Why China's baby policy won't spur a boom

With the abandonment of the one-child policy, China is turning a page in its recent history. While a big policy change for the country of more than 1.3 billion people will no doubt change demographics, it is not likely to have much economic impact.

Since 1979, when the policy was introduced, China has averaged nearly 10 percent annual GDP growth. In that year, China was a poor rural and agrarian society struggling to recover from decades of economic mismanagement under Mao. It faced agricultural, social and economic challenges as its population continued to grow.

An elderly man holds a baby in his arms as he rides a bicycle along a road in Beijing on September 8, 2015.
Wang Zhao | AFP | Getty Images
An elderly man holds a baby in his arms as he rides a bicycle along a road in Beijing on September 8, 2015.

Now, with the end of the one-child policy, China is facing a pivotal moment of change as a country. China is now seeing a decline in its working-age population, facing a decrease in its growth rates and finding a need to transition to a consumption-based, innovation economy from one based on investment and exports. To understand why China has ended the policy, just look to the repeatedly asked question: "Will China get old before it gets rich?" The question suggests a false tradeoff, but reflects the reality that China's working-age population is set to fall over the next few decades cutting into growth.

The one-child policy created several unintended consequences that have been distorting the Chinese economy. For example, China's limited social safety net meant that young Chinese face a lifetime of savings to care for themselves, their parents and their grandparents. And a Confucian preference for male offspring has led to a huge gender imbalance and a marriage market in which men and their families are in a financial savings arms race to attract a smaller potential pool of wives. As a consequence, China has one of the highest savings rates in the world, creating a massive over-investment headache. Much of this money has been plowed into over-investment in infrastructure, real estate and the stock market — all facing bubbles to a certain extent.

Altering the demographic outlook is an important part of rebalancing the Chinese economy. Unfortunately, this end of the one-child policy is unlikely to have much impact. For women over the age of 40, the costs of fertility treatments are out of reach and it is already too late. If China does see a sudden baby boom, it must wait roughly 20 years before those new children can start entering the labor market. By then, China will already have a much older population. And in 2040, it will have a median age of 44, according to census estimates (compared to 39 in the U.S. and an astonishing 54 in Japan).

But even in the long term, we should be skeptical of much change. China's fertility rates were declining in the 1970s well before the one-child policy was enacted. We know fertility is tied to income and as China gets wealthier its birth rate will be held back as well. Just look at comparable rates in Germany, Italy or Korea.

Moreover, the value of focusing on just one child has been a staple of government propaganda for a generation. Adherence to the one-child policy has not grown over time due to more coercive measures. Instead, birth rates largely fell as the costs of education and child-rearing led parents to focus all of their resources on a single child.

In fact, the policy has already been loosened in recent years with, for example, couples that were both only children allowed to have a second child. But, very few of the families eligible decided to have a second child for all the reasons cited above. Recent surveys in China suggest very few parents would opt for more than two children.

Finally, we can look to the Chinese populations in Hong Kong, Taiwan and Singapore, who were never under the policy and yet have among the lowest fertility rates in the world (about 1.2 kids per woman) — again driven largely by increasing incomes and costs of child rearing.

China's one-child policy may be a grand statement on its commitment to strengthen the Chinese economy, but the country will need more than just a policy change to stimulate consistent growth. The graying populations of Japan, Europe and much of the developed world are going to get some pretty big company.

Commentary by Joseph Foudy, a clinical associate professor of economics at the NYU Stern School of Business. He teaches courses on Asian economies, international management and Chinese business and foreign relations.