Zara Hirani

260726410

ECON 336 - The Chinese Economy

Prof. Christopher Green

What were the consequences of China’s one-child policy on its economic growth during the

period of 1985-2015?

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Abstract

This paper aims to gain insight into how population control through the one-child policy

enhanced, as assumed, China’s economic growth, and what its challenges were. Analysis of

the research of various economists has led to a comprehensive understanding that while the

imposition of the one-child policy in the 1970’s was the appropriate measure and form of

government intervention, an overpopulating country otherwise would have suffered

economically and socially with extreme poverty, low productivity and high levels of

unemployment and income inequality. Using the Malthusian’s model of economic growth in

relation to population control was efficient in understanding the significance of the

relationship, but was too simplistic it its assumptions in the case of China. The paper

concludes that population control did play a large part in boosting economic growth, but

other exogenous factors such as foreign direct investments, export-oriented polices,

investment in human capital and technology perhaps have been more influential factors in

accelerating the growth of the Chinese economy.

Introduction

History of China’s Economic Background

The People’s Republic of China has been know for its eminent dynasties, where

hereditary leadership has governed the country for centuries. Before 1979, China remained a

planned economy under Mao Zedong. The economic affairs of the country remained largely

controlled by the state, with the main goal of making China’s economy self-sufficient. The

government dictated production goals, controlled prices and allocated resources accordingly as

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was deemed appropriate by the leadership (Morrison, 2013). During the 1950’s, the Chinese

government was in support of rapid industrialization, where large-scale investments in physical

and human capital were made. They began socializing the economy by nationalizing the

economy, creating large collective cultivation entities in the agricultural sector, establishing a

state controlled banking system and setting up government trading companies to control the

distribution of commodities from producers to consumers (Grivoyannis, 2012). By 1978, 75% of

the industrial production was produced by centrally controlled, state-owned enterprises planned

according to centrally set targets. Most aspects of the economy were managed by the central

government, which meant that market mechanisms were absent, hence it can be questioned as to

whether the allocation of resources were efficient; this led to little incentives for firms and

workers, including farmers to be concerned with the quality of their production (Morrison,

2013). During Mao’s ruling period, the Chinese economy suffered numerous economic

severities, including a famine, which led to the death of 45 million people as well as widespread

political conflict, disrupting economic growth immensely.

Background on China’s One-Child Policy

China’s one-child policy came into effect in 1979, under which households exceeding

birth quotas would be penalized. At that time, there were rising concerns to the increasing

population as China was becoming home to a quarter of the world's people, who were occupying

just 7 percent of world's arable land. However, initially Mao believed in the ideology “more

people, more power,” as a larger military would ensure greater political control; he later did also

acknowledge the hardships of overpopulation on several occasions but during the The Great

Leap Forward, China’s population growth soared, with the fertility rate reaching more than six

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births per woman and Mao’s view reverted back into a support of a large population (Zhang,

2017). After Mao’s death, Deng Xiaoping stressed the importance of birth control as a necessity

for long-term economic prosperity; Deng viewed population control as a means of increasing

GDP and raise living standards (Zheng, 2017). Economists and demographers recognize that a

falling birth rate offers a demographic dividend as the economically productive portion of the

population grows more rapidly than the overall population (BMJ, 2006). Without the strict

control of fertility, China would not have been able to attain the rapid economic growth it has.

With the implementation of the one-child policy came many benefits for the population, such as

those who adhered to the policy were rewarded with additional benefits such as government

subsidies, priority schooling, healthcare and housing. However, those who failed to abide by the

policy faced harsh consequences such as reduction of their basic salary and even unemployment

(Liao, 2013). Those living in rural areas of China were often imposed with fines and on many

occasions were allowed to have a second child, however the policy was far stricter on urban

populations (Zhang, 2017). Nonetheless, the policy was effective in achieving its goal, despite

numerous criticisms, helping prevent millions from suffering from extreme poverty.

Theory
Assumptions of Malthusian’s Growth Theory

The relationship between economic growth and population was first established by

Thomas R. Malthus. His main argument was that rapid population growth would eventually lead

to overpopulation, severely hindering economic growth. The main assumption in his theory

firstly is that the existence of factors of production, such as land, which is fixed in supply,

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suggest decreasing returns to scale for all other factors of production. The second assumption is

that there is a positive effect of the standard of living on the population growth rate (Galor &

Weil, 1999). The Malthusian model implies that there exists a negative feedback loop where in

the absence of advances in technology or in the availability of land, the size of the population

will naturally overflow. More importantly, even if available resources expand, the level of

income per capita will remain unchanged in the long run because better technology or more land

will lead to a larger, but not necessarily an efficient, population (Galor & Weil, 1999). Galor and

Weil (2000) develop a single, unified growth model that captures this historical evolution

between population growth and income per capita. The first regime is called the "Malthusian"

regime in which income and population growth are positively correlated, which is consistent

with the Malthusian model’s prediction. As population gradually rises, technological progress

speeds up because countries with denser population should have superior technology (Chen,

2016). According to Kuznets, a larger population means more potential inventors and higher

chances of technological breakthrough, thus resulting in an increase in technological progress,

allowing the economy to transition to a second regime, which is called the "post-Malthusian"

regime. During this regime, income and population growth are still positively correlated, but

both grow at a faster rate due to the effect of more rapid technological progress. In this regime

income and population growth become negatively correlated. This negative relation is due to the

demographic transition, in which parents switch to having fewer, higher quality children. As

Schultz (1964) argued, technological progress raises the return to human capital. Thus, an

advance in technology increases the level of resources invested in each child, and decreases the

total number of children each family has (Chen, 2016).

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Malthusian Population Theory in relation to China’s One-Child Policy

Based on Malthusian’s assertion that given limited resources, population growth harms

economic growth (Li & Zhang, 2007), China’s implementation of the one child policy as a

means of controlling population growth is justified. Li and Zhang’s estimations also showed that

a decrease in birth rate of 1/1000 would increase the steady-state GDP by 14.3%, leading to the

conclusion that the extreme control of population may have actually helped China prosper

economically. However, Lee and Wang in their article One Quarter of Humanity: Malthusian

Mythology and Chinese Realities argue that Malthus was wrong in understanding the

demographic system and its operations. While Malthus thought famines were the most important

positive check on Chinese population growth, the authors find no evidence of increases in

mortality or in the intensity of the mortality crises in the last 300 years. The positive check

occurred through individual and proactive interventions, such as for female infanticide, not

famines or epidemics. Also, Chinese fertility was likely not as high as Malthus assumed it to be

in comparison to European fertility. In short, the relationship between the economy and

population growth in china was far more complex than Malthusian’s assumptions. Another

aspect that plays an influential role is demographic behaviour, which is different in the West to

the East. Additionally, Lee and Wang state that poverty is the main reason why marital fertility

was lower in China than parts of Europe; it was not birth control, rather it was chronic

malnutrition, untreated diseases and hard manual labour that made bearing children difficult

(Hayes, 2002)

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Analysis

Economic Benefits of China’s One-Child Policy

While it is loosely assumed that China’s one child policy has positively impacted china’s

economic growth, increasing its gross domestic product, income per capita and employment

levels, it is important to analyze all factors closely to better understand the correlation. According

to the data provided by Li and Zhang (2007), the data set consists of demographic and economic

variables of 28 Chinese provinces for the period 1978- 1998; 14 Demographic variables come

from the Basic Data of China's Population (SSB, 1994) and various issues of the China

Statistical Yearbooks (SSB, 1980-1999) all of which help suggest that the annual growth rate of

the real per capita income was as high as 8.1% between 1978 and 1998. The annual population

growth rate was a low at 1.4% and the birth rate was lower than 2%. Such findings lead to the

assertion of the negative causal effect of population and economic growth, as stated by Malthus.

However, Li and Zhang also point out that this increase in income levels was mainly so in urban

areas; many of the rural areas were not able to converge with the richer areas of China in terms

of income levels, despite having a lower birth rate. Li and Zhang agree that the birth control

policy may have negative effects socially, there is also no denying that the policy may indeed

have contributed to the rapid growth of the Chinese economy.

The biggest economic effect of the one-child policy is that it promoted the accumulation

of human capital, increasing per capita output and hence increasing GDP and GNI (Liao, 2012).

Fundamentally, controlling the population means that each individual gets a larger sum of the

total production in the economy. Hence, with the implementation of the policy, the wage rate

increased, making it an incentive for unskilled labourers to become skilled; without the policy,

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couples would have more children, which decreases the ratio of skilled labourers to total

labourers and makes it more expensive for skilled workers to have children (Liao, 2012). This is

immensely important because the one-child policy reduces skill premium and income inequality

as a result. An unskilled parent will be incentivized to increase his or her time working, bringing

an increase to household income as well. Liao (2012) concludes that China would have had a

lower per capita output and hence, slower accumulation of human capital as result had the policy

not been introduced in 1979. In fact, rapid human-capital accumulation and fast increases in per

capita GDP have been observed in China after the introduction of the one-child policy. Figure 1

(Birdsall, Jamson, 1983) places China on a graph with other countries around the world to

compare totally fertility rate and GNP per capita. While China has a low fertility rate it also has a

low GNP per capita in1978, due to its large population. In comparison to countries like

Singapore and Hong Kong, who have the same levels of fertility rate, have significantly higher

levels of GNP per capita due to their small population size. However, It would be incorrect to

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conclude from such results that higher income is what lowers fertility. It is more likely that in

China, as in most other countries, income is highly correlated with a number of other variables

such as the educational attainment of adults and wage rates and employment opportunities for

women that more direct factors influencing fertility as they increase the cost of children to

parents; if all factors were to be controlled then, the pure income effect would be expected to be

positive (Birdsall, Jamson, 1983). 


In terms of unemployment, the one-child policy has had a positive effect, in that labour

participation increased significantly. Following the implementation of the one-child policy,

female labour participation increased as now women were no longer confined to the traditional

roles of bearing children and being house-makers (Zhang, 2017). The increased female

participation in the economic helped increase the size of labour force, and ultimately economic

output. Urban migration has also increased labour force participation of both men and women,

providing them with greater employment opportunities as well as a higher income.

Challenges of the One-Child Policy

While there may have been numerous economic benefits of population control for China,

after the 1970’s, the long-term consequences of this policy in the future are questionable.

According to Zhang (2017), it seems as if China is headed towards negative economic growth. In

2016, China's government officially replaced the one-child policy with the two-child policy.

However, this change seems unlikely to alter China's population decline. Wang et al. (2016)

found that the increase in fertility in response to the two- child policy would be mild, within the

range of 0.3 to 0.7 more births per woman (Zhang, 2017). Invcentivitizing couples to now have

more children may be ineffective as the culture of the Chinese society has changed vastly.

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Couples now prefer having fewer children and instead want to focus on earning higher incomes.

The future challenge now remains to deal with an ageing population, which can potentially cause

economic slowdown at China’s economic and political rise. Given that the new two-child policy

cannot be expected to reverse the trend of a declining and aging population, the Chinese

government will need to adapt to the predicted demographic changes in other ways. For example,

China should speed up its discussion of postponing the current retirement age. It should focus on

removing the urban-rural divide, which hinders many from migration. While the one-child policy

is now often blamed for causing a labor shortage in China’s economy, relaxing restrictions in

urban and rural areas, and implementing later retirement ages, the labor shortage can be

substantially improved (Zhang, 2017). Ageing has become one of the most serious population

challenges in China. Supporting social systems such as pensions, medical care, and social

services all have big capacity deficits regarding coverage, affordability, sustainability, and quality

(Jing, 2013). As China's population ages, the government needs to pay more attention to the

reform of the pension systems in the urban and rural areas. This is because, due to ageing

population, the government is likely to have increased expenditure on pensions and health care

(Zhang, 2017).

Conclusion

This paper comes to the conclusion that introducing the one-child policy in the 1980’s

and up till today has had several positive consequences for the Chinese economy. It stopped the

potential overpopulating of the country, helping prevent extreme levels of poverty. It also

increased labour force participation of men and women, thereby bringing an increase in the

output of the economy, as noticed by increased GDP, GNI and per capita income levels. Not only

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that but it has played a role in increasing the living standards of many households. Compared to

its neighbouring country India, which failed to strictly curb its population growth, continues to

suffer from poverty and lower standards of living in comparison to China. However, it is to be

acknowledged that this acceleration of growth in China’s economy cannot solely be attributed to

the one-child policy; it plays merely a small role as there are numerous other factors that have

boosted China’s economic performance. Some of these factors included, increased foreign direct

investments, implementation of export oriented policies and large investments in technology and

infrastructure. Despite that, the government’s commitment towards investing in enhancing

human capital through public education, health care and creation of jobs, led to the focus on the

quality of its people instead of its quantity, which has helped China’s economic growth

exponentially, especially the increase in skilled labour. Malthus’ theoretical assumptions while

are relevant in China’s case, they are oversimplified in nature as numerous exogenous factors

other than fixed capital influence economic growth; the multitude faceted relationship of

economic growth and population needs to be understood and analyzed holistically with all its

complexities. Looking towards the future, China’s is yet to take action to deal with its challenge

of an ageing population, as its two-child policy is likely to be ineffective. Because population has

been controlled for more three decades, the coming decades may bring a threat of an economic

slowdown. It is questionable to gage whether population can become the strongest force

affecting the Chinese economy, with increased government spending on pensions and health care

and smaller labour force, perhaps leading to lower productivity.

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