Sunday, November 11, 2012

India: Demographic Dividend or Demographic Catastrophe?

Economists love to project current rates of economic growth into the distant future and draw weighty conclusions. Such thinking leads to predictions that China will dominate the world decades hence. Some conclude that since India will eventually have a larger population than China, it will ultimately be even more powerful. It is often assumed that India will overtake China because its economy will benefit from a demographic dividend as its large numbers of young people enter the work force, while China, because it has limited births, will become a less efficient and aging society. Does this make sense?

The concept of a demographic dividend seems to have been invented to explain China’s successful expansion of its economy. One acquires this dividend by achieving a state in which a country has a large number of employed workers who can save, invest, consume, and pay taxes with their earnings because they are relatively unencumbered by nonworking dependents such as children and the elderly. The United Nations provides a population database containing much useful information. Here are data on dependencies for some relevant countries.


Traditionally, a child dependency is defined as the number aged 0-20 divided by the number between 20 and 65 and then multiplied by 100. Similarly, the dependency for the aged would consider the population over age 65. The sum of these two ratios would be the total dependency. The table includes an entry labeled "Equilibrium." This is arrived at by taking the projected age distribution of the world at 2100, when presumably, if we are still around, we will have achieved a steady-state solution.

China does possess a low total dependency, but Russia’s is even lower. Does that mean that Russia has an economy that is primed to grow as fast as China’s? Not likely. Having a society in which people don’t live long, and they also don’t wish to bring children into it, is not a sign of a vibrant state. Thus, having a low dependency ratio is not necessarily indicative of a healthy economy.

How did China achieve its low dependency number? Consider this data from a report by David E. Bloom.

China arrived at its demographic dividend by drastically—some might say brutally—decreasing the number of children that would be born. India is following a much different path and allowed its population to continue to grow at a healthy rate.

India has the highest total dependency of any of the countries in the table presented above. It is almost entirely due to its large number of children and ever-growing population. If India is ever to turn these children into tax-paying, saving, investing, and consuming engines of the economy, it will have to educate them, keep them healthy, and provide them with jobs when they become adults. What are the odds of that happening?

India is a large and extremely heterogeneous country. Average statistics for the nation tell a misleading story. Nicholas Eberstadt provides some perspective in an article from Foreign Affairs.

"But India has striking regional disparities in population profiles. India is bisected by a great north-south fertility divide: in much of the north, including parts of the Ganges river belt and some of the country's westernmost districts, fertility levels remain quite high, at four, five, or more children per woman; in much of the Indian south, however, fertility levels are at, or already below, the replacement level. In effect, this means that two very different Indias are being born today -- a youthful, rapidly growing northern India whose future population structure will be akin to that of a traditional Third World society and a southern India whose population growth will be slowing or ceasing, where manpower growth will be coming to an end, and where pronounced population aging will be taking hold."

The Bloom report corroborates Eberstadt’s claim;

The states listed from left to right are roughly consistent with a south to north progression.

Eberstadt elaborates further:

"India's engines of economic growth are mainly its sub-replacement-fertility areas, which include much of the south and practically all its major urban centers: Bangalore, Chennai, Kolkata, and Mumbai. But its demographics mean that the country's future workers will increasingly come from the high-fertility areas of the north. This reveals a fundamental mismatch: India's continued economic growth requires workers who are relatively well educated, but India's mostly rural high-fertility areas are producing a rising generation with woefully low levels of schooling."

"India, it is true, can boast of a cadre of millions of highly trained engineers, scientists, researchers, and professionals. But in a country of well over a billion people, these specialists compose only a tiny fraction of its overall manpower. In the country as a whole, educational levels are still remarkably limited, and remedial efforts will take generations to achieve substantial improvement. Currently, about a third of India's working-age population has no education at all; 20 years from now, a sixth of the country's work force may still be totally unschooled. These educational shortfalls place material constraints on the prospects for sustaining rapid rates of economic growth."

These children who are to be depended upon for economic growth in the future are not only under-educated, but nearly half of the children can be considered undernourished—not a healthy combination.

What are the prospects that India will be able to provide enough jobs to satisfy these growing youths? Sadanand Dhume provides this perspective from an article in The Wilson Quarterly: India’s Feckless Elite.

"Economic growth slowed to an annual rate of 5.5 percent in the first quarter of the current fiscal year, and few independent analysts expected it to top six percent in the rest of the year. For a country still at an early stage of development—in dollar terms, the average Indian earns about as much as the average Chinese did in 2004—this augurs ill. Most economists believe that India needs to grow by more than seven percent annually merely to keep pace with the 13 million new entrants into the job market each year."

Recently, the Asian Development Bank forecast growth in India’s economy of 5.6% in the coming year. Here is some perspective on the implications of a 5% growth rate.

"Given India’s demographics and the need to absorb labour, 5 per cent is flirting with social catastrophe."

China and India both have serious problems to deal with as their economies mature. China has been remarkably effective at identifying issues and coming up with plans to address them. They have in place just such a plan to bring the remaining hundreds of millions who are merely subsisting into a more secure place in society and in the economy.

India has been much less successful. When it comes to a plan to address wide-spread and persistent poverty, someone once said something along the lines of: "Our problem is not that we don’t have a plan; our problem is that we have hundreds of plans."

India projects an image of political dysfunction. Let us hope for the best. India is so huge that its failures become worldwide issues.

A few hundred million poorly-fed and uneducated people looking for work is a reality closer to catastrophe than economic dividend.

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