Business Today

"With right policies, India's demographics will give it an edge over China"

There are two compelling examples of demographic change leading to economic growth.

David E. Bloom | Print Edition: April 18, 2010

There are two compelling examples of demographic change leading to economic growth. One is the so-called East Asian miracle, which refers to a group of East Asian countries whose economies grew very rapidly for several decades. When people set out to unlock the secrets of what drove that region's economic growth, and couldn't do so, they called it a miracle. When we look back, we see that they actually did not pay proper attention to demographics.

In East Asia, infant and child mortality rates went down in the 1950s and '60s and it was only shortly thereafter that these countries— which include Korea, Taiwan, and China—saw a sharp drop in fertility rates. This meant that there were fewer children to be clothed, fed, housed, and educated—and the resources saved could be put into the economy. These countries invested very heavily in infrastructure, and in widening and deepening their education systems. And they took advantage of the international market to sell the labour-intensive products they were making. When you take account of the change in age structure, demographic change accounts for a sizeable portion of economic growth in East Asia. The miracle was not a miracle at all— in a major way, demographic change was a key contributor.

The second example is the Irish miracle, which again is actually not a miracle. Ireland had very high birth rates, in part because contraception was illegal. In 1979, contraception was legalised and birth rates dropped. With fewer mouths to feed and fewer children to educate, economic growth skyrocketed. Legalisation of contraception gave birth to the Celtic Tiger and whopping economic growth in the 1980s and 1990s.

India has most of its demographic dividend ahead of it. With the right policies, especially investments in education and health, India's demographics will give it an economic edge over China in the coming decades.

The demographic transition begins when infant and child mortality rates start to decline. This results in population growth until birth rates follow suit, which reduces the burden of youth dependency and increases the relative size of the population at the prime ages for working and saving. This creates the potential for a demographic dividend. The policy environment is crucial to the realisation of the potential dividend.

I don't know any other country that is as heterogeneous as India. The demographic profiles of Tamil Nadu and Bihar are as different as those of Ireland and Uganda. The favourable demographics in some Indian states, as compared with others, could promote greater economic inequality and result in political strains that could jeopardise economic growth. States need policies that fit their specific conditions.

Some states would benefit most from efforts to catalyse a demographic transition. Others would benefit from policy interventions aimed at accelerating that transition. And others still would benefit from policies designed to capture the benefits of a favorable age structure. India's demographics right now are creating a strong impulse for economic growth. The most imperative measure is enhancing the skills of India's youth by better and more widespread education and training.

Now is the time when the demographic dividend can be reaped—in 30 years it may be too late. The government needs to make big investments in people. One of India's strengths is its diaspora, which can be channeled to abet India's growth. If India can raise the skill level of many millions of people, it can follow the Celtic Tiger's model of growth. India's institutions of higher education can facilitate this growth.

But there are instances where this dividend was frittered away. That would be Latin America. Since 1970, its demography has looked like South East Asia's, but South East Asia has done better economically, mainly because Latin America got a late start in adopting policies that would help it reap a demographic dividend. Poor macroeconomic management in much of Latin America resulted in high inflation and low savings rates, undermining an important channel for the demographic dividend.

More people working, more people saving —that's high-octane fuel for an economy. Latin America failed to take advantage of this window of opportunity for two decades, though it has done much better in recent years. Now, with respect to the population aging, India's demographic transition pretty much guarantees that large cohorts of working age individuals today will be large cohorts of elderly dependents in the future. If we peer into the demographic crystal ball, we see that India will experience a dramatic rise in its 65+ age population, from 5 per cent of the total population today, to 14 per cent by 2050. That translates into 220 million people, which is roughly 25 per cent more than the current population of Brazil.

My views on this are not alarmist. First of all, an aging 65+ crowd currently represents only about a fourth of its number of adolescents and young adults. And it is not going to outnumber the young for nearly 40 years. It is important that we do not lose sight of the fact that the education and training needs of India's adolescents and young adults make for the 800-pound gorilla in the room. However, notwithstanding its modest affect on economic growth, population aging is going to create a significant challenge.

The challenge arises because of the current reliance in India on private family networks, which will not be able to withstand the increased number of older Indians, especially given increased female labour force participation, widening generation gaps and costly treatment of diseases such as cancer and diabetes.

David E. Bloom, Professor, Harvard University
(Based on Bloom's speech at the Conclave and an exclusive interview with BT)

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