How Will China's One-Child Policy Change Impact the Economy?

China Moves to Allow Couples to Have Two Children

Getty Images / Yadid Levy.

China’s family planning policy, which became widely known as the one-child policy, was implemented in the 1980s to alleviate social, economic, and environmental problems. While the program included a number of exceptions, the birth rate fell from 2.8 births per woman in 1979 to 1.5 births per woman in 2010. The ratio of males to females also reached 1.17:1 compared to averages of 1.03:1 to 1.07:1 elsewhere in the world.

These falling birth rate could take a big toll on the country’s economy over time. Between 2010 and 2030, the United Nations projects that the country’s working age population could shrink by around 7%, which means that fewer workers will have to generate enough benefit to cover the rising number of retirees requiring social benefits. These long-term demographic problems mirror those that are already facing countries like Japan today.

On October 29, 2015, a communique from the Communist Party revealed plans to abolish the one-child policy in favor of a two-child policy. The policy change has been widely seen as an attempt to remedy these long-term economic problems by generating a so-called demographic dividend – that is, boost the number of younger workers in order to offset the growing number of retirees and ultimately avoid any pending demographic problems.

Does It Matter?

The dramatic decline in the Chinese birth rate following 1979 may seem to suggest that the policy had a big impact, but similar declines occurred at the same time in other Asian countries without the same policy in place.

As a result, it’s unclear whether the policy had a meaningful cause-effect relationship or was simply a meaningless correlation.

When certain exemptions were introduced in 2013, just 6.7% of eligible families applied to have a second child. These data points suggest that the policy may not have been responsible – at least solely – for the dramatic impact on the country’s declining birth rate.

Many couples seem to be choosing to spend their wealth on a better standard of living rather than having children, especially given the rapidly escalating cost of living in urban areas.

There’s also the question of whether or not the country is equipped to handle a higher birth rate in the short-term. After all, Beijing’s maternity wards have been overbooked into the first half of 2016 following the relaxation of certain policies in early 2014, according to IHS Global Insight, which means that some families may wait to make the decision.

Short-term Pain

If the one-child policy change does have an impact, the economy may have to wait two decades or so for the impact to be felt in any meaningful way.

The benefit of a high birth rate is the creation of a demographic dividend, but these children become dependents before they become workers. While dependents can help stimulate economic spending in some ways, many parents feel compelled to spend money on basic needs rather than luxury goods. Many companies that produce baby goods have already seen their prices rise following the announcement, but the rest of the economy may see less income.

The real benefit comes into play down the road when these children become working age and are able to contribute to the economy on their own.

In a 2011 paper, the IMF found that a substantial portion of growth experienced by India since the 1980s is attributable to its age structure and changing demographics, with the country expected to surpass China as the world’s largest by 2025. China is likely aiming for much of the same over the long run.

Key Takeaway Points

  • China’s family planning policy – known as the one-child policy – was abolished in late-October of 2015 in order to boost economic growth and fight an aging population.
  • The policy is unlikely to become a short-term fix for the economy, while it’s unclear whether it will even help over the long-run.
  • If successful, the policy would likely only boost the economy in two decades or so as the child population reaches a working age.