The world’s most populous country is ending its one-child policy more than four decades after it was made the law and will of the Communist Party of China (CPC). In 1979, China’s population was 964 million. The Chinese news agency, Xinhua, very tersely announced that: “China will allow all couples to have two children.”
The flattening population, and its somewhat unfavourable demographic profile, has been causing concern in China for some years now. In 2013, the CPC’s Central Committee allowed couples to have a second child if one of the parents was an only child. Considering that the one-child policy was put in place in 1979, the probability of one parent being a single child would be very high. But the allowance didn’t have many takers. The party demographers were expecting an additional two million births, but they got only 700,000, one reason being that China’s one-child policy worked exceedingly well.
By preventing almost 400 million births since 1979, China gave its living citizens greater prosperity. It is estimated that between 1980-2010, the effect of a favourable population age structure accounted for between 15 per cent and 25 per cent of per-capita GDP growth. That demographic dividend has now ended.
Since the advent of the one-child policy, China has had 336 million abortions and 193 million sterilisations. By all yardsticks, the one-child policy was a spectacular success, but it came at a huge cost, not anticipated back then. Moving at a slow crawl from 1.330 billion in 2010, China’s population is expected to stabilise at 1.391 billion in 2030 . In 2050, it is projected to decline to 1.303 billion.
One immediate consequence of this slowdown is that its cohort of people who are 60 years and above, will increase from the current 180 million to 360 million by 2030. The economic consequence of this is that its savings rate will decline precipitously.
As a nation climbs the economic ladder, people inevitably live longer. But old age is more expensive. For instance, in the US, the old actually consume more than the rest due to medical expenses. They either support themselves or their families have to support them. Apart from the first few years of one’s life, consumption remains reasonably constant throughout one’s life cycle. But, income generation and output only occur between ages 20 and 65 — neither before nor after. This ratio of working age to non-working age cohorts is called the dependency ratio. As Indian, African and the US’ dependency ratios turn increasingly favourable in the coming decades, China’s dependency ratio will go downhill, making it one of the world’s most aged societies along with Europe and Japan. The CPC leadership has finally grasped this essential truth.
Why is China doing this now? Its National Health and Family Planning Commission said: “Abolishing the one-child policy would increase labour supply and ease pressures from an ageing population. This will benefit sustained and healthy economic development.” The reasoning is clear. In the decade 2015-2025, at present trends, China will add only five million to its workforce, when in the previous decade it added as many as 90 million.
Sustained low fertility means that the number of young workers will decline more sharply. In 2010, there were 116 million people aged 20 to 24; by 2020, the number will fall by 20 per cent to 94 million. But the actual number of workers will be considerably lower than 94 million, thanks to rising participation in higher education in China. While between 2001-2010 the number of new college students (aged 18-21) rose from 5.6 million to 22.3 million, by 2030 the young population aged 20-24 will only be 67 million, less than 60 per cent of the 2010 figure.
The 10th Five-Year Plan set a population growth target of 62.6 million, but China recorded an actual population gain of just 40.1 million. For the 11th Five-Year Plan, the population gain of 34.2 million was far below the 52.4 million target. In both cases, the margin of error was greater than 50 per cent! China’s total fertility rate — the average number of children born to each woman — is among the lowest in the world, at only 1.4. The developed world average is 1.7. China’s replacement rate — the rate at which the number of births and deaths are balanced — is 2.1. At purchasing power parity (PPP), China’s per capita income is just a fifth, or less, of other large economies. But China’s fertility levels are far below those of the US, the UK or France (all around 2.0), and at par with those of Russia, Japan, Germany and Italy — countries with sharply declining populations.
China’s ratio of workers to retirees will drop precipitously over the next 20 years, from roughly 5:1 today to just 2:1. Such a big change implies that the tax burden for each working-age person must rise by more than 150 per cent, assuming the government will maintain its current level of tax revenue. In addition, mounting expenditure on pensions and healthcare will put China in a difficult position. If the government demands that taxpayers pay more, the public will demand better scrutiny of how their dollars are collected and spent. This could very well open the floodgates of challenges to the CPC?
Quite understandably, the greater the number of older people, the lesser the savings. In such as scenario, China’s impressive savings rate of 53 per cent, which drives its economic growth, is bound to falter. The Chinese government is banking hugely on its new “one-couple-two-children policy” to stem the tide of ageing and for high economic growth, which is important for the very survival of the CPC. After all, it was in the name of growth that it extracted huge savings from its people and curtailed families, not to mention the $4 trillion it has stranded in mostly American and European banks.
But will the one-couple-two-children policy succeed? The conditions now are against it. The cost of a child’s upbringing in China has gone up manifold. The state may require more children, but most families will find the costs unaffordable, because China is now a predominantly middle-class nation. How will this policy reversal pan out for China? Demographers give three scenarios: The highest outcome will mean 1.43 billion in 2050, while the more plausible outcome will be between 1.35-1.37 billion. That is not going to alter the future very much for China, as it will become old, before it becomes rich.
The writer, a policy analyst studying economic and security issues, held senior positions in government and industry. He also specialises in the Chinese economy.
