CHINA’S DEMOGRAPHIC TRANSITION
MANSI MATE
A 7075
MARWA SHERZAD
A 7077
SUMAN SURESH
B 7234
YASHODHARA THORAT
B 7253
PRAPTI MOHANTY
D 7837
___________________________________________________________________________
RESEARCH SUPERVISOR:
Uday Sinha
A Project Submitted in the Partial Fulfilment of the
Requirements for the Degree of
Bachelors of Arts
In
Economics
(2016-2019)
DEPARTMENT OF ECONOMICS
FERGUSSON COLLEGE
(AUTONOUMS), PUNE.
Examiner’s Certificate
This is to certify that the project titled ‘China’s Demographic Transition’ submitted by
students,
Mansi Mate, Suman Suresh, Yashodhara Thorat, Prapti Mohanty, Marwa Sherzad
have been assessed and graded towards the Partial fulfilment of the degree of B.A. Economics
in the academic year 2018-2019.
__________________________ (Signature)
Name of Internal Examiner:
_______________________________________________________________
_________________________ (Signature)
Name of the External Examiner:
________________________________________________________________
Date:
Time:
Place:
Table of Contents
ABSTRACT............................................................................................................................................ ii
ACKNOWLEDMENT .......................................................................................................................... iii
ABBREVIATIONS .................................................................... Ошибка! Закладка не определена.
CHAPTER: 1 ......................................................................................................................................... iii
INTRODUCTION .............................................................................................................................. 1
CHAPTER: 2 .......................................................................................................................................... 3
LITERATURE REVIEW ................................................................................................................... 3
CHAPTER: 3 .......................................................................................................................................... 7
METHODOLOGY ............................................................................................................................. 7
CHAPTER 4 ......................................................................................................................................... 11
PRESENTATION OF FINDINGS ................................................................................................... 11
CHAPTER: 5 ........................................................................................................................................ 13
CONCLUSION: ................................................................................................................................ 13
RECOMMENDATIONS: ................................................................................................................. 13
FUTURE SCOPE: ............................................................................................................................ 14
REFRENCES ........................................................................................................................................ 15
ABSTRACT
This paper analyses and explains the effects of the demographic transitions due to the “One
Child policy” introduced by the Chinese government in the year 1979. This paper elaborates
on the consequences of the 35-year long policy implications on Household savings, Capital
investment, Gross fixed capital formation and Government expenditure on research and
development. It studies the increase in capital productivity and total factor productivity
contrary to the decline in surplus labour and the decline in the labour productivity in later years.
Despite the weakening of the labour participation, the Chinese enterprises still had an edge on
the technological advancements. The lack of efficient labour saw rise in the mobility levels
from rural sector to the industrial sectors, thus having an increase in the capital allocation.
ii
ACKNOWLEDMENT
Our research would be incomplete sans the mentorship of Uday Sir. We would like to express
our sincere gratitude to him for providing his invaluable guidance, time, comments and
suggestions throughout the course of the study.
Our study was one that involved the exploration of complex variables and their integration and
inter-linkage to arrive at the conclusion. The obtaining of this data from authorised sources was
critical and a challenging yet thoroughly enjoyable task. A lot was learnt about the
demographics and economic growth of the said country and we were provided with key insights
on how to further study variables of other nations, if required in the future.
It would be unfair to not acknowledge and thank Fergusson College and our professors for
giving us the freedom to work on the vast topic that we chose and simultaneously helping us
through the ups and downs of research.
It was nothing but a pleasure to conduct this study.
iii
CHAPTER: 1
INTRODUCTION
Statement of the problem:
This study deals with the demographic transitions and the introduction of the “One Child
Policy” in China, and studies if these policy changes affect the surplus labour and productivity
of the country. To study this, we have explored factors including the saving, investment and
capital formation patterns of the country, as also the total factor productivity. The research and
development have also been taken into consideration.
Purpose of the study:
The “One Child Policy” was an interesting introduction to China’s policy framework.
Following this, it was observed that there was a decline in China’s surplus labour. On the
contrary, there was a simultaneous increase in the productivity levels of the country. The
paradoxical nature of this phenomenon is what is intriguing and caused this study to be
undertaken. It was also observed that there was a decline in the growth rate. The complex nature
of this situation caused the study of the inter-linkage of these factors and its effects on the
growth and development levels of China.
Research question:
Has China’s Demographic Transition and its One Child Policy led to a decline in its surplus
labour and productivity?
Significance of the study and treatment of the data:
In a country, the changes in its Demographic patterns have direct implications on its economy.
Such changes in the age structure are particularly significant in large and populous countries
such as China. China has been experiencing drastic population changes over the past few
decades. Previous governments had encouraged people to have more children believing that it
would increase their labour workforce and growth rate. However, during 1970s, the new
Chinese government introduced number of measures to reduce birth rate and slow down
population growth. And thus, introducing the most controversial family planning scheme "One
Child Policy" in 1979, limiting one third of the population to have only one child which
prevented more than 400million births. Everything seemed to run smoothly over the years,
however in 2011 the Old Age Dependency Ratio peaked and hence in 2015, the One Child
Policy was officially removed. The Lewis Turning Point also caused a migration of labour from
the agricultural to industrial sector. As a consequence, there was an increase in the labour
productivity of the nation. These are the primary highlights of the study.
1
According to the data that we have generated, our first variable i.e. the Old Age dependency
ratio of China has been increasing since the implementation of One Child Policy. On the other
hand, the young age dependency ratio is decreasing. Due to the dependency structure, our
second variable i.e. the Savings-Investment balance is on a rise. The third variable and the
fourth variables that we are looking into, the GFCF and the expenditure on R&D are also on a
rise. The working population has been dropping significantly since the implementation of the
policy, owing to the decrease in labour productivity. To nullify this phenomenon, China has
been investing in the improvement of Capital Productivity by focusing on capital formation.
The Chinese government has increased its expenditure on the Research and Development to
boost its technological progress. However, with the removal of One Child Policy in 2015, it is
evident that the young dependency ratio is increasing.
Method of procedure: The method of study was chiefly the collection and usage of secondary
data. To do this, we collected information from secondary sources like:
·
·
·
·
The World Bank
OECD
China’s Statistical Year book, 2017.
Economic survey of China.
We are trying to study the trends in the levels of Savings, Investment, Labour Productivity and
finally the Total Factor Productivity during the period of Demographic Transition years i.e.
1982 to 2016. We are focusing on the Qualitative reasoning of the research.
Limitations:


An important limitation in carrying out the study was the retrieval of data. The
frameworks regarding data privacy and statistics are very stringent in China, as they
give utmost priority to data leakage circumstances and have strong legal policies
backing the same. Thus, obtaining data for the study from authorised sources on the
Internet was a crucial task.
Another minor setback was collecting data from different periods of study and different
research papers and conceptualising it into a review that represents and evaluates all
time periods, so that there is no missing out on any factors studied during any time.
The overview of the proposal helps us to conclude our remarks on the Demographic structure
of China and its implications on the few mentioned variables of Productivity. The Proposal and
the data mentioned in it clearly suggest that China can climb on the value chain by focusing
more on higher productive activities through technological advancements and innovation.
2
CHAPTER: 2
LITERATURE REVIEW:
(Stratford & Cowling) in their study found that income has been a key factor in determining
the household consumption and savings behaviour in China. If the propensity to consume and
propensity to save of the households differs with income, then the aggregate consumption and
savings at any point of time will depend on the distribution of income. The changes in the
income pattern/distribution of the households over a period will affect the growth of aggregate
consumption and savings, relative to if the income distribution remained unchanged. Over the
past 20 years, China’s real household income has seen an annual 10% rise in the growth rate
however this drastic growth has been accompanied by a rise income inequality. The Gini
coefficient index of China rose from 0.3 in the 1980s to 0.5 in the mid-2000s. Since 2009, the
Gini coefficient has declined a little but yet remains among the top quintile worldwide. The
rise in inequality of incomes has not led to a stagnation of income in the poorer households,
but has been due to the richer households having a stronger income growth. The World Bank
has estimated a decline in the proportion of Chinese living in poverty from 67% in 1990 to
11% in 2010. The impact of the distribution of income affecting the level of aggregate
consumption has additional effect on the composition of aggregate consumption. The growth
of Chinese household consumption has been significantly strong, averaging to 9% per annum,
given the increase in China’s aggregate saving rate over twenty years. This level of growth is
very drastic in comparison to other economies.
(Jianguo & Zhang, 2017) wrote on the share of GFCF to GDP increased from 33.8% in 1998
to 45.3% in 2014. High Investment has led to High economic growth in China. The rate of
return on capital hiked up to 30.5% in 2011, hence there was sturdy Investment. Increase in
saving rate has led to increase in Investment. For rate of return on capital approach (Bai et al
and Lu et al; 2014) macro approach which estimated for enterprise and secondary sector was
stable while micro approach estimated individual enterprise for total rate of return and total
profit was U-shaped. It was found that the Industrial rate of return was greater than secondary
sector rate of return. The rate of return on industrial enterprise has played a major role in china's
economic growth. There was higher rate of return due to rural-urban migration and capital
investment. FDI and international trade have led to market competition and technological
progress, contributing to TFP and labour migration. FDI however, can increase or decrease rate
of return on capital. Positive externalities had been created by rapid infrastructure investment
since 1990s contributing to the rate of return on capital in China whereas lack of infrastructure
increases costs and brings down development. The efficiency of government consumption of
public services e.g. health and education has gone up. China has a large share in corruption
hence bureaucrat actions can have a negative effect on Investment. Using Regression results
the paper found TFP to have a positive effect on rate on return on capital. The variables used
were the TFP, secondary sector enterprise share, capital-output ratio, real interest rate and
financial deepening. Secondary sector enterprise had a positive impact on rural-urban
migration; capital-output ratio and financial deepening had a negative impact on rate of return.
From 1998-2013, the rate of return increased, Investment increased along with TFP. Since
3
2011, there was a decline in rate of return and also Investment due to increase in lending real
interest rate.
(Knight & Ding , July 2009) In his paper analysis the supply and demand for Investment in
China with increase in Investment-output ratio and inventory accumulation. In 1998 rate of
return on privately controlled industrial enterprise (10.2%) was greater than state-controlled
enterprise (4.8%) but it increased in 2013 to 15.0% and 10.2% respectively. Boost in rate profit
on existing capital had created an expectation of higher profits on new investment. The main
target of the china's state-controlled enterprises was to maximize investment growth and
output. Investment demand increased when China opened o WTO in 2001, whereby the profits
went up by expanding export, this was the reward for investment. There were also informal
sources of security to create investor confidence and less government interference. Supply sideThe savings were made up of enterprise, household and government savings. National saving
rate has increased for which household's saving has been a major source. Households with son
seemed to save more than the ones with daughters. One child policy with minimum social
security benefits led to increase in rural household savings. Private firms rely on their savings
to invest hence savings have been high due to higher profits. Government savings had also
increased since 1978 as the government chose financial investment over consumption. It was
found that enterprise private invested more than they saved and households saved more than
they invested. The ratio of GFCF increased from 36% to 42% from 1998-2007, increase in
national income from 27% to 37%. Therefore, increase in investment was funded through
redistribution of income from wages to profits. Private sector funded investment from their
profits left or other informal sources at a high cost whereas the state sectors were given easy
bank loans at low interest rates. Foreign firms had favourable licensing policies than the ones
domestic private firms had to confine with which decreased their profit levels. Increase in
capital accumulation would have led to a decline in marginal productivity but not happened so
in China. Both investment and marginal productivity have been on a rise. Alongside Human
capital and compulsory basic education had contributed to increase in economic growth.
(Avuk, Benkova , & Vojtka , May 2012)
One child policy by the People’s Republic of China brings out a huge change in the socioeconomic status of the country. This brings out enormous change in the economy of whole
country which also has its effect in the world’s economy. This policy has its own pros and cons
in the present and future.
One of the major advantages of this policy is that it helps in reducing the population of china
which is increasing in an alarming rate leading to unemployment, scarcity of resources,
environmental threats and poor standard of living. Due to single child the economic and social
condition of the family improved, the individual savings rate increased which results in better
standard of living as there is no need for dividing the wealth among progeny. As the
competition gets reduced the unemployment problem also gets reduced. Due to this policy the
people are getting rich before getting old. There will be reduced demand on natural resources.
It will have the availability of cheap labour which leads to low cost production.
On the other hand, The One Child Policy had reduced the population of younger generation
and the population is aging rapidly. The productive labour is decreasing at the same time
government must provide pension for more pensioners. There will be fluctuation of price for
the goods manufactured in China due to consolidation. Financial inflow is shrinking. In future
4
the One Child Policy will lead to have lowest dependency ratio. We may realise in future how
sustainable and proactive the policy is and what effect it made to the welfare of its citizen and
their economy.
(Ozyurt, Total Factor Productivity growth in the chinese Industry, 2005), has described China
has seen rapid industrialization in the recent decades and how it has grown as an economy in
terms of productivity. He uses the parametric approach to support his data. This paper points
out the various reasons which lead to the industrialization. The major reason was reallocation
of resources and productive factors. The paper illustrates the increase in capital formation due
to increase in investment, domestic savings and FDI flows. Furthermore, it shows the increase
in capital productivity and capital-labour ratio due to the substitution of labour with capital.
According to the paper, labour productivity also increased due to expansion of small-scale
enterprises in rural areas and decrease in barriers of labour migration between urban and rural
areas. Therefore, China has faced an increasing trend in terms of total productivity in this
period.
(Fang & Dewen ) explained about the predictions regarding the effects of demographic
transitions. They had mentioned about the decrease in young age dependency ratio and increase
in working population and its benefits on the growth of China. But on the other hand, the paper
gives predictions which stated the change of demographic dividend into demographic debt.
They predicted that due to the decrease in fertility rates due to the one child policy, the working
population will shrink, whereas, the old age dependency ratio will keep increasing. Due to this
the government’s expenditure on the well-being of the aged population will increase and the
savings rate per household will also see a rise. These predictions by Fang and Dewen were
proved to hold true as China went through the demographic transition.
One paper focuses on the how the saving- investment balance will evolve in the decades ahead
(Kuijs, 2006). China sees high household savings compared to other OECD countries. That
being said, the primary source of the high economy-wide saving is owing to strangely high
enterprise and government saving. The saving and investment in China is higher than expected,
even post adjusting economic structural differences. As of 2006, analysts observed that saving
and investment both would only mildly deteriorate in China in the following 2 decades, on the
basis of projected structural developments including urbanization and demographics. On the
other hand, the saving-investment balance of several policy adjustments could be large. Once
the policies are identified, it is suggested that rebalancing could reduce current and saving
account surpluses, even though it is not likely that saving surpluses will turn into a deficit
anytime soon.
The paper explores how China’s saving, investment, and the saving-investment balance can
evolve in the decades ahead. Household saving in China is relatively high, compared to OECD
countries. The paper proves that households in China contribute greatly to national saving. The
household saving rate, as a percentage of household disposable income, rose steadily from
about 5 % before 1978 to over 30 % in the mid-1990s. Thereafter, it declined gently to around
25 percent in 2000, at which it broadly remained since. As a share of GDP, household saving
is estimated to have been around 16% in recent years. This is significantly more than in OECD
countries, but less than in India, the other large developing country currently undergoing a
rapid integration in the world economy, but with much lower overall saving and investment
and a very different sector composition of saving.
5
As mentioned above, the literature has primary focus on households. While this misses’
multiple factors driving saving, the paper investigates possible reasons for China’s relatively
high household saving rate, compared to OECD countries. Those that are commonly seen as
having had a major role in China are demographics; high economic growth; (lack of)
government policy and spending on health, education, and social safety; and (lack of) financial
sector development. Relatively high household saving in China also appears to be a result of
the “withdrawal of the government” in many spheres during the transition. International
evidence suggests such effects on precautionary saving occur. Chou, Liu, and Hammitt (2003)
found that introduction of a National Health Insurance in Taiwan reduced household saving by
an average of 9-14%. For China, surveys appear to confirm that household saving is motivated
by precautionary motives.
(Zhi, 2015) uses regression results to analyse the determinants of China's Household Savings
using variables like Long Term Per Capita Growth, Demographic Structure, Inflation, Housing
prices and pension based on sample data from 1978-2012. The study found a positive relation
between household saving and long. Term Per Capita Growth (15 years period) as Income
growth was steady, people had more money to save. Demographic Structure also showed a
positive relation, a one percent point increase in Dependency can lead to 4.86 percentage point
increase in Household Saving. The enactment of One Child Policy will cause an increase in
Old Age Dependency and hence increase in Household Savings. With fewer children,
consumption will decrease and savings would rise because younger population would tend save
for their own old age. Inflation would affect saving behaviour but it is frail in explaining.
Housing prices seemed to have a positive relation. As housing prices increase people save to
buy more houses, decrease their consumption to some level but limited data could not
statistically prove the same. After adding Pension data, dependency ratio (demographic
structure) will not be significant. As pension distribution grew, people to increase their
consumption more now and save less for future. Hence, keeping reliable with Modigliani
method, Longs Term Income Growth and Demographic are two main determinants for
household saving.
(Chamon, Lui , & Prasad, December 2010) mentioned the reason behind the increase in
household savings in their paper on Income Uncertainty and Household Savings in China.
According to them, the main reason behind the rising savings in the younger households is the
uncertain transitory shocks to the levels of income. The pension reforms post the demographic
transition reduced the pension replacement income as the old age dependency increased on the
declining working population. These made the older households save more as they approached
retirement.
(Nofri, 2015) observed that labour productivity in China has improved on YoY (year on year)
basis in December 2017 by 6.85%, compared with the growth of 6.49% in the previous year.
It was observed that by 1970, by primarily exploiting labour cost advantages, China has risen
to middle income status. But these advantages vanish once the pool of surplus labour is
exhausted and wages start to accelerate. The trend of rural migration to urban centres is creating
a steady and growing supply of low-cost labour, thus the numbers are falling downward,
rapidly. The wages are rising faster than the GDP.
6
CHAPTER: 3
METHODOLOGY
The data used in this paper is taken up from World Bank open data, International Monetary
Fund and Chinese yearbook, 2017.
Table 1: Dependency Ratio and Labour Force Participation
Years
1982
1987
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Old
Age
Dependency
Ratio (%)
8.0
8.3
8.3
9.0
9.3
9.2
9.5
9.2
9.5
9.7
9.9
10.2
9.9
10.1
10.4
10.7
10.7
10.7
11.0
11.1
11.3
11.6
11.9
12.3
12.7
13.1
13.7
14.3
15.0
Young age
Dependency
ratios (%)
54.6
43.5
41.5
41.8
41.7
40.7
40.5
39.6
39.3
38.5
38.0
37.5
32.6
32.0
31.9
31.4
30.3
28.1
27.3
26.8
26.0
25.3
22.3
22.1
22.2
22.2
22.5
22.6
22.9
Labour Force
Participation
(%)
79.13
79.05
78.98
78.92
78.83
78.69
78.50
78.26
77.96
77.62
77.22
76.49
75.69
74.85
74.07
73.38
72.79
72.30
71.88
71.45
70.97
70.74
70.53
70.30
70,04
69.74
69.37
Source: China’s Statistical Yearbook 2017, worldbank.org
7
The above table shows the trend between the old age dependencies, young age dependencies
and Labour force participation due to the introduction of the ‘One Child Policy’ in China. Post
the implementation of the policy, the Old age dependency ratio started increasing vis-à-vis the
young age dependency ratio, which was on a decline. Due to the decline of the working
population as a consequence of the said policy, the participation of efficient labour in the
country can be seen to have been decreased. Since 2011, the industrial and agricultural sector
faced a severe shortage in the labour force.
After this phenomenon, the ‘One Child Policy’ was abolished (in 2015) to avoid the risk of
further weakening in the labour force participation in China. As the Dependency ratio was on
a rise, the households started saving for the future precautionary motive. This led to the increase
in saving behaviour among the population.
Figure 1: Dependency Ratios
60
50
40
30
OADR
YADR
20
10
0
8
Table 2: Savings, Capital Investment, Inventories, GFCF
Years
1982
1987
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Household
Savings in
%
of
Disposable
Income
33.98
31.72
33.86
29.61
31.04
31.77
32.23
29.69
28.25
28.01
27.21
30.22
30.57
31.51
34.35
35.80
37.32
37.84
38.99
38.10
38.11
38.46
37.99
37.07
_
Savings,
Capital
In billion Investment,
dollars
In billion
dollars
Changes
in
Inventories
In
billion
dollars
Gross
fixed
Capital
Formation
In Billion dollars
72.83
105.5
138.23
153.74
178.44
190.83
241.96
296.68
343.94
377.20
402.94
409.29
441.64
512.29
585.75
730.83
921.66
1094.17
1389.76
1845.92
2387.25
2611.35
3141.66
3746.07
4259.02
4700.96
5205.18
5354.52
5175.54
7.67
18.46
36.69
36.54
37.24
27.53
31.66
47.72
50.95
43.46
19.87
17.20
12.06
27.96
16.10
22.62
45.31
21.03
32.60
91.94
147.37
78.80
159.90
211.34
168.54
179.92
206.14
181.97
166.36
59.48
85.68
88.64
100.95
132.82
169.22
199.42
243.78
280.48
305.96
347.27
365.31
405.00
459.87
529.14
651.98
793.42
925.15
1094.02
1381.08
1842.03
2294.33
2745.12
3400.00
3875.00
4373.21
4721.00
4841.09
4787.00
67.16
104.14
125.34
137.5
170.07
196.76
231.08
291.5
331.44
349.42
357.15
382.51
417.06
487.84
545.24
674.6
838.74
946.19
1126.54
142.85
1989.48
2373.13
2904.64
3611.04
4043.53
4552.65
4927.52
5023.46
4962.41
Source: worldbank.org
9
The trends above firstly show the perpetual increase of the savings of the country as a whole
from USD 72 billion just 3 years after the implementation the Policy to about a whopping USD
5175 billion as of 2016. With the increase in savings, there was a subsequent increase in fixed
assess investment. There was an expected increase in the rate of return on capital. This rate of
return was also consistent due to technological improvements. This further increased
investment which boosted the formation of capital in the country, showing a USD 4787 billion
GFCF figure as of 2016. This figure comprised structure, building machinery and equipment.
Another major reason for the steady increases was the positive externalities. The contribution
to capital formation was also made by FDI and international trade. A sharp increase in internal
competition led to an increase in exports, which boosted inventories.
Table 3: Expenditure on Research and Development
Years
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
R&D
expenditure
% of GDP
0.56
0.64
0.65
0.75
0.9
0.94
1.06
1.12
1.21
1.31
1.37
1.37
1.44
1.66
1.71
1.78
1.91
1.99
2.02
2.07
Source: China’s Statistical Yearbook, 2017
The research and development consist business enterprise, higher education, government and
private non-profit sectors. The Government expenditure on research and development was
188.20 USD million in 2012 which further increased to 269.56 USD million in 2016. As a %
of GDP, its share rose to 2.07% in 2015 from a mere 0.56% in 1996. The number of R&D
projects rose from 79343 in 2012 to 100925 in 2016.
10
CHAPTER 4
PRESENTATION OF FINDINGS
Table 4: Total Factor Productivity
Years
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Total Factor
Productivity
(Index
2011=1, not
seasonally
adjusted)
0.707
0.716
0.679
0.683
0.691
0.709
0.752
0.784
0.821
0.847
0.898
0.954
0.952
0.977
0.993
1.000
1.014
1.029
Source: Chinese yearbook 2017
Initially, the labour force participation was low. There was a vacancy of efficient labour in the
industrial sector, which caused a migration and subsequent efficient allocation of labour from
the rural to urban sectors. This led to an increase in the labour per output. Capital productivity
saw a decline as investments were high and inefficient, and improperly allocated. Investment
is SOEs were negligible. Eventually, surplus labour nearly vanished. Capital productivity
increased and replaced labour. Proper distribution of capital was seen, and there was also
availability of capital to the SOEs. Thus, labour replaced capital. The total factor productivity
increased because of a compensation of lack of labour by capital, as also improvement in
technology and education.
11
Figure 2: Trends in Total Factor Productivity
TFP
1,2
1
0,8
0,6
TFP
0,4
0,2
0
12
CHAPTER: 5
CONCLUSION:
For 35 years, the “One Child Policy” has been affecting China. It has affected the nation
socially, politically and economically. It has affected the country in more ways than one. It has
taken away the Chinese people’s basic right. The Chinese government has taken away their
choice. Due to all these concerns faced by them, reforms were made to abolish the policy in
the year 2015. However, the policy saw a major impact on the Chinese economy during its
time period.
In the initial years of the policy implementation, the old age dependency ratio was increasing,
with no addition to the labour force of the country. The lack in efficient labour force found in
the industrial sector saw a rise in the mobility levels of labourers from the agricultural sector
to the industrial sector. This rise in the formal sector workings led to an increase in the labour
productivity in the country. During these years of the policy, the capital productivity levels
slowed down as a consequence of excess levels of investment and insufficient capital allocation
among the sectors especially the SOEs.
Since 2011, the Chinese economy saw various negative effects of the policy, such as the
decrease in the labour productivity. On the contrary, the capital productivity increased due to
increase in the capital formation and proper distribution of capital resources in the various
sectors, especially the small-scale industries. Similarly, the technological advancements in the
country raised the productivity levels. This was the main reason that allowed China to maintain
its increasing trends of high productivity in spite of the drop-in labour productivity levels.
RECOMMENDATIONS:
1. The working age of the population should be increased, i.e. the retirement age should
be decreased.
2. Increase the levels of investment in public infrastructure, such as, public healthcare,
social security, education and employment.
3. There should be an increase in the Research and Developments in the country.
4. The government should be more favourable to domestic private enterprises.
5. Due to lack of surplus labour, the labour costs i.e. wages have increased. For this reason,
they should encourage import of cheap labour.
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FUTURE SCOPE:
If the policy were to be continued,
There would have been a further increase the old age dependency which would then burden
the limited working population therefore, increasing the precautionary savings among the
households. This would have then reduced the consumption levels and thus the decrease the
aggregate demand of the country, increasing the inflationary pressures.
However, with the withdrawal of the policy,
The above-mentioned consequences aren’t seen. The country might regain its initial levels of
surplus labour and have a more efficient labour productivity in the coming years. Higher levels
of investment usually lead to lower marginal productivity of capital investment but this was
not the case in China. They managed to keep their capital productivity by channelizing their
capital in an efficient manner. They have invested substantial amounts in human capital which
has been creating efficient units of labour further increasing the profitability of investment.
This is how China kept an overall increasing trend in the Total Factor Productivity.
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REFRENCES
Avuk, A., Benkova , K., & Vojtka , M. (May 2012). Economic Impact of One Child Policy In People's
Republic of China.
Chamon, M., Lui , K., & Prasad, E. (December 2010). Income Uncertainity and Household Savings in
China. IMF Working Paper .
Fang, C., & Dewen , W. Demographic Transition and Economic Growth in China . Chinese Academy
of Social Sciences.
Jianguo, Y. T., & Zhang, X. (2017). China's Investment and Rate of Return on Capital. Journal of Asian
Economics .
Knight, J., & Ding , S. (July 2009). Why does China invest so much? Department of Economics, Oxford
University.
Kuijs, L. (2006). How will China's Savings-Investment Balance Evolve? World Bank China Research
Paper .
Nofri, E. M. (2015, July 13th). Alberto Forchieli blog. Retrieved from http://www.albertoforchielli.com
Ozyurt, S. Total Factor p.
Ozyurt, S. (2005). Total Factor Productivity growth in the chinese Industry.
Stratford, K., & Cowling, A. Chinese Household Income Consumption and Savings.
Zhi, N. (2015). The Determinants of Chinese Household Savings During 1978-2012. Honor Thesis.
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