What is Demographic Dividend and How it Affects the World Economy?

A Short Window of Opportunity for Economic & Human Development

What is Demographic Dividend and How it Affects the World Economy?
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Demographic Dividend is a phenomenon whereby falling number of dependents and growing workforce provides an opportunity for high rate of economic growth. However, not every country is able to make the best use of such an opportunity. Those countries, which successfully optimize this situation, invariably leap ahead of others in the race for economic dominance.

One of the factors that drove China’s ascendance to the global economic order was the rich demographic dividend that it enjoyed, accentuated in particular by its one child policy. Similar demographic dividend has helped several nations to improve their economic fate. Europe and Japan in the post war years also benefitted from the same, as did the South East Asian economies. South Asian and African nations are also faced with this opportunity now, and if they make the best of it, they can help a very large proportion of humanity to come out of poverty and have a decent life.

What is Demographic Dividend?

Demographic Dividend refers to a situation where after a phase of strong population growth, the child birth begins to fall rapidly, resulting in a situation where the ratio of dependents per worker experiences a steep fall. This is a period when the workforce rapidly expands, while the number of dependents is rapidly falling, so that the productivity of the economy tends to grow relative to its demand for consumption.

Why Demographic Dividend Happens?

Demographic Dividend is a result of falling fertility rate and longer life expectancy with a corresponding prolongation of the active working life. Both of these are primarily a result of good medical facilities, availability of contraception, women empowerment and urbanization.  As people tend to live more, work more and have lesser children, demographic dividend appears to accumulate.

In some countries, Government policies can accelerate it, like the one child norm did in China.

How Long does Demographic Dividend lasts?

Demographic Dividend is a temporary phenomenon, which begins to taper off as the workers tend to become old and retire from workforce. As the number of retirees who do not work but consume resources tends to accumulate, the demographic dividend tapers off, and can even turn negative after a while as the number of old retired and relatively debilitated people seeking service and medical care rises, while the workforce tends to fall due to lower fertility rates. However, the exact period depends on the characteristics of a population. In most cases, it can vary from two to five decades, before the negative trend of demographic decay sets it.

Economic Implications of Demographic Dividend

If the economy is able to employ the growing workforce in an effective manner, it can result in rapid rise in economic productivity and growth. This also requires a corresponding growth in capital and technology to ensure that the productivity of the growing workforce is maintained. This capital formation can result either from the domestic savings or from capital inflows into the economy. Most economies experiencing a phase of demographic dividend resort to both these means by following policies that incentivize domestic savings on one hand and facilitate inflow of capital into the economy, on the other. China, for instance benefitted from 40 to 50% saving rate of its households at one point of time, while also pursuing foreign investment by all means.

To reap the benefits of demographic dividend, the government needs to play a proactive role in ensuring that the policies facilitate capital formation and deployment of that capital into production facilities that can then meaningfully employ the growing workforce. Very often, the ability of the government to address this need differentiates between those countries that are able to lift their economy by optimizing the demographic dividend and those who fail to utilize it.

Dangers of Not Optimizing Demographic Dividend

Rising workforce is a good thing, but only if the able bodied people get meaningfully deployed in the economy. This usually depends upon their capacity development and prevailing level of entrepreneurship in the economy. When the economy is unable to absorb them, it can give rise to unemployment and restlessness among the people. Such stressed societies can also be vulnerable to political manipulation and chaos.

Thus, it would not be wrong to say that in case of poorly managed economies, demographic dividend, instead of being a great opportunity for economic revolution, can also take the form of a double edged word and end up hurting the people.

Demographic Dividend & International Experience

Most developed countries of today have experienced this phase of demographic dividend during the sixties, seventies and eighties. In particular, Japan’s example stands out, which reaped this benefit in the form of 10% rate of annual economic growth during the sixties and seventies to become the second largest economy of the world during the eighties. The experience of the countries of South East Asia has been similar, with almost all countries in that region having benefitted from varying degree of demographic dividend by attracting foreign investment and pursuing export led economic growth.

In recent times, the biggest beneficiary of demographic dividend has been China, which reaped this benefit during the nineties as well as the last two decades, arising largely from the impact of the one-child policy rigorously followed by the Chinese administration. With the largest population in the world and a very low per capita income, China had the great advantage of cheap labor, which it made use of by following policies that facilitated large inflows of capital and technology into China, making it virtually the factory of the world. With the benefits of demographic dividend, China has leaped ahead in the race for economic dominance, to acquire a place of great eminence on the world stage, and is all set today to become the largest economy of the world in near future.

Can South Asia & Africa also Benefit

Countries of South Asia as well as Africa are currently faced with the promising prospects of demographic dividend and if they can make the best of it, most poor people on this planet will become better off. However, these countries face several constraints that pose a hurdle. These include conflicts, poor governance, less than optimum public policies and in particular, inadequate level of skill enhancement and entrepreneurial capacity building in their education systems.

India has the second largest population in the world, and is slated to overtake China in due course to become the most populous country in the world. Yet, unlike China, it is yet to reap the benefits of demographic dividend, as the number of dependents per worker has only begin to fall recently, though it will keep falling for another two decades or so from here on. Given its democratic polity and an extensively adversarial, rights based legal environment, India may not find it easy to impose policies to make the best of this demographic dividend.

Other countries of South Asia, including Pakistan, and Bangladesh face similar constraints like India. The hold of military and extremists over Pakistani polity and their perennial quest to justify their vested interests by perpetuating proxy wars with Afghanistan and India is another great obstruction faced not only by Pakistan, but which also affects the economic region as a whole. As the window of demographic dividend passes by, such self inflicted hurdles can only result in an irreversible economic doom.

Most African countries are also destined to experience demographic dividend in the coming decades. Unfortunately, most of them are short of the necessary expertise in the governance and policy making to make the optimum use of this opportunity. Conflicts, corruption and lack of adequate economic coordination among themselves also hamper their efforts. However, there is a good chance that some of them will be able to emulate the rest of the world and one can hope that their success will finally lead to a wave of economic well-being and prosperity in Africa.

Whether it actually happens or not is something that only history will be able to tell us.

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