Recent Pro-fertility Policies in Developed Countries

In Europe, with fertility falling below replacement levels, most countries have adopted generous pro-fertility policies. Recently, in France, a family could receive 177 euros per month per child. For families with three or more children, the cash bonus is increased to 600–800 euros per child, per month until the age of 19. The cash bonus in France is very generous, even by European standards.

In the United Kingdom, the welfare system provides many benefits to families with children. In 2014, they include: for most families, a bonus of £20.50 per week for the first child, and £13.55 per week for every additional child, up to the age of 20; for low-income families, £122.50 per week for the first child, and up to £210 per week for families with more than two children. Also, under certain conditions, when both parents are working, most of the daycare expenses can be reimbursed.

In Germany, regardless of citizenship, a child cash bonus is paid to parents until their child reaches the age of 25. The amount of the bonus is adjusted every year. In 2012, the bonus was 184 euros per month for the first two children, 190 euros for the third child, and 215 euros for the fourth child. Mandated maternity leave benefits include two-thirds of the mother's previous monthly salary, up to 1,800 euros, paid for 14 months.

In Russia, since 2007, for every child after the first two children, the government gives a one-time bonus of about 250,000 rubles (three times the average annual income); this is a very generous bonus relative to Russia's per capita income level.

Reversal of Fertility Policy in Asia

In East Asia, the fertility policy has experienced a reversal over the last 30–40 years. In the 1960s and 1970s, East Asian countries were still relatively poor, and like the rest of the world, their governments were deeply concerned that a fast-growing population would hurt their ability to sustain their economic development. Accordingly, they implemented various policies to reduce the fertility rate. However, when their economies developed rapidly during the 1980s and 1990s, their fertility rates dropped precipitously. Today, most of these countries have various pro-fertility policies in place.

Japan was the first country in the world to experience an ultra-low fertility rate. Its fertility rate dropped right after the Second World War, with almost no post-war baby boom. Its fertility rate dropped below the replacement level in the 1970s, and by 2010 had dropped below 1.5, becoming the first ultra-low-fertility country. Currently, the fertility level is only 1.4, one of the lowest among high-income countries. The Japanese government has realized the damaging effect of low fertility in recent years, and started to implement pro-fertility policies.

In Japan, a one-time bonus of 1 million yen (about US$10,000), which represents approximately one-quarter of the average annual income, is given for every new child. In 2013, the government raised the budget for enhancing fertility from 9.4 billion yen to 14 billion yen (roughly US$0.14 billion), which represents only a small portion of the overall GDP. Compared with European countries, Japan's spending to raise fertility is quite low.

The situation in Korea is similar to that of Japan, albeit with a 20-year time lag. The population grew rapidly between the 1950s and the 1980s. In the 1970s and 1980s, wary of overpopulation, the government implemented policies to reduce the fertility rate; for example, they gave housing priority to sterilized couples with fewer children. But in the 1990s, when the country grew much more affluent, with GDP of around US$6,000 per capita, the fertility rate had already dropped below 2. Moreover, in the 2000s, as the country grew even wealthier, the fertility rate continued to drop steeply, reaching an ultra-low level of 1.4 and currently sitting at 1.3, below even the level of Japan. The Korean government had to completely reverse its policies, and implement many measures to raise the fertility rate. In 2010, Korean President Li announced the allocation of 3.7 trillion won (US$3.7 billion) to raise the fertility rate. This amount represents less than 0.5% of Korea's GDP, which is still relatively stingy compared with European countries.

Taiwan followed a similar trajectory to Korea. In 1945, Taiwan had a population of 6 million, and in 2014 its population stood at 23 million. In 1964, Taiwan established the Family Health Committee, which was responsible for implementing policies to reduce fertility. In 1967, the committee advocated that families should only have two children; it stated that they should wait three years after marriage to have their first child, and another three years to have their second child. In 1971, it used the slogan: “Two children are perfect, boys and girls are equally as good.” Similar to Korea, the fertility rate in Taiwan started to drop below the replacement level in the 1990s, and below 1.5 in the new century. In response, the Taiwan government reversed its fertility policy and rolled out measures to encourage people to have more children. In 2012, it allocated 3.2 billion Taiwan dollars (about US$100 million) to raise the fertility rate; however, the fertility rate of Taiwan remains very low at only around 1.3, one of the lowest in the world.

Singapore's reversal of its fertility policy was the quickest and most dramatic. Singapore has a land area of only 683 km². Its population grew from 1.7 million in 1960 to 5.5 million in 2014; it is one of the most densely populated countries. Singapore has almost no natural resources, and imports most of its water from Malaysia. In 1960, Singapore had a high fertility rate of 5.4 and a fast-growing population. In the 1970s, like many other Asian governments, the government of Singapore started to implement policies to reduce the fertility rate. These policies included an advertising campaign of “two is enough,” the legalizing of abortion and sterilization, and the cancellation of maternity leave and childcare benefits for women with more than two children. These policies had a disproportionately significant effect on low-income families. As a result, the fertility rate declined rapidly from 3.0 in 1971 to 1.6 in 1985. In 1986, Singapore's first Prime Minister, Lee Kuan Yew, quickly realized that the fertility rate was too low, and decided on a 180-degree reversal of the fertility policy. On June 30th, 1986, the government of Singapore eliminated its Family Planning and Population Committee and in the following year, introduced a new advertising campaign to convey the benefits of marriage and raising children. Its slogan was: “Have Three or More (if you can afford to).” In the meantime, it changed its immigration policies to attract more immigrants. With a reversal of its fertility policy in 1986 and 1987, the fertility rate rebounded to 1.92 in 1987 and 1.87, 1.77, and 1.76 in the following three years. The next Prime Minister of Singapore, Goh Chok Tong, was optimistic that the fertility rate would soon recover to the replacement level, but to his dismay the fertility rate started to drop again in 1992. In the new century, the fertility rate has dropped to 1.4, an ultra-low level. However, being a very small country, Singapore has another way of very quickly boosting its population, which is to attract immigration. I will analyze immigration policies later in this chapter.

China, with a much larger population and a very different political regime, actually followed a similar narrative to that of other Asian countries. From 1949 to 1980, the population of China grew from 430 million to over a billion. In 1980, the government started advocating its one-child policy. In the cities, anybody who had more than one child was faced with a steep fine and the loss of jobs, which effectively forced everybody to have only one child. However, in the countryside, where most people live, due to strong opposition to the one-child policy, the government effectively implemented a 1.5 child policy (i.e. allowing people to have a second child only when the first child was a girl). This one-child policy represents the most drastic policy implemented in the world to reduce fertility. China's fertility rate dropped like a rock in the 1990s. By 2000, the fertility rate was around 1.6 and by 2015 it was below 1.3, one of the lowest in the world. But unlike other Asian countries, the Chinese government was very slow to reverse its fertility policy. Only in 2015 did the government officially relax the one-child policy, allowing people to have two children (two-child policy). In later chapters, I will discuss future demographic trends in China and their significant impact for the world.

In the long run, China will have to completely reverse its fertility policy in order to raise its fertility rate to a near replacement level. An increasing number of countries are joining the low-fertility-rate club. Iran, an Islamic country, which surprisingly has a below-replacement fertility rate, has recently reversed its fertility policy to encourage people to have more children. How to raise fertility to the replacement level will be a common problem for most developed and middle-income countries, irrespective of their cultural specificity.

Analysis of Pro-fertility Policy

The following are the common pro-fertility policies:

1. Financial support (i.e. cash transfer or tax relief to families with children).
2. Daycare and education support.
3. Benefit to mothers, such as paid maternity leave.

Financial Support

Cash transfers or tax reliefs essentially transfer tax money collected from all taxpayers to only those families with children. Is such a transfer fair? In pre-industrial societies, old-age support was provided by children, whereas in modern societies, old-age support is partially provided by a public pension benefit, which is available to everybody irrespective of whether they have had any children. In other words, tax paid by the younger generations supports the older generations, including those who chose not to have any children. This way, people with children (who are future taxpayers) are actually subsidizing those without any children. To use the United States as an example, the pension and medical benefits to support the elderly account for about 15% of GDP, so it should therefore be fair to offer subsidies to families worth 15% of the average annual income for every extra child raised. Education is one way for such subsidization; typically, public education spending is about 5% of GDP. So, it is fair to give an extra 15% − 5% = 10% income a year to child-raising families for every extra child raised. In the United States, 10% of per capita GDP is around US$5,000 a year, which is about what it costs to raise an extra child. In China, 10% of per capita GDP is only US$800 a year, which is nowhere near enough to raise a child in a typical urban family.

Many low-fertility developed countries give various levels of child-raising bonuses to families, ranging from 1% to 5% of GDP. How effective are the bonuses in raising fertility? Figure 5.1 shows the relationship between the level of child-raising subsidy and the fertility rate. The vertical axis is the fertility rate, and the horizontal axis is the level of financial subsidies provided to families with children as a percentage of GDP. Apparently, there is a positive relationship: higher subsidies are associated with higher levels of fertility. Increasing the bonus by an extra 1% of GDP will raise the fertility rate by about 0.1 children, which implies that financial support works, although it is very costly.

Scandinavian countries—such as Norway, Sweden, and the Netherlands—all have high levels of subsidies and relatively high fertility rates. East Asian countries—such as Korea and Japan—are ungenerous in child-raising subsidies and therefore have low fertility rates. Some countries, like Southern European countries, which may be constrained financially, also have low subsidies and low fertility rates. These countries may have fallen into the “low-fertility trap.” Because of their low fertility rates and aging societies, their economies have weakened to a point where they can no longer afford large subsidies to raise the fertility rate.

The United States is one of the very few developed countries in the world that has a near replacement fertility level of around 2. Although the U.S. government does not directly give cash to child-raising families, it does allow families to claim about US$3,000 worth of tax deductions per dependent. The United States is exceptional in that even without a large cash bonus, it still has a relatively high fertility rate. Economists and sociologists still debate the cause of this high fertility in the United States. In my view, it is probably due to a high level of religiosity and a large immigrant population, who have a greater number of children.

Maternity Leave

In the United Kingdom, paid maternity leave is 39 weeks at 90% of full pay. In addition, employers have to keep each mother's job open for a year. If the employer cannot afford these maternity benefits, then the government can step in to provide funding. Fathers are also entitled to some limited paid leave too.

In France, mothers can obtain 16 weeks of full paid maternity leave, and a partial paid leave until the child is three years old. The government even provides free pelvis correction and weight-loss training.

In Germany, employers are required to keep mothers' jobs open for up to three years while they are on leave. Fully paid maternity leave is 140 days in length, after which 40% of pay is offered until the child is one-and-a-half years old.

The maternity benefits in Europe are typically very generous. In many Asian countries, such as Singapore, paid maternity leave is 16 weeks. Figure 5.2 shows the length of maternity leave (in weeks) for many countries, ranging from just a few weeks to three years.

Building a Pro-fertility Culture

In addition to providing pro-fertility benefits, governments have also tried to build a pro-fertility culture. On the streets and subways of Russia, there are many poster adverts encouraging women to have more children. One poster in the Moscow subway shows a woman with three babies with the slogan “Patriotism begins with family.” Russia officially advocates that it is a woman's patriotic duty to have three babies. The government issues a medal of honor to women with more than three babies, and a “Heroic Mother” medal and cash reward to women with more than 10 babies. Some cities have even set up “pregnancy holidays,” where couples can have a day off from work to try to conceive babies.

The French government gives a medal of honor to mothers with four or more children. A bronze medal is awarded to mothers with four or five children, a silver medal to mothers with six or seven children, and a gold medal to mothers with eight or more children.

In Korea, the government has developed many interesting marketing slogans, such as: “Daddy, I am lonely, I want a brother or sister”; “Many candles are brighter than one candle”; “The best gift to give your baby is a sister or brother”; and “We can make beautiful people.”

Marriage Ratio and Out-of-Wedlock Births

It is a global trend that the marriage ratio is declining. The map in Figure 5.3 shows the percentage of people who are married in the population. In India and China, the marriage ratio (the percentage of the population that is married) is roughly 70%, which means that almost everybody over age 25 is married. The marriage ratios differ in developed countries. The ratio for Americans shows that 60% of the population is married, while in Europe less than 50% of the population is married.

Surprisingly, in Japan, approximately 50% of the population is married. A 50% marriage ratio of the overall population implies an approximate 75% marriage ratio for people over age 25. One generation ago, in the 1970s and 1980s, Japan was like China and India, where almost every adult was married. But today, nearly 20% of women and men will remain unmarried for life.

The reason for the declining marriage ratio is that as an economy develops, women become more educated and economically independent. They have the option of staying single. Moreover, in Asian countries, women are reluctant to marry down (i.e. marry somebody with lower social and economic status). An adult unmarried ratio of 20% is a major contributor to the low fertility rate in Japan. Assuming that only married women have children, even if the fertility level of married women is 2, then the overall fertility rate is only 2 × (1 − 20%) = 1.6. But actually, married Japanese women on average are having 1.87 children. And with only 80% of women married, the overall fertility is only 1.4. The situation in Japan is quite typical in other Asian countries, such as Korea, Taiwan, and Singapore. Wealthy cities in China are also experiencing a declining marriage ratio.

The low marriage ratio is a major problem for fertility in Asian countries, because out-of-wedlock birth continues to be culturally unacceptable. For China, India, Korea, and Japan, the unmarried birth rate is nearly zero. In contrast, this is not a problem for European and North American countries, because unmarried births have become socially acceptable and thus a lot more common. Figure 5.4 shows births to unmarried women as a percentage of overall births in different countries in 2007 compared with 1980. Evidently, births to unmarried mothers have increased rapidly over the last 30 years, especially in Western and Northern European countries such as Sweden, Norway, Iceland, France, and Denmark. In these countries, children from non-traditional families are culturally accepted and receive as good-quality education as other children. President Obama was from a single-parent family, and so was the late Steve Jobs. Families where parents are unmarried but live together are common and effectively function as traditional families.

Births outside of marriage are quite common in Europe, partly because governments in these countries do not discriminate against single mothers when providing child-raising benefits and education subsidies, making it much easier for single women to raise children. The high unmarried birth rate contributes significantly to the high fertility rates in Northern Europe, for example. Asian countries need to somehow either raise the marriage ratio or change their culture to be more tolerant of births outside of marriage, both of which are very difficult to do. At the very least, governments of East Asian countries need to fix the discriminatory benefit regulations to provide the same level of benefit to single mothers as they do to traditional families.

The Future of Pro-fertility Policies

It is increasingly difficult and expensive to persuade couples or single women to have more children. Women today have many competing demands, such as education, career, leisure, and entertainment. The availability of public pension plans has also reduced the incentive for bearing children. Many governments have provided increasingly generous benefits to help families raise children, although they are still significantly lower than what could be considered a fair level (i.e. 10% of GDP). For wealthy East Asian countries, the level of benefits is still ungenerous, and not nearly enough to raise the fertility rate close to the necessary replacement level. The prospects for East Asian countries in the near term are quite grim.

In the long run, reproductive technologies, such as in vitro fertilization (IVF), may help address some of these problems. A woman can freeze her eggs and delay pregnancy, or even outsource pregnancy to other women. With the IVF technology available today, twins can also be implanted. In the long run, with breakthroughs in artificial womb technology, babies may be produced in laboratories, but they will still need to be raised by human parents. Today, many governments restrict the use of these technologies, as the legal and moral implications are complicated, but in the long run, this may be the only way to reduce the burden of pregnancy imposed on women and to keep the fertility rate from falling further.

Immigration

From a global perspective, immigration will not solve the problem of aging populations, but for any single country or region, immigration seems to be an easier and faster solution than persuading people to have more children. For example, a college graduate is a very attractive immigrant, because this individual can immediately work and pay tax, and the receiving country effectively gets a free ride on the educational investment made by the sending country. In recent years, most developed countries have turned toward immigration to deal with the problem of labor shortages and aging populations.

The issue of immigration varies considerably among countries. High-income countries are generally destinations and developing countries are the source of immigrants. Figure 5.5 shows the net migration for major countries in 2012. The United States was the largest net immigrant country. Among the largest emigrant countries, India is ranked first, China is ranked second, and Pakistan is ranked third.

Immigration not only helps to solve the problem of labor shortages, but it can potentially also enhance entrepreneurship and innovation. In the United States, immigrants are on average more entrepreneurial and innovative than the natives, as I will show in Chapter 8.

However, voters in the destination country usually have many concerns regarding immigrants. The common concerns regarding immigration are quite similar to the concerns connected with overpopulation. People worry that an influx of immigrants will cause shortages of jobs and schools, lead to congestion on the roads, and so on. I have argued previously that these are short-term problems. Although immigrants will consume public resources in the short term, in the long run, immigrants, especially young immigrants, will work, save, and pay taxes, leading to more public resources becoming available. Immigrants will not raise unemployment either, because they not only take jobs but also create jobs by way of their own demand for goods and services. The cultural concerns are also blown out of proportion. Although first-generation immigrants might have a hard time assimilating completely, second-generation immigrants usually become native speakers and fully functioning members of society. Some people are worried about Muslim immigrants in Europe; I will discuss this in detail in Chapter 9. For a country like the United States, there are many more people who want to enter than can be accepted. Therefore, there has to be an immigration policy to choose a certain number and a certain mix of immigrants. Not all immigrants can be welcome.

Internal Migration

Much like every country that seeks to attract highly skilled immigrants, every city within a country would also like to attract highly skilled workers from other parts of the country. Following a similar logic, cities would want to turn away unskilled migrant workers, because they would hurt the earning potential of native unskilled residents. However, a country as a whole should consider not just the welfare of the native residents of a specific city, but also the welfare of the migrant workers (and everybody else in the country). For a migrant worker in a developing country, moving to a large city is far better than staying in the village, as it is probably the only way to escape poverty. Moreover, when one farmer leaves for the city, the other farmers remaining in the village will also benefit because there will be more farmland available per farmer. Internal migration in a developing country is an important mechanism in reducing poverty and income inequality. So, for the overall welfare of all the citizens in a country, the government should remove all restriction on internal movement. Following the same logic transnationally, the best program for the relief of poverty globally would be for the United Nations to require every country to open their borders. Of course, this is impossible, because nation states are committed to the welfare of, primarily, their citizens only.

The War for Talent

More countries have come to realize the benefits of highly skilled immigration, and that the race of innovation will be won by the country or region that can attract the most talent. The strong agglomeration effect suggests that only a handful of innovation centers can prosper globally. The stakes are high and the competition for talent is fierce. So which places can, and are most likely to, attract the brightest and the best? Economists have ranked the most attractive cities in which to live. The criteria include: transportation, environment, education, diversity, and economy. Clearly, in today's world, the winning centers of innovation appear to be mostly in the United States. Silicon Valley is the center of IT innovation, Los Angeles is the center of the entertainment industry, and New York is the center of financial innovation. This is not surprising, since the United States has the largest market and the largest talent pool among all the developed countries. The only countries that can realistically compete with the United States are China and India, as both have a much larger population than that of the United States. Chinese cities like Shanghai, Shenzhen, and Beijing, with their mega-sized populations, are thus becoming new centers for innovation.

The first-tier cities in China—Beijing, Shanghai, Guangzhou, and Shenzhen—have populations of 20, 23, 18, and 17 million residents, respectively. They have the potential to become global innovation centers. However, they are congested and polluted, and also have some of the most expensive real estate in the world. In short, they are not great places to live. All of this is due to inadequate urban planning. It is crucial not just for China but also for any country around the world to plan adequately for the development and growth of large cities. With more innovation activities concentrated in large cities, the importance of these metropolises increases. A country will lose the global race of attracting talent if its largest cities are congested and expensive. Moreover, a country is likely to fall into the “low fertility trap” if its largest cities cannot provide adequate housing or schools, as residents will find it difficult to raise children and hence will have fewer of them.

Competition among Countries: Large Countries vs. Small Countries

In the global race of innovation, large countries have many advantages. They have bigger markets, more talent, and larger cities. The scale advantage of a large country is overwhelming. Small nations can use free trade agreements to form large, free-trading blocs to take advantage of the benefits of a large market. The European Union (EU) is just such a free-trading bloc, where all restrictions connected to the movement of goods and labor have been removed. However, due to differences in culture, language, local laws, and regulations, non-tariff frictions still prevent small nations from enjoying the full benefit of one large homogeneous market, like that of the United States, China, or India. Culture and language barriers also prevent the movement of labor without friction, even in a theoretically single labor market like the EU. As long as large countries do not make colossal economic mistakes, they are endowed with significant advantages in the race of innovation.

Is there a downside to a country possessing a large population? Would a population increase ever create a shortage of natural resources? I have argued in previous chapters that natural resources are no longer an important factor in the development and growth of a modern economy. In developed countries and middle-income countries, including China, the value of natural resources accounts for less than 10% of the economy.

A Tale of Ctrip.com: An Analogy between Company Size and Country Size

In one of the classes that I taught at Beijing University, I was once asked by one of the students: “Professor Liang, you have been telling us that a large population is good for innovation, but in the business world, why are small companies more innovative than large companies?”

I quickly dealt with the question by asking the student to examine patent filing patterns; by this measure, large companies are much more innovative than smaller companies. But in the next few days, I was intrigued by this question. Although large companies are better innovators on average, there are indeed many very creative small companies, and some of them have managed to beat the large companies in the race of innovation. There are also many examples of failures of large companies to effectively harness the latest technology trends as a growth driver.

My company Ctrip.com is an interesting case study for innovation. I co-founded Ctrip.com in 1999, and ran the company until 2006. Through a series of innovations, Ctrip.com quickly grew to be the leader in the Chinese online travel market, with more than 50% of the online travel market share. Ctrip.com became a very profitable public company, with a multi-billion-dollar market cap. I was so confident that Ctrip.com's dominance would continue that I resigned from my CEO post and went to Stanford to pursue a PhD in Economics between 2007 and 2012. After graduation, I became a professor at Beijing University and continue to do research on demographics and innovation. However, during my absence, Ctrip.com lost its innovative edge, and was out-innovated and out-maneuvered by smaller rivals. Beginning in 2009, Ctrip.com started to lose market share and its profitability suffered. By 2012, its market capitalization was as low as US$2 billion (it is currently over US$20 billion). The situation became so bad that I was asked by the board to return from my deeply enjoyable academic foray to run the company again.

So, in 2014, I was back at Ctrip.com trying to turn around a large company. The problem at Ctrip.com is actually not an unusual one for large companies. Like many large and successful companies, it became complacent and conservative. Moreover, Ctrip.com became overcentralized, and innovative ideas were blocked by a stifling bureaucracy. To boost innovation and speed of execution, I decentralized the company into a number of autonomous business units. Each business unit has its own research and development, product, service, and distribution function. They became much quicker to experiment with new product ideas and technologies. In order to make the leaders of business units more like entrepreneurs, they were allowed to purchase a significant chunk of virtual stock, and they were also granted virtual stock options in the business units themselves. Cooperation between the business units was handled by free-market negotiation between the parties, instead of being coordinated by headquarters. Headquarters was no longer a bottleneck, and became only responsible for unified branding, financing, investment, and strategic relationships with external partners. These functions were still centralized, because these are areas where economies of scale are key. With most of the function decentralized, speed, flexibility, and innovation greatly improved. Between 2014 and 2015, Ctrip.com quickly reinvented itself as a one-stop mobile travel platform, and was faster than its smaller rivals in building innovative mobile functionality, including new products such as train and bus ticketing. In less than three years, Ctrip.com regained its leadership position in innovation, and is now once again one of the most successful Internet companies in China, with a market capitalization of over US$20 billion.

Policy Pitfall of a Large Country

The rise and fall of Ctrip.com's innovation capabilities in a very short period of time is a lesson analogous to the innovation capabilities of a large country. Complacency and overcentralization are the most common policy pitfalls of a large country.

Only a country as large as China could ever consider autarky out of complacency and overconfidence. When asked about the rationale of China's closed-border policy, Chinese Emperor Qianlong commented that China was so vast that it had everything it needed within its territory. But he was wrong, because the outside world is much larger and has many more people too. The autarky policy that grew out of Chinese emperors' complacency effectively squandered its size advantage in innovation, and was the main reason for it being the loser in the race of innovation against the West over the last 500 years.

The other policy pitfall is overcentralization. Large countries tend to implement uniform laws and regulations nationwide that are applied in a top-down fashion. This is clearly an advantage in terms of efficiency. For example, if the EU were a single nation, a pan-Europe business would not need to worry about different tax laws that exist in the different EU countries. But there is also a downside to uniformity. First, one size may not fit all, as optimal policy for each region might be different. Second, an extreme form of uniformity does not allow for enough experimentation with different policies or for competition between different regions. Even homogeneous countries like China should allow for experimentation with different policies in different regions. Successful policy reforms will be imitated by other regions, or residents will move to regions with a successful set of economic policies. In some areas, a free market of competing policies is beneficial and worth the cost of not having absolute uniformity in a nation.

The absurd anti-fertility policies pursued to date in China are an example of overcentralization. Some poor, remote agricultural provinces in China may still be at a Malthusian economic stage of development, but most of the coastal regions like Shanghai and Guangdong are developed economies with very low fertility and are not so much different from Korea and Japan. If China left the fertility policy to its provinces, many of the wealthy provinces would have ended the “one-child policy” many years ago. But the overcentralized political system in China prevented such policy experimentation by different regions. When I advocated revoking the “one-child policy” in 2011, I was surprised to learn that the anti-fertility policy was enshrined in a constitutional amendment.

The optimal policy arrangement is one that balances the high efficiency of a uniform policy and the benefits of having some regional differences. Large countries should allow for different regions to have some differences in economic policies and to experiment with new controversial technologies, while maintaining some level of uniformity to reduce transaction costs across regions. In general, for anything that is of little economic significance but more of a convention, uniformity is preferred (e.g. language, unit of measure, etc.). Other things are much trickier, so it is a delicate balancing act for any large nation or transnational policy bodies like the EU or World Trade Organization (WTO).

Policy Strategies of Small Countries

The pitfalls of a large country are the opportunities for smaller countries to outperform their larger rivals. When a large country has high trade barriers, a small country can act as a gateway to that large country. For example, when China had just opened its doors in the 1980s, there were significant practical barriers to connecting it with the world. Hong Kong thrived, being a gateway to China and effectively connecting it with the rest of the world. In recent years, as the barrier lowered, the role of Hong Kong as a gateway diminished.

Large countries tend to have uniform policies and are usually slow to adopt new policies related to innovation. For example, when large countries are slow to permit the introduction of controversial new technologies, such as reproductive assistance, self-driving, and genetic engineering technology, small countries can experiment by introducing these new technologies, potentially surpassing larger countries in terms of innovation in the related industries.

The policy strategy for a small nation should be that of a free-trading economy with a progressive and flexible policy toward new technologies. However, it is an uphill battle, because smaller nations—even with a high fertility rate—face the constant pressure of emigration. Large nations with vibrant and innovative large cities, such as the United States, are constantly cherry-picking the best talent from smaller nations, simply because they can offer both more opportunities and greater rewards. Eastern European countries have a high-quality workforce, but they are still losing many talented citizens to the United States, as well as to Western European nations—the United Kingdom in particular. To make up for a loss of talent to bigger nations, it is critical for small nations to have a successful immigration policy to attract talent from around the world, capitalizing on talent that is not captured by the larger countries.

In my economic PhD class at Stanford, most of the foreign-born students stayed in the United States after graduation; only those students from large countries such as China and India would even consider returning home. Almost all the Southern and Eastern European students stayed in the United States. However, there were quite a few international PhD students who went to work at universities in small English-speaking countries such as Australia and Singapore.

Language Barrier and the English Advantage

There is an interesting tale in the Bible. God wanted the people to spread out and populate the earth. Instead, they congregated and started making Babel, a tower to heaven. God was displeased at their disobedience and changed their languages, which forced them to disperse away from each other over the earth. One of the major barriers in the exchange of ideas and goods is language. China historically was the largest unified country throughout most of its history, partly because Qin Shi Huang unified the Chinese writing system about 2,000 years ago. Unlike the phonetic Latin language, which has morphed into many different languages over the years, Chinese written language uses glyphs, making it immune to dialectal change over the years. The unified written language is a key factor behind China's uniform culture.

Today, English is the world language of commerce and academics, and English-speaking countries have an advantage. The small English-speaking nations such as Singapore, Hong Kong, Canada, and Australia are much more integrated with larger English-speaking countries such as the United States and the United Kingdom. It is easier for these English-speaking countries to attract global talent, because immigrants can more easily collaborate with the native population. In small Northern European and West European countries, English is also the lingua franca in high-tech companies and universities, because the natives are proficient English speakers. It is more important for smaller countries to adopt English as their first or second language. Even large countries like China or Japan should consider introducing English as the second language in their universities. Otherwise, these countries will, in the future, be at a great disadvantage in attracting global talent.

Trade vs. Immigration

One can argue that a country need not rely on immigration to realize the benefits of a large population. Instead of importing people, a country can trade with larger nations to realize the necessary economies of scale. Indeed, trade openness is an essential ingredient for innovation and economic efficiency. That's why more and more countries are joining the WTO and forming free-trading blocs such as the EU. However, importing goods is still quite different from importing the people who make the goods. Immigrants can work together with the local population to generate creative ideas, start up a local new business, pay taxes, and vote to ensure that free trade and open border policies prevail.

Brexit and Donald Trump's Presidency

The benefits of immigration and trade on innovation are long term, but its distribution and disruptive effect on the native populace are often short term. Sometimes voters can be swung by taking a shortsighted view, like those who voted for Brexit and those who voted for Donald Trump. To everybody's surprise, Donald Trump won the 2016 election on the platform of anti-globalization and anti-immigration. It was the elderly and the less educated who voted for Donald Trump and for Brexit; they understandably are not the immediate beneficiaries of innovation.

The country that needs immigrants most is Japan, which has a rapidly shrinking young workforce. However, the older Japanese voters, who significantly outnumber the young voters, would reject any policy allowing large-scale immigration, because they care much more about the short-term disruption stemming from the arrival of immigrants rather than the long-term economic vitality of the country or a vague concept such as innovation. For this reason, it is important to have young and highly skilled immigrants enter the economy as future voters, so that the political interest is aligned with the long-term interest of the country. Otherwise, a country will fall into the “demographic trap,” as the country's economic policy is trapped in the short-term populism of anti-immigration and trade.

Even with Brexit and Donald Trump's presidency, the United States and the United Kingdom are still the most open and attractive places for talent in the world. I believe that the setbacks for these two countries are temporary. The United States and the United Kingdom both have large and growing young, highly skilled populations, continuously fueled by the large number of highly skill immigrants and a relatively high fertility rate as well. The United States will remain the most attractive place for immigrants, compared with most of Europe, Japan, and other Asian countries, whose political policies will likely be even more handicapped by their much older populations.

Education Reform

My son recently transferred to a private high school in Boston. Observing his progress, I have been surprised that it compared to my high-school experience 30 years ago. Despite all the productivity improvements everywhere else, the education sector is no more efficient than it was 30 years ago. Actually, primary and secondary education is arguably less efficient than it was 30 years ago. Despite the fact that students are working harder and the facilities and access to technology are much improved, at the age of 18 students still only manage to acquire approximately the same amount of knowledge as in the past.

On the other hand, as argued in Chapter 2, the knowledge required for innovation keeps increasing. Today, most research fields require a PhD as a minimal starting point; some fields even require postdoctoral study or years of work experience. Moreover, people are graduating with a PhD much later; it is now common for students to complete their PhD at the age of 27 or 28. Meanwhile, as we have discussed in previous chapters, the best age for entrepreneurship is around 30, and the most creative age for innovation is between 30 and 40. That leaves only a short window after graduation to create the best innovation (for women it is even shorter, because of their biological clock). So, the dilemma for policy makers and educators is that we need people to speed up their learning in order to fuel innovation, but the education sector is effectively standing still or, at best, advancing very slowly. And this is primarily due to onerous regulations and a lack of pressure to improve.

In China and other Asian countries, the national college entrance exam dictates what students learn in high school; these exams still cover the same material as they did 30 years ago. In China, students are estimated to waste two years in high school just studying for the tests. Cram schools have prospered in China, which further saps the energy of young high-school students, who become unmotivated and exhausted when they enter college.

In the United States, even the most talented students are discouraged from skipping grades, and almost everybody has to wait till they are 18 years old to attend college. Private high schools and some public schools do offer college-level classes to talented high-school students. For example, Philips Academy, a prestigious boarding school in Boston, offers computer science and calculus classes even to 15-year-olds. Bill Gates and Mark Zuckerberg attended such private schools, which allowed them to finish college-level classes earlier than their peers. While clearly exceptional, they were able to start their companies before they graduated from college. But such high schools are the exception, as most high schools do not give students an option for graduating early. In recent years, with the “No Child Left Behind” initiative in the United States, the average standard of public high schools has actually decreased.

In my opinion, Internet technology can help speed up the learning process. First of all, a lot of material can be learned outside of class, or later in life. For example, it is possible to reduce the length of history classes, given that all the facts and materials are available online. Social issues can be taught later in life, as students will have a better understanding of social issues later on. English classes can be shortened for native speakers, partly because writing in the Internet age will be quite different; for one thing, perfect spelling is not that important any more with spell-checkers. Furthermore, subjects such as history, economics, and physics today are repeated multiple times in middle schools, high schools, colleges (and graduate schools), and there can be quite a lot of overlap in learning between different levels of the same subject. On the other hand, subjects like computer science or basic finance should become part of the standard curriculum, either in high school or college. The availability of good teachers for these subjects should not be a bottleneck, because all the best lectures and exercises are online, and teachers just need to monitor progress.

I am not advocating speeding up education for everybody, but for the most talented students it is my opinion that a significant speedup is achievable with the latest technology and a redesign of high-school and college curricula. (A one- to two-year speedup is certainly possible in many East Asian countries, as the high-school students there waste at least one to two years in preparing for the college entrance exam.) If we can allow a portion of students to graduate a few years earlier, this will benefit not only those students over their lifetime, but also society overall in terms of vitality of innovation and entrepreneurship in the long run. Of course, such a reform would still require a lot of research and innovation. But, unfortunately, because the education sector is heavily regulated, the incentive for innovation and reform is weak compared with other sectors.

At the core of the problem is the fact that high schools and elementary schools (and even parents) do not have any incentive to shorten the number of school years. If college admission is based on test scores regardless of age, then it is in the high school's interest to keep every student until he/she is 18. However, students suffer because they waste precious prime years studying for tests rather than working or innovating. Major education reforms are required to change the status quo, and the first thing to do is to encourage colleges to admit talented students younger than 18.

Graduating from college and starting to work one year earlier could have a huge lifetime benefit. It is not just one extra year of salary, but also, much more importantly, one extra prime-age year of getting promotions and raises. If, on average, one gets a 10% raise in the 20s, then one extra working year in the 20s means a 10% overall increase in terms of lifetime earnings, which is huge. Moreover, during the mid to late career stage (age > 50), a person who is a few years younger than another candidate has a significant advantage in getting promotion to senior executive positions. Therefore, the benefit of graduating earlier, although small initially, could be very big later in life.

A handful of Chinese universities offer young genius programs for talented students before the age of 15; I was one of the lucky few to attend Fu Dan University at the age of 15. For me, the advantage of graduating from college three years earlier was not obvious at the beginning, but later on in my career, being three years younger than my peers was a distinct advantage. I co-founded Ctrip.com in 1999, and turned it into a successful Internet company in China. By 2007, at age 37, I decided to apply to the economics PhD program at Stanford. The Stanford economics program usually admits students in their 20s, and occasionally students in their 30s, but almost never anybody in their 40s. If I had been 40 instead of 37, I would not have had the chance to pursue a second career as an economist. Now, at 47, I am still considered young as the executive chairman of a major Internet company in China. The advantage of attending and finishing college a few years earlier means a few more productive years over one's lifetime, which is hugely beneficial. A speedup in education not only increases labor supply, but also boosts the potential for innovation, simply because there is more time to take risks and change tack if early ventures fail.

Recently, Stanford has announced that it will accept applications from talented students younger than 18, and offer more flexibility in the number of years required in order to graduate. I hope other colleges will follow suit. Learning is a lifelong journey; graduating earlier can offer a lot more flexibility later in life.

There is another benefit of shortening the number of school years. If women can finish college earlier, they will have a few more years to start a family and have children. In the United States, on average, the fertility rate of a high-school graduate is about 40% higher than that of a woman with a bachelor's degree, and about 50% higher than that of a woman with a graduate degree. If school years can be reduced by two years, I estimate that it will boost the fertility rate by 10–20% (i.e. a 0.2 to 0.4 increase in fertility). If a government uses cash bonuses instead, based on our analysis earlier in this chapter, it would require an annual spend of 1% of GDP to achieve the same level of increase in fertility. The education reform suggested here is a rare policy reform that can simultaneously boost the fertility rate, reduce education expenditure, increase the tax base, and enhance innovation.