Tuesday, March 1, 2011

Economic Growth And The Demographic Dividend

I’ve been sold on the idea of a “demographic dividend” for well over a year now, and here’s some more evidence from a new IMF paper (abstract):

The Demographic Dividend: Evidence from the Indian States
Aiyar, Shekhar & Ashoka Mody

Large cohorts of young adults are poised to add to the working-age population of developing economies. Despite much interest in the consequent growth dividend, the size and circumstances of the potential gains remain under-explored. This study makes progress by focusing on India, which will be the largest individual contributor to the global demographic transition ahead. It exploits the variation in the age structure of the population across Indian states to identify the demographic dividend. The main finding is that there is a large and significant growth impact of both the level and growth rate of the working age ratio. This result is robust to a variety of empirical strategies, including a correction for inter-state migration. The results imply that a substantial fraction of the growth acceleration that India has experienced since the 1980s - sometimes ascribed exclusively to economic reforms - is attributable to changes in the country’s age structure. Moreover, the demographic dividend could add about 2 percentage points per annum to India’s per capita GDP growth over the next two decades. With the future expansion of the working age ratio concentrated in some of India’s poorest states, income convergence may well speed up, a theme likely to recur on the global stage.

Malaysia’s age profile is similar to India’s and Indonesia’s – in fact it’s somewhere in between. Compare that to say Thailand’s or Singapore’s, there’s higher growth potential in these countries than either of the latter.

The argument is simple – the higher the  number of workers relative to the population as a whole, the greater the potential output per capita. And the greater the number of potential workers about to enter the workforce, the greater the potential impact on economic growth. Malaysia’s median age is rising, but it’s still at a relatively low point (about 26) and we’re just about to reap the benefits – assuming of course we implement the appropriate policies and soft infrastructure to fully realise that potential. The paper quoted above estimates the impact to be about 2% per capita over and above trend output, this older IMF article estimates the impact to be as high as 1.9%.

Which makes comments like this a little flabbergasting (excerpt, emphasis added):

Reversing the ‘Brain Drain’

...Inflation hits everyone regardless of age, religion, race, job status or gender. But it is most painful for those of us who are not high-income earners, who are retiring soon or are already retired.

Malaysia is moving towards an aged population. This is going to place more pressure on fewer wage earners to support government services via their taxes. To release this pressure, one solution is to provide permanent employment beyond the current retirement age norm.

If retirees-to-be and retired Malaysians haven't accumulated enough retirement savings for their old age something that inflation is going to exacerbate the back-up plan will have to be: continue working...

The point about inflation is correct, but the underlying premise is completely wrong. Not only is the ratio of workers to the overall population going to rise, the old age dependency ratio is going to drop. I don’t expect to see the old age dependency ratio to start increasing anytime in the next 20 years.

Technical Notes:

Aiyar, Shekhar & Ashoka Mody, "The Demographic Dividend: Evidence from the Indian States", IMF Working Paper No. 11/38, February 2011


  1. Hi, I stumbled across your blog from Google. I buy the demographic dividend concept (there's a paper by Bloom and Williamson called "Demographic Transitions and Economic Miracles in Emerging Asia" which you might be interested to read.

    I think there's still a caveat though (and would be interesting to research). I think some thought should be given to not just the ratio of workers to population, but to the type of worker. I think there will be a distinct difference between having an increasing ratio of low-skilled workers to population and having an increasing ratio of high-skilled workers to population on overall growth. Anyway, basically, quality should matter, not just quantity. Would be good area for some research.

    Good post.

  2. Thanks...and agreed.

    That's why I put in the remark about "...appropriate policies and soft infrastructure to fully realise that potential."

    I think there's not enough funding or emphasis on retraining/reskilling programs in Malaysia's development plans or in the NEM/ETP. These will be necessary to accommodate those in the current workforce who are displaced as Malaysia moves up the value chain, and as skills are given a premium.

    To be fair though, a lot of the long term moves needed are already in place or in the process of being implemented, like universal pre-school education and the legal framework for part-time and temporary workers.

    So I'm optimistic over the long term, but over the medium term as we get closer to the 2020 target, I think we'll see some people losing out in the process.

    The ETP job creation projections are just enough to absorb the new entrants into the work force coming out of the younger age cohorts right now, but there's almost no provision for the job losses that will come from low-wage industries that are being competed away.

  3. Something mildly relatedly. Do you know any source for statistics of emigration of Malaysians based on ethnicity?

  4. Not that I know of, sorry.

    This paper suggests that data on outward migration isn't collected at all (see page 345, "Gaps and Deficiencies").