Chinese Economy
Class meeting 11
Monday February 24, 2014
One Child Policy
China Workforce Slide Robs Xi of Growth Engine
By Bloomberg News
Jan 21, 2014 2:41 AM ET
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China (http://topics.bloomberg.com/china/)’s second
straight annual drop in its working-age population is
robbing President Xi Jinping of an engine of three
decades of growth, underscoring the need to close the
gap between his achievements and ambitions.
Xi and Premier Li Keqiang
(http://topics.bloomberg.com/li-keqiang/), who in
November unveiled the broadest policy shifts
(/photo/china-workforce-slide-/ikFwvCwEvqrQ.html)
(http://www.chinadaily.com.cn/m/shanghai/lujiazui/2013-11/16/content_17111754.htm) since the 1990s, are
facing a labor force decline that the United Nations estimates will total almost 30 million in the decade through
2025. China’s working-age population, or people age 16 to 59, fell by 2.44 million in 2013, the National Bureau of
Statistics said yesterday.
The demographic bind adds pressure on Xi and Li to find sources of growth (/quote/GDPNTTLY:IND) beyond
1
plans that may have a limited impact, including an easing of the one-child policy, while they try to absorb about 7
million college graduates a year. Leaders also face headwinds from reining in a record credit boom, with the central
(/photo/china-workforce-slide-/ikFwvCwEvqrQ.html)
(http://www.chinadaily.com.cn/m/shanghai/lujiazui/2013-11/16/content_17111754.htm) since the 1990s, are
facing a labor force decline that the United Nations estimates will total almost 30 million in the decade through
2025. China’s working-age population, or people age 16 to 59, fell by 2.44 million in 2013, the National Bureau of
Statistics said yesterday.
The demographic bind adds pressure on Xi and Li to find sources of growth (/quote/GDPNTTLY:IND) beyond
plans that may have a limited impact, including an easing of the one-child policy, while they try to absorb about 7
million college graduates a year. Leaders also face headwinds from reining in a record credit boom, with the central
bank pumping funds into the financial system after money-market rates yesterday rose by the most in seven
months.
“The decline of the labor force (http://topics.bloomberg.com/labor-force/) just makes everything more difficult
in terms of generating growth,” said Freya Beamish, a Hong Kong-based economist with Lombard Street Research.
“You have less people to take part in production and that reinforces the need to be more productive. It makes more
urgent the need for China to find ways to shift capital to areas of the economy that can boost productivity.”
While government data yesterday showed China’s $9.4 trillion economy expanded 7.7 percent in the fourth
quarter (/quote/CNGDPYOY:IND) from a year earlier, exceeding the median estimate of analysts in a
Bloomberg News (http://topics.bloomberg.com/bloomberg-news/) survey, gains in factory output and
investment spending moderated last month. Growth was 7.8 percent in the third quarter.
2
China’s Population
• 1 in 5 people in the world live in China.
• Population change = births – deaths.
• Premodern population growth in China 0.4% per year.
– At this rate, population doubles every 70/0.4=175 years.
– Premodern economic growth about the same as population
growth=>very slight per capita GDP growth. Struggle for survival
on subsistence income.
– Similar pattern observed around the world (Europe).
– Malthus (1766-1834), "Population increases in a geometric ratio,
while the means of subsistence increases in an arithmetic ratio."
Hence, economics called the dismal science.
– From end of Roman Empire to 1500, there was almost no per
capita output growth in the world. This period of stagnation is
often called the Malthusian era. Malthus conclusion: unless you
regulate family size, the misery of famine would always be
present. Until 1750 the world was Malthusian.
3
• Modernization:
– Fertility rates are high partly because of high infant
mortality rates. Better maternal care and nutrition reduces
infant mortality.
– Better agricultural productivity raises nutrition.
– Better sanitation improves health
– Death rate declines.
– These things lead to rising population growth rates.
Population explosion in Europe in the 1800s.
• In China, population waxed and waned over ancient
history but explosion didn’t occur until the 1950s,
after Communist revolution.
– Improvements in sanitation, better distribution of food,
public health and sanitation raised population growth rate
to 2% (doubling every 35 years).
4
• Life Expectancy in China
– 1950: 41 years.
– 2000: 71 years
• (Endogenous) Fertility:
– 2011, fertility rate was Japan 1.4, Italy 1.4, Korea 1.2,
USA 1.9.
– Individual choice to voluntarily reduce fertility (These
societies aren’t even replacing themselves). Hence,
was China’s one child policy necessary?
5
•
Well known determinants of fertility: Inversely related to
•
•
•
•
•
Income
Fraction of people in non-agriculture
Womens’ education level. Women in the workforce and opportunity cost of time.
Children used to be investment (capital) goods. Are becoming consumption goods.
Impact of GLF. High birth rates in 1960s were replacement births. Households postponed births
because of GLF conditions now having children. Those who lost children were replacing them.
By mid 1960s population growth rate was 3% (double every 23.3 years).
6
Animated population tree
(You can watch the video later)
http://www.bloomberg.com/news/articles/20
15-03-24/no-country-for-kids-these-townsshow-what-china-will-become-i7nsvv1y
7
Population Policy
• Mao promoted population growth. Saw big
population as advantage in terms of a big human
labor force. Held this view until GLF.
• 1962-1966 Pilot program of urban family planning,
promoting birth control on voluntary basis.
• Comprehensive initiative 1971, the later-longerfewer campaign.
– Marry later, longer space between children, fewer total
children. Legal minimum age to marry increased. Directed
both to urban and rural couples. Policy lasted until 1978.
Fertility rate fell from 5.8 in 1970 to 2.7 in 1978.
• New worries about the post GLF baby boom
generation getting married, entering child-bearing
years. Hence, the one child policy hatched.
Objective to target population at 1.2B in 2000.
8
Population Policy
• Coercive Policy
– Penalties imposed for women who have more than one child.
Implementation strict in first 5 years.
• Additional children taxed.
• Urban people lost their jobs at SOEs (Marriage Encounter story)
– 1983: Mandatory IUDs for women with one child. Forced
sterilization for couples with 2 or more, forced abortion for
unauthorized conceptions.
– Implementation of policy delegated to local government. Local
officials are evaluated in part on compliance with the policy.
• OCP is an example of why we might distrust centralization,
government imposed policies (social, industrial, economic).
• OCP may seem to be a straightforward and obvious solution
to the problem.
– Many horrible unintended consequences
– Heartbreaking abuse of human rights
• 10 minute video on OCP (we watch this in class)
– http://www.youtube.com/watch?v=n-_06DyfRoo
9
Gradual Loosening of Policy
• By 1984 forced sterilization and abortions renounced by
central government but sometimes local officials
continue with and abuse.
• Non Han Chinese exempt
• Rural couples could have a second child if they faced
hardship and first child was a girl.
– In country side, people have more than 1, births are hidden and
babies are sent away to be raised by relatives. (Missing girls-no
official records)
• For many years, if both husband and wife were products
of one-child familes they can have 2 children
• November 2013: Couples can have two children if either
parent was an only child.
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Unintended Consequences: Sex
Imbalance
• Natural birth ratio is 106:100 boys:girls. Why?
• Sex imbalance due to cultural preference for
boys.
– Girls marry out of family, boys remain in village, and
serve as old-age support.
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Unintended
Consequences
China sex imbalance: See Table
7.2.
In 1930s the birth ratio was120:100.
In some areas of china today is
150:100.
In 2000 census, 121:100. This is
called the phenomenon of the
“missing girls.” Where are the
girls?
Female infanticide.
Selective sex abortions.
Ultrasounds can detect sex in
utero.
Unreported female births. Girls
hidden in other villages to live with
relatives
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Unintended Consequences: Sex
Imbalance
• Bare branches. 30 million surplus men, mostly
low income, who will never have the chance to
marry.
• Girls subject to kidnapping, increased sex
trafficking.
13
Unintended Consequences: Sex
Imbalance
• Implications for Labor Force and Growth
– Demographic dividend: Declining dependency rates during
high speed economic development. Increased working to
total population ratio, generates faster growth and higher
productivity and living standards, higher saving rates and
investment.
– China’s Economic Future (David Dollar).
• https://www.youtube.com/watch?v=Ax_4NZUeVfs
• Life-cycle Implications for Saving:
– Dependency ratio composition. Fraction of working to total
population. Workers support children and retirees. Has
consequences for saving in the life-cycle context.
– China’s One-Child Policy GOES WRONG:
• https://www.youtube.com/watch?v=xPqUfVHJMJE
14
15
Curtis, Lugauer and Mark
• Quantitative model of overlapping generations
model of finitely lived households. Life-cycle aspects
incorporated include
– Caring for children in younger households (age-children
profile).
– Rising wages with experience (age-earnings profile).
– Retirement support from children and formal pensions
• Why a model, when we’ve already seen Modigliani
and Cao?
• Point of their paper: Exogenous reduction in family
size explains a big part of household saving rate
increase
16
Demographic
transitions
17
18
Sketch of Model
• People live for 85 years
– 0 to 19 don’t make decisions. Eat what is provided by
parents
– 20 to 49, have children living at home
– 50 to 63, empty nesters
– 64 to 85, retired. Draw income from pension and adult
working children. Die at 85.
• 65 generations at different phases of life-cycle
alive at each time period.
19
ct ,j
β 2 (0, 1)
ct ,j t
n t = N tc / N tp
cct,j
t
! n t cc ,1− σ 1!j +!2 r[0,
ct ,j = (1 − ⌧
)
w
+
(1
+
r
)
a
−
a
29].
1−
σ−
t
t
t
,j
t
+
1,j
+
1
29
c
t
,j
c
c
c
ct ,j X
c
at +
t
+
j
,j
t
+
j
,j
⌘
t
,j
Ut = ⌧ β j µ (n t + j )
+
1− σ
1− σ
j=0
j
=
30
Sketch of model
!
1 + rt
1− σ
X65
c
t
+
j
,j
j
j is economic age. (j=1 is real age
+⌧ β
,
ct ,j = (1
− ⌧) wt +1 −
(1σ+ r t ) at ,j − at + 1,j + 1 − n t cct,j ,
j 2 [0, 29].
20)
j = 30
Households earn exogenous wage,
can consume for themselves and
buy stuff for kids, and purchase
assets (save).
ct ,j = (1 − ⌧) wt + (1 + r t ) at ,j − at + 1,j + 1,
j 2 [30, 42].
j = 30
ct ,j = (1 − ⌧) wt + (1 + r t ) at ,j − at + 1,j + 1 − n t cct,j ,
j 2 [0, 29].
nt
Lifetime utility maximization
j = 65 saving
problem. Solve for optimal
function for individual, then
aggregate according to
demographic data
ct ,j
t
Pt =
⌧wt j = 30
= (1 − ⌧) wt + (1 + r t ) at ,j − at + 1,j + 1,
t
at + 1,j + 1
To analyze saving/consumption
at + 1,66 = 0.
decisions in 1955, must
start with
w
N
t
generation born in 1870.
r
t
Pt =
t
N tr
at + 1,j + 1
a
⌧wt
c̄t ,j
N tw
P
=
c̄t ,j t = n tNctrct,j⌧w
+ t ct ,j
ct ,j = Pt + (1 + r t ) at ,j − at + 1,j + 1,
ct ,j
j t2 [43, 65],
n
( 1− σ)
( 1− σ)
X29
X65
j 2 [0,
42]
c̄t + j ,j
c
t + j ,j
j
U
=
γ
+
β
, 65],
t
t
+
j
,j
= Pt + (1 + r t )(1at−,j σ)
− at + 1,j + 1, (1 −
j 2σ)[43,
j=0
j = 30
Pt =
at + 1,66 = 0.
Nw
j 2 [30, 42].
j 2 [43,
65], 42].
t ) at ,j − at + 1,j + 1,
ctc,jt ,j= = (1P−t +
⌧) (1
wt ++Nr(1
j 2 [30,
w + r t ) at ,j − at + 1,j + 1,
j a=t +65
Perfect foresight assumption.
1,66 = 0.
People can see past and future
population/demographic
breakdown, wage and interest
j = 65 rate
Nt
N tw
N tr
γt ,j
N tw
N tr
⌧wt
✓
σ 42]
h
i 1/
j σ2◆
[0,
⌘+ σ − 1
= β 1 + µn t
, nt
j
j 2 [0, 42]N w
nt
20
Data Requirements for perfect foresight model with 65 overlapping
generations.
21
Smaller families allow for more saving.
Fewer children to provide old age support means you need
to save more.
More workers earning money to save in the economy now
22
Let wages and interest rate evolve
23