Why China should boost productivity not reproductivity

China’s one-child policy, finally ended by Beijing last week and replaced with a two-child stipulation, caused untold heartache for tens of millions. Worldwide, an estimated 1.5 million girls are not born each year because of sex-selective abortion in just four countries (Azerbaijan, China, India, and Vietnam). Many young Chinese men have been left with no prospect of ever finding a wife and raising children of their own.

But it is economics, not social equity, which forged the policy and has now ended it. Deng Xiaoping, who imposed the policy in the late 1970s, did so to ensure that the “fruits of economic growth are not devoured by population growth”. Now China’s leadership is reacting to the rapid aging of China and its threat to growth.

Partly as a result of its one-child policy, China experienced a sharp decline in the fertility rate from about 5.8 births per woman in 1964 to 1.6 in 2012. Its working-age population peaked in 2010, and MGI analysis suggests that the labor force could shrink by one-fifth over the next 50 years. There could be one dependent aged 65 or over for every two working-age citizens. Peak employment could occur as early as 2024.

But the truth is that China, like many other countries, is past the point where policy can influence demographics. Although the partial relaxation of the one child policy in China’s urban areas has led to a small increase in fertility, and there is bound to be something of a spike in births as a result of the latest policy change, the economic impact in the short term will be limited.

In any case, declining fertility and shrinking labor pools appear to be globally irreversible. Consider that birth rates in China’s East Asian neighbors—where there are no policy restrictions—are also very low. Even higher incomes doesn’t appear to be persuading women to have more children. In Japan—which has invented a new word shoshika, which means a society without children—the fertility rate has only been above the “replacement” rate in seven of the past 50 years.

At the margin, governments could offer incentives for women to have more children including, for instance, fully funded, high-quality child-care services, and tax breaks for parents with children. In Europe, Denmark, France, Finland, France, Sweden, and the United Kingdom all have high levels of public spending on child care as a percentage of GDP, and they have among the highest fertility rates in the region.  But such policies are costly and take a long time to have an effect.

In reality, the only option for China to mitigate the impact on growth of a rapidly aging population is productivity—not reproductivity. And productivity has to include women. China’s full productivity potential will not be realized without fully using the economic potential of women.

MGI’s new research on gender equality finds that if Chinese women were to participate equally in labor markets (including hours worked and sector participation) as men, as much as $4.2 trillion, or 20 percent, could be added to China’s annual GDP in 2025. Even in a more conservative scenario in which China matched the progress toward gender equality of its fastest-improving neighbor, $2.5 trillion or 12 percent could be added to China’s GDP in that year.

These new entrants will find an economy in need of productivity-based reform. There has been substantial progress. Productivity has increased 14-fold over the past 50 years. But even if it maintained impressive historical rates of productivity growth, demographic headwinds mean China’s economy would grow at a 30 percent lower rate at an average of 5.3 percent a year over the next 50 years compared with 7.6 percent over the past half century.

The good news is there is considerable scope to accelerate productivity growth in China. Take the auto sector, which has about 67 percent of the average productivity in developed economies; consolidation of the industry into a smaller number of large car plants could boost productivity by up to 50 percent. Agricultural productivity in China remains relatively low because of a lack of mechanization—China has nine tractors per 1,000 hectares compared with 16 in India and 27 in the United States. Mechanization could reduce the labor needed to cultivate single rice by more than 40 percent. The productivity of China’s burgeoning online retail sector is only two-thirds that of the United States.

Simply adopting and spreading best practice in the way companies—and governments—conduct their operations would capture three-quarters of China’s productivity potential. The rest would come from technological, operational, and business innovations that push the frontier of China’s growth potential.

The ending of China’s social experiment in birth control is welcome social and humanitarian relief. But China’s aging economy will need the power of gender parity and the power of productivity to sustain itself in the years ahead.

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I'm a senior partner in McKinsey's Shanghai office and Director of the McKinsey Global Institute (MGI) in Asia. I also co-lead the Urban China Initiative (UCI), a thinktank devoted to transforming China's urban future. Visit the UCI website here. Read my latest work as co-author of No Ordinary Disruption (Public Affairs, May 2015), which examines how long-term shifts in the global economy challenge long-held assumptions.