Working Paper: NBER ID: w19160
Authors: Xi Zhu; John Whalley; Xiliang Zhao
Abstract: We argue that the demographic changes caused by the one child policy (OCP) may not harm China's long-term growth. This attributes to the higher human capital induced by the intergenerational transfer arrangement under China's poor-functioning formal social security system. Parents raise their children and depend on them for support when they reach an advanced age. The decrease in the number of children prompted by the OCP resulted in parents investing more in their children's educations to ensure retirement consumption. In addition, decreased childcare costs strengthen educational investment through an income effect. Using a calibrated model, a benchmark with the OCP is compared to three counterfactual experiments without the OCP. The output under the OCP is expected to be about 4 percent higher than it would be without the OCP in 2025 under moderate estimates. The output gain comes from a greatly increased educational investment driven by fewer children (11.4 years of schooling rather than 8.1). Our model sheds new light on the prospects of China's long-term growth by emphasizing the OCP's growth enhancing role through human capital formation under the intergenerational transfer arrangement.
Keywords: intergenerational transfer; human capital; growth; demographic transition
JEL Codes: J13; O11; O53
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| one child policy (OCP) (J13) | educational investment (I26) |
| educational investment (I26) | long-term growth (D25) |
| one child policy (OCP) (J13) | long-term growth (D25) |
| decrease in number of children (J13) | educational investments (I26) |
| educational investments (I26) | human capital (J24) |