Ageing China Switches To Two-Child Policy

In October 2015, China announced that its one-child policy, introduced in 1978 but implemented in effect from the period of 1980-84, will be changed to a two-child policy throughout the country. This will require the approval of the National People’s Congress in March 2016 and once approved, the provinces and local governments will take some time, perhaps two to three years, to fully implement the policy.

The official rationale for the two-child policy appears to be to increase the total fertility rate (TFR), defined as the average number of children a woman is expected to have in her productive years. That in turn would help China progress towards a better gender ratio, mitigate rapid ageing, increase supply of working-age persons, and perhaps enhance acceptability of the official population policy.

The two-child policy represents a refinement of the existing one-child policy which already exhibits a number of conditional exemptions and deviations at the local level. The state population policy will continue to be supervised directly by an estimated one million government officials. Revenue from fines on those who break the official population policy is estimated to be around USD 3 billion a year, with many localities deriving non-trivial revenue from this source. The fines on those who broke the one-child policy and on those breaking the new two-child limit will continue. Broadly, the Government of China is continuing to implement a national population policy.

What are to be the likely effects?

The magnitude of the two-child policy on various demographic variables, labour supply, economic indicators and growth drivers is difficult to predict with accuracy, but is likely to be modest. The implications of the refined policy will nevertheless be wide-ranging on many aspects of China’s economy and society.

Demographic Variables

The two-child policy is expected to impact the TFR and to improve the gender ratio (defined as the female population divided by the male population). Among OECD and many upper middle-income countries, the latter typically ranges between 1.00 and 1.06 – higher than the 2015 ratios for China (0.94) and India (0.93). Gender ratios significantly below one portend an excess of boys over girls, necessitating socially disruptive adjustments.

There is a consensus that China’s one-child policy did not have a significant impact on the overall TFR. The TFR, which was slightly above 6 between 1950-55, had been falling since to around 2.7 when the one-child policy was implemented, falling to 1.55 over the 2010-15 period.

While the current TFR is well below the replacement rate of 2.15, broader forces have played prominent roles in the decline. Examples of such are increasing direct and opportunity costs of child-rearing, long-term commitments needed by parents, insufficient child-care and other facilities which are accessible and affordable, and relatively more severe constraints on the career advancement of women with children. Intense competition for what are regarded as schools providing opportunities for networking among influential and high-income families has also contributed towards lower TFRs generally.

Delayed first marriages – the average age of women getting married is now 27.4 as compared to 26.4 in 2007 – have further contributed significantly to a reduction of TFR in China. This is a factor India may wish to consider encouraging to reduce its fertility rate.

It should be stressed that China’s TFR is significantly higher than several other economies without a one-child policy, such as Hong Kong, Singapore, Korea, Germany and Japan. Arguably therefore, the existing one-child policy has only had a modest impact on TFR. Indeed, over the past decade, China’s TFR has increased by 0.05 while India’s has declined by 0.66, though from different bases.

There may be a short-term positive impact on TFR from the two-child policy, but any longer-term effects will, at best, be modest. Roy Amlan of Credit Suisse has projected that even under optimistic assumptions, incremental births will be 8.3 million over the 2014-20 period, with the effect tapering off over time. This is modest when compared with China’s population of 1.4 billion in 2015. The impact in additional births is expected to exhibit wide variations among the provinces, with varying fiscal and other implications.

Also, of the households eligible for a second child with the loosening of the restrictions in 2013, most (approximately 85 percent) chose not to do so. The broader factors affecting TFR trends are likely to continue in China. Instead, the conditional deviations permitted from the one-child policy do suggest a positive impact on the gender ratio as the possibility of a second child made preference for males somewhat less intense. Thus, the two-child policy could potentially help improve China’s gender ratio, mitigating adverse social gender imbalances.

Impact on the Labour Force

The consequence of the prolonged decline in TFR in China has affected the age composition and, therefore, labour force trends. United Nations data suggests that China’s working age population growth turned negative in 2015. The medium term projection is acceleration of this trend until, at least, 2035. The resulting excess demand for labour is positive for providing livelihoods, but adds urgency to improve the overall productivity of capital and labour.

The likely-modest impact of China’s two-child policy on the TFR suggests that a declining working age population trend will only be marginally affected by the policy. It also implies that China will continue to experience rapid ageing even under the two-child policy. By 2050, the percentage of the total population above 60 years of age is projected to be 36.5 percent in China, nearly twice as high as India’s (19.2 percent). Thus, challenges of structuring adequate pension and healthcare arrangements, including for those migrating from rural to urban areas, will not be lessened by the new policy.

Implications for India

Growth in India’s working age population, while declining, will remain positive well beyond 2035 and India faces a formidable challenge of continuing to provide a large number of productive livelihoods while improving factor and sectoral productivity, particularly in agriculture and manufacturing. Unlike China, India has an available demographic ‘window’ to allow for a decline in TFR in order to manage its future ageing population challenges better.

In particular, China’s experience with population policy does hold implications for India in the two broad areas briefly stated below.

Accelerating TFR Reduction in India

The United Nations projects India’s population in 2050 (median variant fertility rate assumption) to be 1.71 billion as compared to 1.35 billion for China – a difference of 360 million. China’s two-child policy, which in future could even transform to active official encouragement of more than two children (at least selectively), suggests that the TFR assumptions made earlier may be somewhat understated, leading to a modest increase in population size.

In contrast, the TFR for India may overstate actual fertility trends. A 2013 sample Registration Report released by the Census Commission of India estimates India’s TFR to be 2.3, with states having below replacement rate TFR comprising slightly more than half of India’s 2011 population. Initiatives such as Beti Bacho Beti Padhao (save and educate girl child); and Swacch Bharat (Cleaner India), with potential to improve public hygiene of the Prime Minister Modi-led government are expected to contribute to a better gender ratio, and to improving the status of women in society , including an increase in the age of first marriages for women. Such improved status has been found to be correlated with a lower TFR.

Encouraging development performance of some of the states, such as Rajasthan and Madhya Pradesh with a combined population of 150 million (about 12 percent of India’s total population in 2011), which in 2013 had a TFR of around 2.8 could further lower India’s overall TFR.  Wide variations in fertilty rates  among states in India suggests narrowing TFR variations within the country as an important policy priority.

The declining TFR trend in India, however, may be partially counter-balanced by prospects of improved life-expectancy at birth (67.5 years in 2015 as compared to 75.4 years for China) and at age 60 (17.7 years as compared to 19.9 years for China).

The probable impact of climate change in India, where the agricultural sector accounts for about 17 percent of GDP, but more than half of the population primarily derives its livelihoods from this sector, could also be partially mitigated by a more rapid reduction in the TFR. This is because such a development would reduce the severity of challenges in providing livelihoods and bring about structural transformation of India’s economy.

Databases and Population Studies

As suggested from China’s experiences, too large a variation in fertility rates within a country between generations could give rise to significant socio-economic challenges such as a sudden surge in the level of support required for an ageing population which can be difficult to reverse. This is evidenced by global experiences which suggest that it is relatively easier to reduce TFR, but much more difficult to raise TFR, even when fiscal expenditure and incentives are large. At best, TFR has increased by 0.3 to 0.4 points from pro-TFR policies.

A population policy (even its explicit absence is an implicit policy) has wider-ranging implications throughout the economy for livelihood challenges, internal migration and society. These inter-linked areas require appropriate databases, analytical capabilities, and willingness to base public policies on nuanced and timely research, not only at the national level but, also as crucially for different states, population groups, and regions. India’s largely compartmentalized and tradition-bound population policy and demographic studies undertaken in the current think tanks and academic institutions thus requires a wide-ranging revamp.

India is at a different demographic stage from China and a China-type of official population policy is unlikely to be implemented in India. However, to take advantage of the current window of opportunity to better prepare for future ageing contingencies and requirements, India needs to first delay as long as possible from becoming world’s most populated country, and minimize differences in population size with China.

Instead of formal legislation and institutional arrangements, the challenge is to rapidly create enabling conditions, including delayed first marriages for women, better spacing of children, and improved status of women and higher labour force participation of women in the society, which contribute to accelerating the TFR decline within India’s federal political system and within its traditional values. There is also a required rethinking of pension reform strategies to enhance policy and regulatory coherence and professionalism of provident and pension fund organizations.