Demographic dividend: India

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Demographic dividend: delayed, but getting better

Swaminathan S Anklesaria Aiyar 2013/06/30

Swaminomics, The Times of India

The latest employment data for 2011-12 show that India’s much-hyped demographic dividend has not yet arrived. The proportion of workers in the population rose slightly from 40% in 1980 to 43% in 2004-05, but is now down again to 40%.

This is actually good news. It means that the record GDP growth of the 2000s was due to higher productivity, not rising worker participation.

Second, the demographic dividend has not vanished. It’s merely been postponed, and mainly for an excellent reason. Over 300 million youngsters above the age of 15, above all females, are studying in school and college rather than working. When these youngsters eventually join the workforce, they will be far better skilled than earlier expected.

What exactly is the demographic dividend? When a developing country reduces child mortality, it experiences a population explosion in which the proportion of dependants to workers rises. This is a sort of negative dividend — workers have to support a much higher proportion of dependants, depressing per capita income. But in the next phase the birth rate falls sharply, even as the original baby boomers enter the workforce. So, the proportion of workers rises sharply, even as the proportion of dependants falls. In many countries, the ratio of workers to dependents goes from 40:60 to 60:40, giving a huge boost to per capita income.

Something like this happened in all the Asian miracle economies from the 1960s onwards. They all experienced a demographic dividend that added a whopping 2% to their annual growth of per capita income. Their economic miracle was in large part a demographic miracle.

India hopes for a similar bonanza. It has been undergoing substantial demographic change since the 1970s. An IMF study (Aiyar and Mody 2011) shows that between 1981 and 2001, the proportion of the population in the age group 15-59 rose in Tamil Nadu from 58.6% to 64.4% and in Karnataka from 53.9% to 60.4%. This facilitated faster growth in these states. By contrast, the proportion stayed almost unchanged in Bihar and UP (from 51.5% to 52.1% and from 51.5% to 52.3% respectively), one reason why these states were laggards. Overall, the study estimated that the demographic dividend added 1-1.5% to annual GDP growth in the 1980s and 1990s, and could add 1.5-2% from 2001 onward.

However, this assumes that a bigger working-age group will translate into higher worker participation. That has not happened. Worker participation is still stuck at the 1980 level of 40%. The rise in numbers of the 15-64 age group has been offset by a greater number opting out of work. The proportion of females interested in working has crashed from 30% in 2004-05 to just 23% today. This is dismayingly low: in rich countries, it can be up to 60%. Over 35 million Indian women have opted out of working.

The sharpest withdrawal has been in the 15-25 age group, denoting more girls studying. But withdrawal has occurred in all higher age groups too. I suspect the main reason is social. As families move from working class to lower middle-class, they get social status by saying that their women do not go out to work. Thus the rise of the middle-class has exacerbated female withdrawal.

This will be temporary. Studies show that once girls complete college, they enter the workforce in large numbers (as is evident in elite families). So, as girls increasingly go to college, we will get a female demographic dividend, but this will take time.

We must examine why urban female participation is as low as 15% today. It could be related to lack of safety (which overlaps with middle-class values). Better urban working conditions for women are a must. Besides, the share of casual jobs is rising, showing how badly our labour laws discourage regular employment.

Literacy rose 9.7% in 2001-11 led by Bihar (16.8%), Jharkhand (16.1%) and UP (11.45%). Female literacy shot up even faster in Bihar (20.2%), UP (17.1%) and Jharkhand (15.3%). These are positive signs for the quality of the future female demographic dividend, and indeed for growth in backward states.

Education, vocational training and specialized training are all growing explosively, although standards leave much to be desired. Corporations (like Infosys) are starting their own universities and training centres to cope with the severe skills crunch. Vocational training institutes are growing rapidly, financed by the new National Skills Development Corporation.

UN estimates suggest that changing demographics will give India an additional 300 million people in the working-age group (15-64 years) between 2010 and 2040. Rising college education should improve female participation sharply. There’s no dividend today, but tomorrow’s dividend will be pretty good, the more so if labour policies improve.


Demographic dividend

Poor states/ social spending/ development spending/ private education spending Poor states reap big demographic dividend SA Aiyar

10 April 2011, Poor states reap big demographic dividend Many have celebrated the census revelation that Indias population increased only 17.64% in the last decade, down from 21.54% the previous decade. Yet, the best news relates to kids aged 0-6.Their numbers have actually fallen 3.08%. Fewer children translate into a demographic dividend that will send per capita income booming in the coming decades. The biggest dividend came in Uttar Pradesh, where the share of the 0-6 age group in the population declined 4.1%.Substantial decreases were recorded in Rajasthan (3.5%), Madhya Pradesh (3.4%), Chhattisgarh (3.1%),and Bihar (2.3%).

What exactly is a demographic dividend When economic development causes mortality to fall, parents have fewer children. Fewer children means the proportion of workers rises, and of dependents (children and old folk) falls. This raises income per head. Second, countries can divert funds from spending on children to investing in physical capital, job training, and technological progress. Third, declining fertility means more women can join the workforce, reducing the proportion of dependents further. Fourth, the working years 15-64 are prime years for savings, so more workers means more savings, which then fund more investment.

An IMF working paper by Shekhar Aiyar and Ashoka Mody (The Demographic Dividend : Evidence from the Indian States) suggests that up to 40% of higher GDP since the 1980s may be due to the demographic dividend, rather than economic reform or other factors. It calculates that this dividend boosted GDP growth by 1.46% in the 1980s, one reason for the sharp acceleration in that decade although economic reforms were hesitant and very modest. The dividend was 1.34% in the 1990s. The paper predicts it will rise to 1.74% in the 2000s. Record GDP growth and preliminary census data suggest that the prediction may be vindicated. The authors estimate that the dividend will boost all-India growth 1.98% in the 2010s and 2.04% in the 2020s, before tapering off in the 2030s. Incomes per head will tend to rise faster in the poor states.

Most economists say an additional workforce is useless if it is not educated and skilled. Surprisingly, Aiyar and Mody find that government social spending is not statistically significant, while development spending is. Perhaps this is because private education and corporate training programmes are significantly improving skills, something not captured by the researchers.

The authors say the ratio of people of working age 15-60 rose sharply from 53.7% in 1961 to 62.1% in 2001 in three leading states -- Tamil Nadu,Karnataka and Gujarat. But in three lagging states -- UP, Bihar, Madhya Pradesh the ratio hardly moved,from 53.1% to 53.4%. Thats an important but rarely noticed reason why the leading states accelerated in GDP while the laggards did not. However, falling numbers of children in the laggard states (in north and central India) now mean that they are about to reap the demographic dividend already reaped by southern and western states. This should help reduce regional inequalities. Last week i wrote, quite incorrectly, that New Delhis social spending had risen from 1.28% of GDP in 1992-93 to 7.27% of GDP in 2008-09. In fact, the latter figure includes spending by the states, and on not just education and health but other welfare services. This combined figure rose from 5.59% of GDP to 7.27% between 2005-06 and 2008-09. Some critics say the governments education spending barely kept pace with GDP over the last two decades. Since GDP itself grew at a record rate in those decades, education spending must have followed suit.

Forget government spending, says Parth Shah of the Centre for Civil Society, the big change has been an explosion in private education spending. Economic reform has increased incomes, so even poor people can afford to switch their children from terrible government schools and colleges to somewhat better private ones. Indicus Analytics, a research firm, estimates that private spending on education, tuition, books, newspapers and journals was 1.2% of GDP in 2009-10.This could be an important reason why literacy rose in the last decade, notably in Bihar (up 16.82 percentage points), UP (11.45 points), Jharkhand (16.07 points) and Orissa (10.37 points). Moreover,poor states in the last decade hired huge numbers of teachers and parateachers on contract. Bihar alone hired two lakh contract teachers. They were paid one fifth or less than regular teachers, yet researcher Karthik Muralidharan found they improved learning outcomes, boosting the educational bang per fiscal buck.

The demographic dividend will steadily reduce the number of schoolchildren in the next three decades, easing the teacher shortage and reducing class sizes. But thats no excuse for avoiding radical reforms to improve teacher accountability and performance in government schools.

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