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The East African : December 9th 2013
34 The EastAfrican OUTLOOK DECEMBER 7-13,2013 D E VE LO PME N T Chinese couples now allowed to have 2 children Expe≥ts say the new ≥elaxed child policy will ≥esult in a mode≥ate baby boom and bette≥ child-≥elated consume≥ stocks By JIN KEYU Special Correspondent old “one-child” policy. Couples will now be permitted to C have two children if one parent is an only child (previously, both parents had to be only children), making the new rule applicable to most of the post-1980s generation that grew up in urban areas. But, while the potential social consequences are obvious, the likely economic impact is less apparent. When the one-child policy was implemented in 1979 — in an effort to alleviate social, economic, and environmental pressures following the population boom in the 1950s and 1960s — the fertility rate plummeted, from three children per household in 1970 to 1.2 in 1982. The household savings rate subsequently soared, from 10.4 per cent in 1983 to a staggering 30.5 per cent in 2011. Could the one-child policy have fuelled this rise? If so, will the modified policy precipitate a reversal in this trend and, in turn, a consumption boom in the coming decade? Rising fertility rates can lower the household savings rate in two main ways. First, children demand increased household expenditure, especially on education, which, for only children aged 15-22, accounts for 15-25 per cent of total Chinese household expenditures. Second, with more children to support them in their old age, parents feel less pressure to save for retirement. An examination of the spend- ing and savings patterns of households with twins born under the one-child policy suggests that these changes could lead to a drop of 8-9 percentage points in China’s household savings rate, to around 22 per cent in the coming decades. Because the birth of twins is ar- guably an exogenous occurrence (unrelated to factors like income and education that affect parents’ The upshot of the policy change will be a moderate baby boom — and betterperforming child-related consumer stocks.” hina’s leaders have now agreed to relax the country’s decades- decision to have multiple children), comparing households with an only-child with those with twins can reveal some of the effects that an additional child has on savings. From 2002 to 2009, the average saving rate for an only-child household was 21.3 per cent, compared with 12.8 per cent for a household with twins — a difference that holds across all income groups. Regression analysis of all urban households in the 1992-2009 period shows that an additional child reduced the savings rate by about 67 percentage points. One additional child increased education expenditure (as a percentage of household income) by an average of 7 percentage points, food expenditure by 2.5 percentage points, and other spending by roughly 2.7 percentage points. Intergenerational support — whereby children provide for parents in old age — is not only a social norm; in China, it is stipulated by law. More than half of elderly people’s income derives from family support, which includes financial transfers and in-kind benefits like cohabitation. And the total amount of transfers that parents receive rises with the number of children. Save less The added security offered by additional offspring means that loosening the one-child policy will probably lead parents to save less on their own, and possibly even to make the kind of risky investments that would be unwise for only-child families. In fact, the one-child policy could be an important reason why, in recent decades, Chinese households have gravitated toward riskless assets. If parents view having a second child as doubling their “safe assets,” they may decide to allocate more of their portfolio toward riskier assets. It follows that parents of multi- ple children may also feel secure enough to consume more. On average, the share of household income spent by parents of multiple children on non-child-related consumption in later stages of life is about eight percentage points higher than it is for parents of only children. The coming demographic shift will also affect national savings. The share of young dependents or borrowers will rise relative to the middle-aged working population. Reducing the proportion of high A Chinese man with his child. The state has relaxed the one-child policy. HOUSEHOLD SAVINGS RATE: DIFFERENCE IN TWINS AND ONLY-CHILD HOUSEHOLDS BY INCOME GROUP Twin Only-child Households Average household savings rate Lowest 20% income quintile Second lowest quintile Middle income Second highest quintile Highest 20% quintile The following are the effects of the one-child policy and the new relaxed rule on households: FERTILITY RATE: The one-child policy was implemented in 1979. The fertility rate plummeted, from three children per household in 1970 to 1.2 in 1982. HOUSEHOLD SAVINGS: The household savings rate subsequently soared, from 10.4 per cent in 1983 to 30.5 per cent savers in the economy will tend to lower the aggregate savings rate. The share of elderly people in the population, however, will not change until a generation later. Though the change to the one- child policy may cause a moderate consumption boom, it could also reverse a positive trend: The acceleration of human-capital accumulation. The typical only-child receives significantly more educational investment than the average twin, and is 40 per cent more likely to pursue higher education (as opposed to a vocational school). This can likely be explained, in part, by a quantity-quality tradeoff. Of course, without a clear sense of what China’s natural fertility rate would be, any prediction about the new policy’s impact remains largely speculative. Rising education costs, 21.3% 6.4% 18.3% 23.7% 27.4% 33.4% in 2011. HOUSEHOLD EXPENDITURE: Children demand increased household expenditure, especially on education, which, for only children aged 15-22, accounts for 15-25 per cent of the total household expenditure. PARENTS’ SAVINGS: With more children to support them in their old age, parents feel less pressure to save. housing prices, and wages (which increase the opportunity cost of having children) may mean that, even without strict controls, China’s natural fertility rate will not return to the 1970 level. If the average natural rate is currently two children per household, then imposing this restriction will ultimately be welfare-reducing: Households that would like to have more than two children will not be able to, while the restriction would be irrelevant to those who want fewer than two children. But the most likely upshot of the policy change will be a moderate baby boom — and better-performing child-related consumer stocks. Jin Keyu is a lecturer in economics at the London School of Economics. Workers at Waraga 1 well in Hoima, western Uganda. Picture: File Households 12.8% -2.9% 16.6% 10.3% 19.5% 25.4% Ugandans may miss oil jobs due to lack of skills By BERNARD BUSUULWA The EastAfrican AS UGANDA edges closer to commercial oil production, gaps in the labour and service markets mean that local firms and workers may not make most of the 150,000 jobs likely to be generated over the 25-year production cycle. Tullow Oil, which holds a 33.3 per cent interest of Uganda’s oil reserves, says that investment in the supply chain as well as involvement of local artisans will do away with the need to import skills and services. Jimmy Mugerwa, Tullow Ugan- da general manager and director, said Ugandans need to invest in the supply chain, including engineering support and transport services. About 150,000 new jobs are projected across the value chain after the start of commercial production and are spread across sectors such as cement, transport, hospitality and catering. Peak demand for artisans during the commercial production phase is projected to reach 13,000, whereas local supply is currently estimated at 7,000. But Mr Mugerwa said local artisans still need certification to qualify for employment at the production rigs. An extra 1,000 craftsmen will be required per year to close the gap as the country moves closer to production. The demand for engineers is projected at 1,400, but local universities produce about 650 engineers annually. “Ugandans ought to invest in the skills suitable for the upstream sector so as to exploit job opportunities in the local and international market. Recent studies indicate that demand for core specialists is still rising in various oil and gas mining countries. We are also considering raising the funds required for commercial production from international markets due to a very shallow local financial market,” Mr Mugerwa said.
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