economy if investment is not forthcoming, or if innovation and productivity growth is muted.

Secondly, even if birth limits are raised, they may not translate into actual births if the costs of raising a child are too high. With increased costs of living in cities and the increasing difficulties involved in accessing education, very few couples might actually choose to have more children. Families that already bear the burden of caring for elderly parents would not necessarily increase the number of children they have unless it is made economically viable. Many women might choose not to have children if it would impact their ability to engage productively in the workforce. If such a population policy is to have its desired effect, it would necessitate the expansion of the social security net. 

To be sure, the Chinese state does have the administrative capacity to expand the social security and ensure productive investment necessary to absorb the increased labour supply. The repeal of the one-child policy is to be accompanied by various policy interventions such as reductions in educational costs and tax and housing supports. But apart from the administrative and institutional frameworks necessary for such a policy to be made a success, one must question the central idea behind the notion that increasing births are necessary to increase the workforce.

For one, any policy measure that targets births shifts the burden of national goals onto the bodies of women, a burden that is not theirs to bear. Policies that penalise excess births as well as those that reward higher births both imply significant consequences for women and risks entrenching patriarchal norms. 

Secondly, if the aim of increasing birth rates is to ensure an increase in future labour supply, it would take many years for its effects to be seen. China’s initial growth was driven by low-skilled manufacturing labour; given that the future lies in skills and technological innovation, it would take a minimum of twenty years or so for the increased births of today – assuming they are forthcoming – to enter the workforce as skilled labour. 

If economies wish to increase the size of their productive workforce, one does not require births to do so. The world today is divided into countries with labour shortages and those with vast surpluses of low-wage labour reserves. Immigration provides an easy, rapid way to expand the size of the labour force and the market for consumers within the domestic economy. The benefit of migrants to the workforce and economic growth would be felt immediately, rather than in the far future.

India workers in UAE. Credit: Reuters

India workers in UAE. Photo: Reuters

If high-skilled migrants are in relatively short supply, then labour shortage economies could implement skilling programs and subsidised education in order to impart the requisite skills to migrants. This might involve some amount of government expenditure which may or may not be offset by private spending – depending on the migrants’ ability to pay – but the benefits would be felt on a far shorter timeline than if the economy had to wait for the total number of new births to mature, seek education and eventually enter the labour force. These migrants would now be more productive, and the higher wages they earn would provide a much-needed fillip to domestic markets.

Such proposals would seem absurd only to those who believe that state investment in human capabilities should only be extended to those born within the boundaries of the nation-state. This is not even an argument for unrestricted migration; domestic economies have the right to determine limits on migration. The US is an example of a developed economy whose growth has been fueled by migration, from Europe in the 19th and early 20th century, and then Latin American and Asian migrants after the passing of the 1965 Hart-Cellar Act

The simultaneous existence of political and climate refugees – especially those who court death in their search for a better life – along with countries desperately trying to increase births to prevent an ageing population represents a cruel contradiction of the current global economy. A low fertility rate does not present an economic constraint to growth in a world of labour reserves, only a political constraint conditioned by the state and society’s notions of who represents a legitimate citizen. 

Rahul Menon is assistant professor, School of Livelihoods and Development, Tata Institute of Social Sciences, Hyderabad.