James Jianzhang Liang on what China can learn from South Korea's "demographic national emergency"

The leading demographer calls for Beijing to spend as much as 2%-5% of GDP to stabilize new births asap, citing the "failure" of the South Korean response to falling fertility.

Dr. James Jianzhang Liang is unique among Chinese economists and public intellectuals because he co-founded and led Trip.com Group Ltd., a leading online travel platform, where he is now Executive Chairman. But he is perhaps better known in policy circles as a leading demographer who has for years called, publicly, for Beijing to drastically change its population policy.

The Stanford-trained PhD in Economics on Friday (June 21, 2024) again sounded alarms in his prolific WeChat blog, where he apparently wants to use the South Korean demographic national emergency to warn China and agitate Beijing to give significant, direct support to Chinese families in birth. He is not alone in that effort, if you recall my coverage of David Daokui Li’s speech at a recent Center for China and Globalization (CCG) luncheon, where Li is adamant Beijing will include that as part of the Third Plenary Session in July.

Liang is also Vice Chair at the Center for China and Globalization (CCG).

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James Jianzhang Liang: Lessons for China from South Korea’s Demographic National Emergency

On June 19, South Korean President Yoon Suk-yeol officially declared a "demographic national emergency" during the presidential committee on the low birth rate and aging population. Yoon emphasized that if the trend of low birth rates and aging continues, South Korea's population could eventually become extinct. Yoon announced that a nationwide response system will be initiated and operated until the low birth rate issue is resolved.

According to data released by Statistics Korea, South Korea's total fertility rate in 2023 was only 0.72, the lowest in the world. With such a low fertility rate, it's no wonder Yoon is concerned that South Korea's population could eventually become extinct.

However, in the past, South Korea was concerned about high birth rates and implemented family planning policies. In the early 1960s, South Korea's fertility rate exceeded 5, and its population density was more than three times that of China. Thus, the South Korean government began implementing family planning policies in 1961. With South Korea's economic takeoff from the 1960s to the 1980s, the fertility rate rapidly declined, dropping to 1.6 by 1990.

In the early 1990s, there was a debate in South Korea about whether to continue implementing population control. One side, supporting the adjustment of population policy, argued that a further decline in fertility would have severe negative socio-economic impacts and that loosening the population policy would not lead to a population explosion. The opposing side argued that considering South Korea's limited natural resources and extremely high population density, population control policies should be maintained to prevent the fertility rate from rising and nullifying the results of years of family planning efforts.

In this context, the South Korean government established the Population Policy Deliberation Committee in 1995, consisting of experts and senior officials, to conduct research. Based on extensive discussions, hearings, and studies by the committee, the government approved a change in population policy in 1996, shifting the focus from controlling population quantity to improving population quality and welfare, to prevent further declines in fertility. However, after the policy adjustment, South Korea's total fertility rate did not increase but rather decreased, dropping to about 1.2 between 2002-2004. The extremely low fertility rate caused significant concern among South Korea's political circles, leading to the passage and implementation of the "Framework Act on Low Birth Rate and Aging Society" in May 2005, and the establishment of the "Low Birth Rate and Aging Society Committee" directly under the President, to implement pro-natalist policies. Following the implementation of these policies, South Korea's fertility rate briefly rose from 1.10 in 2006 to 1.26 in 2012; however, starting in 2013, the fertility rate began to decline annually, reaching 0.98 in 2018, and falling below 1 for the first time, with a record low of 0.72 in 2023.

The failure of South Korea's pro-natalist policies can be attributed to several reasons:

1. The pro-natalist policies were introduced too late. When South Korea's fertility rate dropped to 2.06 below replacement level in 1983, the family planning policies should have been stopped. However, South Korea did not begin adjusting its population policy until the mid-1990s. Additionally, due to the inertia of previous family planning policies, the population policy adjustments in the 1990s were conservative, focusing on improving birth quality rather than encouraging births. When South Korea's fertility rate dropped to about 1.2 between 2002-2004, it wasn't until 2005 that pro-natalist policies were introduced, by which time South Korea had fallen into the low fertility rate trap, making it difficult to rise again.

2. The intensity of South Korea's pro-natalist policies was not as strong as that of European countries. According to OECD data, in 2019, South Korea's family welfare expenditure for encouraging births accounted for only 1.56% of GDP, whereas in European countries like France, Germany, Sweden, and Denmark, family welfare expenditures exceeded 3% of GDP.

3. The high cost of childbirth in South Korea, especially high housing prices, contributed to low fertility. In the five years prior to 2023, South Korea's housing prices overall rose by 80%, with Seoul's housing prices reaching 150,000 yuan per square meter at one point, second only to Hong Kong, making it the second most expensive in the world.

4. Severe educational pressure in South Korea, with parents intensely competing in their children's education, created an excessive educational burden that negatively affected fertility rates.

5. South Korea's policies failed to create a gender-equal social environment, making it difficult for women to balance work and family. According to the World Economic Forum's "Global Gender Gap Report 2022," South Korea's gender wage gap reached 31.48% in 2022, the highest among OECD countries.

6. Long working hours in South Korea suppressed reproductive behavior and reduced childcare time. According to OECD data, in 2022, the average annual working hours of South Korean workers reached 1,901 hours, compared to 1,571 hours for workers in EU countries.

China and South Korea are both East Asian countries and traditionally belong to the Confucian cultural sphere. China fully implemented family planning policies about ten years later than South Korea, but the birth control measures were more stringent. Since the 1970s, with the comprehensive implementation of family planning and socio-economic development, China's fertility rate has been on a continuous decline. In 2022, China's fertility rate dropped to 1.05, equivalent to South Korea's fertility rate in 2017.

Currently, China's fertility support policies are far less vigorous than South Korea's pro-natalist efforts, so they cannot effectively raise the fertility rate. If China does not introduce strong pro-natalist policies, the fertility rate in the coming years could drop to the current level of South Korea's. In fact, according to data released by the Shanghai Health Commission, in 2023, the fertility rate of Shanghai's registered population was only 0.6, even lower than South Korea's.

Severe low birth rates not only increase the social burden of elderly care but also weaken national innovation and drag down economic development. More seriously, if the fertility rate remains far below the replacement level for a long time, the ultimate result is population extinction. To increase China's fertility rate, we recommend quickly implementing the following policy measures:

1. Cash subsidies: Provide a monthly subsidy of 1,000 yuan for each first child, 2,000 yuan for each second child, and 3,000 yuan for each third child and beyond, until the child reaches 16 or 18 years old.

2. Tax and social security reductions: For families with two children, halve personal income tax and social security contributions. For families with three or more children, exempt them from personal income tax and social security contributions (with a cap for particularly wealthy families).

3. Housing subsidies: Provide mortgage interest subsidies, such as reimbursing 50% of the mortgage interest for families with two children and fully subsidizing the mortgage interest for families with three or more children (up to a capped amount).

4. Increase the number of daycare centers: Given the high labor force participation rate of women in China, many couples are dual-income earners and find it difficult to access daycare services for children under three years old. Many dual-income families worry about not having anyone to care for their children, which inhibits their willingness to have more children. To address this issue, building a large number of daycare centers, as seen in many developed countries, is a solution. According to OECD data, the daycare attendance rate for children under three in France reached 57.9% in 2022. In contrast, China's daycare services are severely lacking, with the National Health Commission reporting in 2021 that the daycare attendance rate for children under three in China was only about 5.5%, leaving a significant supply-demand gap. We recommend raising the daycare attendance rate for children under three to about 50%. To achieve this goal, the government should directly or lead the construction of at least 100,000 daycare centers.

The fiscal expenditure for the above fertility support measures is estimated to account for 2%-5% of GDP. China's fertility rate is the second-lowest among countries with populations over ten million, lower than Japan's severely low fertility rate, so it is necessary to introduce strong fertility support policies. Introducing significant birth subsidies now can provide multiple benefits. These families generally lack money and can increase various consumption; if they can buy houses through loans, it can further stimulate the real estate market. While families with multiple children require government investment in birth subsidies and educational resources in their early years, they will later contribute much more in taxes, helping the government support other families' elderly and enhance overall social progress. Therefore, for the nation and society, having and raising children is the best investment, an investment in future human resources, benefiting both present and future generations.

James Liang Challenges The Economist, Urging Maternity Subsidies to Boost Birth Rate