Microeconomics for Principles and Policy

China has ended its decade old and highly controversial one child policy and couples in China are now allowed to have two children. China’s one child policy was introduced in 1979 as a temporary measure to curb China’s growing population growth. The objective of this policy was to make sure that the population growth did not outpace the economic development of the country. In addition, the policy also aims at decreasing the natural imbalances caused by rapidly expanding population and encouraging sustainable development (Ouyang, 2013).

With the abolition of one child policy, experts believe that population of new born babies would boost from 16 million every year to somewhere between 20 to 24 million a year. Despite, being a the most populous country in the world, the Chinese government abandoned the one child policy in 29 Oct. 2015 over the fears of demographic crisis caused by an aging population, shrinking labour force and gender imbalance (Zhu et al., 2014).

Justification of abandoning one child policy

The reason for abandoning of the one child policy by China is hidden in both anthropology and sociology. The Chinese economy is labour intensive manufacturing based economy and to sustain its impressive growth rate it has to ensure a steady supply of labour in the domestic market. However, China has relied on its one child policy for long and that has resulted in aging population and shrinking labour force. Therefore, by scrapping the one child policy, China would have “extra” workforce that would enter the market by 2035 (Choukhmane et al., 2013).

The one child policy was implemented in the period when the Chinese population was growing at 20% a year and the economic growth was much lower and was unable to support the growing. However, the situation has changed; the country’s economy doubles every decade while the birth rate has dropped to 1.4, below the replacement rate (Gong et al., 2016). Therefore, it has become imperative to implement the two-child policy to maintain the required demographics and social structure.

The Chinese population is ageing at a very fast pace as compared to its birth rate. This means that the Chinese labour force is gradually shrinking and rapidly ageing. This puts a lot of pressure on the pension and social security system. The ratio of workers for every individual (either too old to or too young to work), known as dependency ratio is declining, thereby decreasing China’s economic growth. Moreover, the one child policy in China has created a society where the numbers of male are much greater than the females, as many families preferred male child over the female child. This has unbalanced the social structure, increased crime and poses threat to the social stability (Feng et al., 2013).

Further, it is important to understand that China implemented the one child policy not to control the population but to achieve a balance between economic growth and population growth in the country so that the increasing population does not become an obstacle in achieving greater economic development. In the present context, China’s economy is in great position and the one child policy is no longer required. In fact, China has implemented the one child policy for a short term but it got stretched for too long and now presents various demographical and social threats to the country such as labour shortages, aging population, skewed sex ratio between men and women, sexual slavery, trafficking, high levels of crime and social instability (Gong et al., 2016).

Potential impact of the two-child policy on the Chinese economy

China’s long-standing policy on family planning or rather a fertility rate controlling policy has been abandoned and created way for more pragmatic policy that allows couples in China to have two children. The one child policy was implemented to rebalance China’s population and to stabilize the economy. However, this one child policy has been in practice for too long and has resulted in quick decline in the number of working age people due to a low birth rate. Moreover, the country’s economic development has also been affected by this shrinking and ageing population as the country’s population is driven by the manufacturing sector that requires high number of workforce. In addition, as the workforce is entering into the retirement age the government has to spend more on retirement benefits and other expenses with little influx of young generation in the workforce to counter the people exiting from the workforce. Therefore, it can be said that the recent adoption of the two-child policy by China is a welcome strategic decision and would help the economy in the long run (Chan, 2015).

It is forecasted that the current relaxation in the family planning policy would provide an additional of 20 million people to the country’s workforce by 2035. The Chinese government expects that by allowing the families to have two children, will create a more consumer driven society which will pull the economy. As the population would increase, the demand for various commodities, products and services would increase, that implies more revenue generation for the government and essential boost for the economy. As the consumer spending increases, the viability of economy increases; which further increases the confidence in the market (Lai, 2014).

The current situation in the market suggests that the workforce would shrink in the next 20 years and there will be approximately 1.6 working age people for each retiree by 2030. Therefore, the timing of recent policy change is most appropriate as the “extra” people born due to the implementation of the two child policy would enter the workforce by 2035 and to some extent would balance the shrinking workforce (Scharping, 2013). Further, the two-child policy would have a great impact on the macroeconomic as well as microeconomic perspective, which can be understood as discussed below:

Macroeconomic perspective:

Macroeconomics is the part of economics that deals with the economy as a whole rather than the individual markets. Macroeconomics includes the study of aggregated economic indicators such as gross domestic product (GDP), unemployment rates, price indices, and the interrelations between the different      sectors of the economy in order to better understand how economy functions. China’s current two-child policy would have great influence on the Chinese economy (Mankiw, 2014). 

Positive impact: Boosted consumption

As the policy over one child has been abandoned, this would create a consumers market and help the economy to develop at a steady rate. The market has responded positively to the two child policy and many organization’s share prices have increased. As forecasted by the experts, the new policy would help the country to add 4 to 6 million extra birth a year, thereby creating a market worth of $55 billion (Xu & Pak, 2015). This would have an impact across all the categories of products and services as people would be forced to increase their spending thereby increasing consumption. Boosting domestic consumption has been a long-standing macroeconomic goal of the Chinese government and the two-child policy would help to achieve it, thereby reducing the reliance on export led growth model (Xu & Pak, 2015).

Negative impact – Unemployment

It has been argued that in order to sustain its economic development, China needs greater young workforce in the future as the majority of workforce in China is reaching their retirement age. Further, it is important to understand that China has been a labour intensive manufacturing economy. However, due to massive urbanization and increased level of life style choices, it is becoming a progressive society and future generations would not be willing to accept labour intensive jobs. In addition, with technological advancements fewer jobs would be available for the younger generation that would result in intensive unemployment.  

Microeconomic perspective

Microeconomics is the branch of economics that studies the behaviours of individuals or firms in decision making regarding allocation of limited resources. The study of macroeconomic factors helps to understand how the costs are determined, theories of supply and demand, factors of production and how it is related to the macroeconomics. Further in the wake of two-child policy as implemented by China, it important to understand its implications for the economy (Baumol & Blinder, 2015). 

Positive impacts – Increased supply of labour in the market

With the relaxation on the one child policy, China would have an increased supply of well skilled labours in the market as compared to the present situation. According to the NHFC authorities there would be approximately 30 million extra workforces that would join the China’s workforce by 2050 (Curtis et al., 2015).

Negative impact – economic disparity

As the number of people entering into the workforce increases, it will initiate cut throat competition in the market. Further, it is also expected that the new stream of labours would be well skilled and informed while the future employment opportunities are limited. This would result in increased competition for the limited resources not only between the individuals but also among the companies causing exploitation of resources. The economic and social disparity is expected to widen combined with the already rampant corruption (Zhu et al., 2014).

References

Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Cengage Learning.

Chan, K. (2015, November). Newborn Screening and the Relaxation of One Child Policy in Mainland China. In 2015 APHA Annual Meeting & Expo (Oct. 31-Nov. 4, 2015). APHA.

Choukhmane, T., Coeurdacier, N., & Jin, K. (2013). The one-child policy and household savings.

Curtis, C. C., Lugauer, S., & Mark, N. C. (2015). Demographic patterns and household saving in China. American Economic Journal: Macroeconomics,7(2), 58-94.

Feng, W., Cai, Y., & Gu, B. (2013). Population, Policy, and Politics: How Will History Judge China’s One‐Child Policy?. PoPulation and develoPment review, 38(s1), 115-129.

Gong, W., Xu, D. R., & Caine, E. D. (2016). Challenges arising from China’s two-child policy. Lancet (London, England), 387(10025), 1274.

Lai, J. I. A. N. G. (2014). Looking at the Absence and Issues of Gender Evaluation Mechanisms in Public Policy from the Perspective of the “Couples to Have a Second Baby if Either is an Only Child” Policy.

Mankiw, N. G. (2014). Principles of macroeconomics. Cengage Learning.

Ouyang, Y. (2013). China relaxes its one-child policy. The Lancet, 382(9907), e28.

Scharping, T. (2013). Birth Control in China 1949-2000: Population policy and demographic development. Routledge.

Xu, B., & Pak, M. (2015). Gender ratio under China’s two-child policy.Journal of Economic Behavior & Organization, 119, 289-307.

Zhu, X., Whalley, J., & Zhao, X. (2014). Intergenerational transfer, human capital and long-term growth in China under the one child policy. Economic Modelling, 40, 275-283.

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