China in the past week showed its strongest resolve in recent times to boost economic growth and income levels, increase labor supply and cope with its aging population. Giving shape to those and other goals were two big moves last Thursday: After a four-day session, the Communist Party of China finalized the country’s 13th Five Year Plan for 2016-2020 and relaxed its 37-year-old one-child policy to allow all couples to have two children.

The five-year plan also extends old-age insurance to all citizens, aims to double the country’s 2010 GDP and per-capita income by 2020, and sets a path for China to transform itself into an innovation economy and attract more foreign investment, according to highlights released by the state news agency Xinhua. All those plans are set to take off after approval by China’s parliament next March, when full details will also be released. Earlier today, the Chinese government released some details of its five-year plan, according to a report in the South China Morning Post.

The relaxation of the one-child-per-family policy attempts to fix two chief issues: future labor shortages and an excessive dependence of the country’s elderly people on a younger and smaller working-age population. Whether it will work is an open question. According to Wharton management professor Minyuan Zhao, there will be a “lingering effect of the one-child policy” for some time. “The [current] generation doesn’t know how to raise a family with multiple children,” she said. Many “grew up enjoying their status as the only child in the family, and the incentive to have a big family is [far] lower.” The effort and expense in raising children, especially in urban areas, deter many people, she added.

In any event, there will be “a long lag” before the new two-child policy delivers on its goals, said Jacques deLisle, professor of law and political science at the University of Pennsylvania Law School and director of the Center for East Asian Studies. “If you are having children now, you are talking 18 to 20 years before they come into the workforce,” he noted. “Also, the generation which is now having children is itself a small generation; it’s the product of a single-child-per-family policy. If those people in turn don’t hit replacement rate, you’ve got a population death spiral.”

“If you are having children now, you are talking of 18 to 20 years before they come into the workforce.” –Jacques deLisle

Zhao and deLisle discussed China’s five-year plan on the Knowledge at Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

Time for a Reset

China is now facing a different set of realities than those in 1978, when it introduced its one-child policy (under which rural couples could have two children if the first child was a girl). Back then, the objective was to control a population explosion that seemed unsustainable in the backdrop of low economic growth and low income levels. Penalties on violators included fines, forced abortions and loss of jobs. Exceptions to the earlier policy included families in rural areas, ethnic minorities and couples where both parents came from one-child families. The rules were relaxed in 2013, where if one of the parents was an only child, that couple was permitted to have a second child. But the birth rate increase that followed was far lower than anticipated, said Zhao.

Now, China is grappling with the health care and welfare of more than 212 million people above the age of 60, and 137 million above 65, out of its population of 1.37 billion, according to the Beijing-based China Daily. The culprit here is the one-child policy, which is said to have reduced births by some 400 million over the past 37 years. The new two-child policy aims to reverse that trend, and the Chinese government expects about 90 million couples to be eligible.

Zhao said the two-child policy is clearly a response to a “demographic crisis” China will face in the future. “The 4-2-1 pyramid structure (four people who are the parents of the husband and wife, the couple themselves and their only child) indicates a huge burden for health care and elderly care,” she added. The new policy will also help counter the trend of rising factory wages with increased labor supply, she said.

“China has already hit peak labor,” said deLisle. “With an aging population, the inverted age pyramid was going to make that quite serious with a lot of older people dependent on a small number of younger people. That is not a great position to be in.” China is also unlikely to see inbound immigration that could address a labor shortage, he added.

However, like Zhao, deLisle also expressed doubts about how effective the two-child policy will be. The one-child policy and a preference for sons created another demographic imbalance in that China has more men than women, he noted. “In addition, educated urban women are having a hard time finding suitable [male partners] — they don’t want to marry down,” he said. “So you have this double whammy: women can’t find a husband, and if they have a husband, they don’t want to have children or they want one child. So it’s very hard to get it going.”

Need for New Safety Nets

Health care is another high priority area in the five-year plan. It calls for medical insurance for households to cover serious illnesses, reforms in medical insurance payment processes and public hospitals, and encouragement to the private sector to expand health care services. According to deLisle, these moves reflect citizen polls in China, where complaints run high about an unsafe environment, including air pollution, water pollution and food safety.

“If you know you will face a huge burden to take care of yourself in your old age, then you stop spending now and start saving.” –Minyuan Zhao

Economic insecurity among older people is another reality, according to deLisle. “[The] socialist safety net is long since gone with the market reforms,” he said. “The safety nets of multi-generational families where you can count on kids are now very few in number. The only two substitutes are state social welfare or insurance policy, or people saving massively for their own retirement. [That] has been tough, especially for people who have been in jobs that haven’t done well in the new economy.”

Zhao pointed out that the two-child policy and the moves on health care and insurance are necessary steps to transition the economy from being investment-driven to consumption-driven. Health care, education and housing are important agenda items on people’s spending plans, she noted. “If you know you will face a huge burden to take care of yourself in your old age, then you stop spending now and start saving,” she said. Meanwhile, the extension of old-age insurance to all will increase the burden on the working-age population, noted deLisle.

Emerging Contours

As the five-year plan builds on those policies, deLisle expects to see an expansion in secondary education, including vocational and technical education. He also expected a continued thrust on urbanization. “[It] will bring people into the service sectors, where they can help with an aging population.”

Other key goals of the five-year plan, deLisle noted, include its emphasis on an innovation economy, modernizing agriculture, a continuing shift from manufacturing, exports and investments to consumption and services, and encouraging startups, especially in the tech sector. He said those goals raise questions on whether the government will follow through sufficiently on them.

Zhao and deLisle noted that the plan also emphasizes efforts to reduce emissions, go green and make power plants more efficient. Those are incentives for companies “to innovate and move up the value chain,” said Zhao, adding that the “devil is in the details” of how they will be implemented.

“You don’t see the hunger you saw 15 to 20 years ago. They worked day and night, burned the midnight oil, and did whatever they could to earn the last penny possible.” –Minyuan Zhao

Zhao referred to China’s desire to become an “innovation economy.” She noted that R&D and other subsidies continue to go to handpicked projects or those with strong state backing. “Do you allow entrepreneurs to pursue their projects, or you handpick projects for government support?” she wondered. “Everybody agrees we need to do value addition, cut emissions and promote innovation. But I don’t think the government or society has been clear on how these things should be done.”

The New Normal

China, however, has accepted the new realities of economic growth, noted deLisle. It has tempered GDP growth targets to the “new normal” at levels of 6.5% or 6.6%, after years of talk of double-digit growth rates, he said. “It puts them on track to achieve macro per capita income targets and of doubling the [size of the] economy by 2020-2021,” he said. “The concern now is: Can you sustain 6.5% or 6.6% over the long haul, and/or can you do it without doing other things that are destructive to other goals?”

Zhao did a quick check of how the Chinese economy is faring. Investment, which had been the main engine of growth for several years, is at sustainable levels. The consumer sector doing well. The manufacturing sector has some overcapacity and over-investment, but that is partly because of a maturing economy. She spoke of the change she saw in recent visits to factories and companies. “You don’t see the hunger you saw 15 to 20 years ago. They worked day and night, burned the midnight oil, and did whatever they could to earn the last penny possible.”