Tuesday 23 August 2011

The unintended economic consequence of the one-child policy

China's controversial one-child policy has been criticised on many levels.  Amongst them, it has been blamed for an increased number of abortions, infanticide rates and the resulting gender imbalances.

But it can also be criticised for keeping Chinese household consumption at alarmingly low levels.  China has a huge domestic market yet the country is reliant on export-led growth.  Many families have a high propensity to save their extra income earned, rather than spend it.  This is because they cannot rely on the traditional old-age safety net - their children.  With one child supporting both parents (and potentially, both grandparents), this traditional method of financial support is no longer feasible.  Thus, parents choose to save their money for their old age.

China needs to improve its social security system.  This can bolster household spending - which is desperately needed - their low domestic consumption makes the country excessively reliant on foreign demand.  But even if they do successfully reform their social security system, it will take decadeds to have an effect.  For China's citizens, saving has become a habit - and old habits die hard.  It will prove difficult to change consumer habits - the Chinese have been trained to too prudent about spending.

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