Tuesday, January 23, 2007

China To Retain One Child Policy

Sorry for the lack of posting everyone, but Claus and I have been fairly busy over the last week or so setting up an new economics blog: Global Economy Matters. Some of the themes (but by no means all of them) will be already familiar to regular readers of this blog, especially this one on Japan from Claus. I mean, if we are to some extent right (as opposed to the majority of mainstream economic analysts) about why the BoJ is having so much difficulty raising interest rates it is to some extent due to the sort of ideas we have been working out on this blog.

Now for the main objective of this post. This is not good news:

China has decided not to relax its one-child policy, although a top family planning official acknowledged Tuesday the policy has accelerated the nation's growing gender gap. ... Yet after a review last month, he said, the government decided to maintain the policy, which dates from the late 1970s, and limits urban couples to one child and rural families to two children. Dropping the restrictions now would risk a population surge as a baby boomer generation born in the early 1980s becomes ready to start families, he said.

Now let me be very clear at this point. China needs to introduce pro-natalist policies, and it needs to introduce them urgently. The discourse on sex-imbalances is important, but in this context it is an entirely secondary issue.

If China cannot alter (and it may already be too late) the structure of the population pyramid (and doing this like Scandinavia or Slovenia can with migrants is just unthinkable) then the whole path of savings and investment in China is going to be totally distorted.

The implications of China's rapid ageing are already significant IMHO, but quite frankly this is nothing in comparison with what we might expect 10 to 15 years from now, when it is even possible that the structural distortions may serve to crash the entire global economy. So this is not a light matter in the least. This is why all those who pursue a "demography doesn't matter" type argument should at least have a hard think about things. I can contemplate the possibility we might be wrong (and when I see the evidence, like a lasting and sustained internally driven economic revival in Germany) I am ready and willing to correct, but do those of you who differ ever even consider engaging in a 'what if' type thought experiment? Or are you happy to go to Monte Carlo and bang all your money on the red. The stakes here are high indeed.


Will Baird said...

I think you need to expound a little bit more, Edward. I can make some guesses, but it would be good if you came out and said what the 'what-if' is taht you are thinking wrt the economic scenario that you are extrapolating if China does not adopt pro natalist policies.

Edward Hugh said...

Hi Will,

Thanks for bringing all this out like this. Now I realize that what I am saying may sound a bit strong - the part about the global economy crashin' n'all - but I happen to think that what we have here is an extraordinarily strong situation, and discovering that given all we now know China is not only not going pro-natalist, but is even continuing with a policy of trying to restrict childbirth is truly mindboggling. And nobody seems even to be saying boo.

So why do I think this is a real risk.

Well we don't know exactly what the current tfr of China actually is, but on some estimates it is around 1.3, and even allowing for underestimates it surely isn't much higher.

So, given that immigration on a significant scale is out, and given that we can still expect a significant increase in life expectancy, China is all set to age rapidly.

Now it is the economic aspect of this that interests and concerns me.

By 2020 - 2025 we now know that China will be older than the US. The velocity of this change is very high.

We also know that 15 years from now GDP per capita in China will be much higher than it is now.

And we also know - I think - that there are life cycle like patterns in saving and consumption, and aggregated these reveal themselves at the population level. We don't really know the magnitude of these, and they also vary from country to country for behavioural and cultural reasons, but we know they exist. We can all argue about how big these components are later.

Now if we look at the currently older societies - as Claus and I have been arguing Italy, Germany and Japan, and now aapo (our new member from Finland on DM )seems to be confirming a similar pattern in Finland - we can learn something. Indeed I wouldn't mind betting that we will also be able to see this soon in Sweden - now if we look at all these we can notice a significant weakening in domestic consumption and a relative rise in private - though not public - saving. What this essentially means is that these societies are destined to become export dependent.

This is why you can't think about any of this without taking the global imbalances situation into account.

Now think of a country of the economic size and wealth that China will be on 15 years from now (with a new version of Bretton Woods and a much higher renminbi I imagine). I mean where the hell will all the exports go. It is the size of China that presents the problem.

And look at the export profile of Japan and Germany, machinery and equipment is a big part, and this fits in perfectly with China and now India's development. But just who exactly - when China gets to the high value added sectors in manufacturing and does machinery and equipment - I mean just who exactly is going to be doing all that developing to need so much equipment?

And if they try consumer goods, and remember that most of Europe and Japan will be trying to run surpluses, who the hell is going to buy all those consumer goods?

It is the scale of the problem that is frightening.

I mean we have China currently running a comparatively small surplus in terms of what we could be looking at, and look at all the problems this is causing.

So really, if we have so much excess global capacity, we are only talking about one thing: global deflation. And global deflation if it lasts long enough will simply crash the pensions and financial systems. I mean the pension funds just won't be able to find yield.

Ok, this may all seem like nightmare scenario stuff, but as far as I can see it could happen.

This doesn't mean it will, since could doesn't mean will :)

But this is where we get to the what ifs. I mean if more people stopped saying 'you are simply talking tripe', and tried to address the real issues that are out there, then we might be able to get the sort of discussion going where we could examine all these problems much more seriously, and get a better purchase on just what the possibilities are.

But so far, if you look at where the debate about imbalances is, we are just drawing zilch.

And you need to remember that since the velocity of the age transition will be so high in China, there is much less time for behavioural components to change. By this I mean modern credit based consumption patterns. So consumption in China may just never get to take off - on aggregate - like we see it today in the US, the Uk or Australia. So they may perpetually hover near a surplus. It depends. This is hard to tell.

And even if you don't think things will go the way I am suggesting, it is clear that this kind of structural break in the population is no good thing.

And please note that I am not simply saying that China will crash, rather I am saying that they will crash everyone else. This is the problem.

So I think that Paulson or whoever should be on the plane to Beijing right now, to explain to them that this is simply a piece of madness, but since Paulson himself is hardly convinced, then he is hardly likely to do that, now is he.

Which is why I said it was a tragedy that so many people were taking the view that demography doesn't matter, since some of this is avoidable.

Having said that, I am not suggesting that simply by adopting pro-natalist policies you will avoid all problems. but you have to start somewhere.

And note again that everyone wants more consumption in China, so transferring resources via the state to mums to be would make perfect sense.

I don't claim to have all the answers, just some of the questions, but if we could at least get a consensus on what these questions were, then we would be making an even bigger start. Better to start sooner, rather than later.

S.M. Stirling said...

I don't think lifting the 1-child policy would make much difference in China.

Eg., rural couples are allowed to have two children but they don't; rural TFR's are in the 1.6-1.8 range, IIRC.

And ethnic-Chinese urban TFR's are at or below 1 even in areas where the one-child policy doesn't operate; Hong Kong and Singapore, for example.

The one-child policy probably drove Chinese TFR's down faster than would have happened otherwise, probably much faster, but it's a lot easier to drive fertility down by government policy than it is to push it back up.

Richard said...

I'm not sure that I can agree.

(1) China will certainly become old before becoming wealthy, but the elderly will still have more in the way of wealth than their elders did.

(2) More disturbing is the gender imbalance. A large number of single, not-likely-to-be-married young men in can be a difficult thing for a society. But their is a large Chinese diaspora in Southeast asia, and I suspect that it is likely either that young men will immigrate or that young women will be persuaded to emmigrate from the diaspora. It depends largely upon how the Chinese do vis-a-vis the rest of Southeast asia.

(3) The largest shrinking population is projected to be in Russia, with the population expected to be half the current population by 2050. You heard right, half. Alcoholism and poor medical care seem to be the chief culprits, and if I were looking for a potential regime destabilized by a shrinking population, it would be Russia or Afrrican countries that are hard hit by AIDS -- not China.

S.M. Stirling said...

Edward: I think you're underestimating the degree to which the "gender gap" will make things worse. It's malignant synergy at work.

With a male-female ratio of 120:100 among the young, you've reduced the number of potential mothers (already small) by a further proportion of... what, 10% or something like it?

That makes the downward spiral operate with even greater speed by consistently depressing the crude birth rate below what it would otherwise be with the same TFR... and each of those smaller and smaller cohorts of children has the same distorted gender ratio.

S.M. Stirling said...

The gender imbalance in China (and many other parts of south and east Asia) is an example of how strictly demographic factors interact with cultural ones.

The extremely strong son preference has always resulted in some female infanticide and "infanticide by neglect" in those areas, and things like bride-murder in India.

But those weren't very demographically significant when TFR's were high. The odds of having only daughters in a family of, say, 6 or 7 children were much smaller.

Note also that son-preference is NOT a function of lack of education and economic backwardness.

In both China and India, gender imbalance is _higher_ in the more developed areas.

This means the problem will, other things being equal, get worse, not better.

S.M. Stirling said...

Note also that as usual, no feasible amount of immigration can be significant in Chinese terms. There are just too damned many of them for that. This applies to potential influxes of brides as well.

Where it may be significant is _emigration_ of single males. Again, as usual, even a minor development in China can bulk huge for other parts of the world.

Thus while China's shrinking labor force and high rate of growth over the next decade might lead one to expect a fall-off in Chinese emigration, the combination of lack of marriage partners and the fairly good Chinese educational system may produce millions of young Chinese men willing to move.

It takes a lot of money to compensate for involuntary celibacy.

Also, note that China (unlike the West) has a long tradition of near-universal marriage. There's going to be a sharp contrast between deeply ingrained expectations and what's physically possible.

Edward Hugh said...

"Edward: I think you're underestimating the degree to which the "gender gap" will make things worse."

Ok, fair enough, I may be bending the stick too much one way. My intention was not to underestimate them, but rather to put them to one side to try and examine the other issue.

I don't disagree at all with what you say, and you may well be right that this will produce emigration, the interesting thing would be to know on what sort of scale.


"China will certainly become old before becoming wealthy, but the elderly will still have more in the way of wealth than their elders did."

Yeah, this is for sure. So if then can export enough they can sustain themselves internally, just like Japan is more or less doing now. This is why I put the emphasis not on China crashing, but on the imbalance that this will create crashing the rest of the global economy. Strong and sustained deflation inside China will of course only help those in China with savings, but what will it do for the rest of us?

"The largest shrinking population is projected to be in Russia, with the population expected to be half the current population by 2050."

Oh I agree, the population in China is only ageing not shrinking. Russia is a much more significant case politically speaking, since we may face the prospect of a nuclear rogue state on a large scale.

But economically, short of oil and other commodities, the real economic impact of Russian meltdown should be contained.

Anyway, all this means is that we have two problems not one, so all the more reason to act sooner rather than later.

S.M. Stirling said...

Note that a TFR of 1.2 or 1.3 and falling kills demographic momentum _fast_.

I don't know if China as a whole is really down that low, but it may be -- the CIA figures (1.73 for China as of 2006), while accurate, do tend to lag by a couple of years.

(Eg., the World Factbook has Morocco at 2.6, while Moroccan government figures put it at 2.35. I generally believe the World Factbook unless the other figure is lower.)

If China really is at a TFR of 1.2, then an actual fall in population may be expected as early as the 2020's. And the aging will be _very_ rapid.

Edward Hugh said...

"And the aging will be _very_ rapid."

Yes I think this is the point Sterling. We agree completely about this part.

Robert said...

Edward, I'm curious where you've found estimates of Chinese TFR as low as 1.3 ... I haven't seen that before, and if true, it's important.

Question two: have you seen anything on internal migration trends in China? If China is going to experience population aging and then decline, yet at the same time continue urbanization, especially coastal urbanization, then some rural areas are going to empty out. This goes especially so with the gender gap, as once there is a premium on Chinese brides, if would-be brides are mobile, then the gender deficit becomes focused in the low-wage regions of the country. Depending on where exactly this story plays out, one plausible result is a rollback of Chinese settlement on the northern and western frontiers, with whatever ethno-political instabilities that entails.

S.M. Stirling said...

"Edward, I'm curious where you've found estimates of Chinese TFR as low as 1.3 ... I haven't seen that before, and if true, it's important."

-- The PRC official figure is 1.2, if I recall correctly. Most outside observers think that this is an underestimate, at least slightly. The CIA figure is 1.7

Taiwan is at about 1.4, and Singapore is at 1 or a bit less.

There's general agreement that urban TFR's in China are very low indeed, 1 or so and less in the bigger cities like Shanghai and Beijing.

Colin Reid said...

About the hollowing out of the countryside: there's another factor to consider here, and that's the ethnic minorities. Curiously, China's demographic engineering actually favours non-Han over Han, because minorities have much higher fertility allowances, and partly as a result (but for other reasons on top), taken as a whole the minorities are growing extremely rapidly relative to the Han. They may also be less mobile than Han Chinese and thus less likely to move to the Eastern cities. So unless non-Han are assimilating into Han, China's frontier areas could already be de-Hanifying quite rapidly.

The likely response of Beijing would be to step up existing efforts to 'encourage' more Han Chinese to move West, especially in cases where the local ethnic group's 'loyalty' is suspect (Tibet springs to mind here). But even China can't fight the economic and demographic trends forever.

At least we can hope that China doesn't have the same degree of ethnic obsession as Russia, as China has long had a non-ethnic concept of nationality (unsurprisingly promoted by the Qing dynasty, who were after all not Han themselves).

Edward Hugh said...

Hi Robert

"Edward, I'm curious where you've found estimates of Chinese TFR as low as 1.3 ... I haven't seen that before, and if true, it's important."

Obviously there is a high degree of uncertainty as to just what the level of fertility in China actually is.

The best general survey of the available estimates is "China’s uncertain demographic present and future" by Wolfgang Lutz et al.

Here's the abstract:

"This paper will apply methods of probabilistic population forecasting to assess the range of uncertainty of China’s future population trends. Unlike previous applications of probabilistic population projections that consider stochastic future fertility, mortality and migration, this paper will also account for the significant uncertainty of China’s current fertility level (with estimates ranging from 1.2 to 2.3) and the related uncertainties about the sex ratio at birth (with estimates from 1.06 to above 1.2) and the size of the youngest cohorts in the 2000 census. The model applied in this paper will be based on expert based uncertainty ranges for current conditions, in addition to the probabilistic treatment of future trends. Given the sheer size of China’s population, these significant uncertainties about current conditions are of high importance not only for the future population of China but also on a global scale."

S.M. Stirling said...

While China's real birth rate is somewhat uncertain, it's certainly not as high as 2.3.

If it were, the number of children in school and reported to the census authorities would be much higher. And those figures _are_ pretty accurate.

Also, anecdotal reports mention again and again the scarcity of young children in both urban and, to a somewhat lesser degree, rural areas.

S.M. Stirling said...

Also, as far as minority regions go, Tibet and Sinkiang are becoming more and more Han. Both probably have Han majorities now.

While the Tibetan and Uighur birth-rates are higher than the Han, they're not _that_ much higher.

And in any case Han in-migration is on a huge scale. The government is spending money like water in these sensitive frontier regions, and the resulting development and construction is sucking people in on a huge scale.

Everything in China is on a huge scale. Even with very low birth-rates, there are still so many Han that the government isn't much worried about the minorities. Especially given that their own demographic trajectory is following the same lines, albeit more slowly.

Giacomo said...

Fascinating article on the economics of chinese birth planning , which asks "how necessary was the one child policy in fostering economic development?". In-depth analysis with useful facts and statistics

Anonymous said...

Hi Edward, interesting topic. I think that you have made some assumptions which are erroneous and have ignored some essential points. Firstly, the earth permits the existence of a biosphere in which all human activities take place. The biosphere is not unlimited. Educated estimates at long term sustainable 'carrying capacity' of our biosphere is approximately 1.5 billion. This implies long term demographic decline is not only a good thing, but that it is essential for human survival. Secondly, China can certainly find the numbers to reverse demographic decline with external migrants. Africa can certainly accomodate.
I do however think that much is lost in the numbers