The economics of China's one-child policy

Rumblings in China's state media suggest that Beijing is considering a move to relax its deeply unpopular one-child policy, a change that could significantly alter demographic trends in the world's second largest economy.

Since its introduction in the late 1970s to control China's rapid population growth, policymakers have carved out some exceptions to the rule, including a provision that allows rural residents to have a second child if the first was a girl.

But for hundreds of millions of Chinese, the one-child policy remains a powerful force in their daily lives. Couples who violate the rule face heavy financial penalties, and the deterrent has proved strong enough to drive fertility rates lower in China. The slowdown in birth rates is especially pronounced in major cities like Shanghai.

Efforts to enforce the policy have also spawned a huge bureaucracy, with officials from the family planning agency stationed in towns and villages across the country. Demographic results have been dramatic. China's work force shrank last year for the first time in decades, and that trend is likely to continue.

Few details are known about Beijing's plans, but if changes are coming, it is possible they will be announced at soon as later this year. Incremental changes appear to be more likely than a wholesale elimination of the policy. Equally uncertain is the effect that any rule change will have on China's economy.

Qinwei Wang and Gareth Leather, analysts at Capital Economics, wrote this week that a higher fertility rate "will not provide a solution to the worsening demographic outlook in the coming decade."

For one, even if birth rates were to increase, it would take 15 years -- or more -- for those children to enter the labor force. Wang and Leather also point to evidence that a swelling labor force added less than a percentage point to average economic growth over the past two decades.

In addition, surveys conducted in China suggest that many residents, and especially those who live in cities, are not particularly anxious to have more children. Overall, Wang and Leather think the impact of a policy change will be "relatively small."

"The main reason why we expect growth to slow over the coming decades is not that the labor force will soon start to shrink but that the pace of productivity growth is likely to slow, as the room for catch-up with richer economies diminishes," the economists said.

China policymakers face what is perhaps a more pressing problem at the other end of the age spectrum.

China currently has more than 185 million citizens over the age of 60. The elderly now account for around 12% of China's population, a figure that is predicted to swell to 34% by 2050.

According to a recent study, large numbers of the elderly are living before the poverty line and suffering from physical problems or depression. With millions more Chinese scheduled to leave the workforce in the near future, social services could become even more strained as the still-developing country seeks to reform its economy.