Undergraduate Economist

Perspectives of an economics student

The Demographic Dividend

Posted by Alex M Thomas on October 16th, 2006

India is growing with 7% GDP, Sensex crossing 10,000 and foreign reserves have crossed the $150 billion mark. Is this growth sustainable? Yes it is, provided we reap the benefits of what is known as the ‘Demographic dividend’.

Simply stated, the demographic dividend occurs when a falling birth rate changes the age distribution, so that fewer investments are needed to meet the needs of the youngest age groups and resources are released for investment in economic development and family welfare. The falling birth rates reduce the ratio of the dependent population to the working population.

The demographic dividend, however, does not last forever. There is a limited window of opportunity. When the window of opportunity closes, those that do not take advantage of the demographic dividend will face renewed pressures in a position that is weaker than ever.

India’s current scene

India is and will remain for some time as one of the youngest countries in the world. A third of India’s population was below 15 years of age in 2000 and close to 20 per cent were young people in the 15-24 age groups. In 2020, the average Indian will be only 29 years old, compared with 37 in China and the US, 45 in West Europe and 48 in Japan.

But India’s developments in ‘human capital’ are exiguous. The poverty ratio for India is still somewhere around the 50% mark. Only 7% of the population is employed in the formal sector. Farmer suicides are being reported every now and then. The social infrastructure vis-à-vis the physical infrastructure is disheartening.

The dividends

The generations of children born during periods of high fertility finally leave the dependent years and can become workers.

Working-age adults tend to earn more and can save more money than the very young.

And for given unemployment rates, the higher the ratio of those in the labour force to those outside it, the larger would be the surplus. If this larger surplus is mobilised for investment, growth would accelerate.

However, Fareed Zakaria in his book ‘The Future of Freedom’ depicts this bulge to be bad for the economy. He goes on to state that ‘A bulge of restless men in any country is bad news.’

Conclusion

To sum up, it is evident that India is entering the phase of demographic dividend. In order to realise maximum benefit from this population bulge, it is necessary that programmes aimed at improving health care facilities and education are undertaken. Moreover, farmer suicides are not decreasing; the debts are growing and burdening those employed in the informal sector generally and in agricultural activities particularly. Microfinance can help alleviate the farmers’ distress by granting loans without collaterals.

References

1) John Ross [2004]
1) C. P. Chandrasekhar and Jayati Ghosh [2006]

8 Responses to “The Demographic Dividend”

  1. Kuttan Says:

    If only those responsible act quick enough to reap the benefits.

  2. harsha Says:

    Kuttua, are you somehow mistaken?
    demographic dividend is something that is fixed, there is nothing like milking it out.
    the more working population means, the more savings in percentage terms of GDP and hence the more investment back into the economy, that’s all. well,a clear set of business friendly policies may be needed (though of little effect) to maximise dividend. nonetheless i’m quite convinced that in another 15-20 years time, India would be 2.5-3 trillion dollar economy.fli

  3. alexmthomas Says:

    Harsha,
    The more working populations doesnt essentially mean more savings in terms of GDP. These ‘workers’ need to find work. In India, the agricultural sector is characterised by high rates of disguised unemployment and educated unemployment is rampant in urban areas.

    Kuttan argues for the case that, in order to benefit form this population bulge, adequate education, employment and health facilities need to be provided. Otherwise, like Fareed Zakaria mentions in his book, it might prove bad for the economy.

  4. Radhika Says:

    Greatly informative post again. I know though things to be improving on surface the core issues still remain. But I am hopeful…you gave great recommendations too
    Have to come back again to catch up with your previous posts. Bye for now Alex

  5. Babin Says:

    Excellent subject for a post Alex.
    Demographic Dividend is a powerful economic force for millions of families in a micro level, and for the country as a whole in a macro level. In my family, within the last couple of years all my siblings entered work force, and because of it, the purchasing power of the whole family skyrocketed! I could imagine the same story repeating itself in millions of families in india, much more than the previous rates. Indeed, this is a

    Demographic dividend doesn’t has to be a negative force to the political stability of the country. From what I remember from reading Fareed’s book, he also make the case for an opposing dynamic: As per capita income increases, democracies become more stable. I am hopeful, at the end, things will balance out fine for india. BTW, Future of Freedom is a great book to read. Glad to see you have mention it here!

  6. Prashant Dev Says:

    Very useful and informative.

  7. harsha Says:

    alex,
    i still believe that demographic dividend is not related to employment.
    let us put it down this way,

    1. the more the working population aged 25-60 yrs, the less is the social cost. (social cost is that of taking care of elder population), hence the less is the burden of social cost, as such this is a dividend, and this is what people call demographic dividend. since social cost is less, a good percentage of money might be used for other things.

    what you guys are going overboard to argue is that of unemployment. if people are highly non-productive, the less is the unemployment. or probably we can get all employed removing all automated machines and all such stuff. but a nation as such can’t consume more than what it can produce (though year or year, there may be current account surpluses and deficits)

  8. SC Says:

    why dont you fuse political, cultural and social factors to your conclusion?

Leave a Reply

XHTML: You can use these tags: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>