Demographic Change and Economic Growth


Ajit Kumar AJIT KUMARWISDOM IAS, New Delhi.

The general consensus on the relationship between demographic vectors and economic growth has changed a lot over years. The arguments have touched on opposite ends of the spectrum where some argue that sustained population growth will be catastrophic while some argue that it will lead to more affluence. Broadly speaking, there are three schools of thought to this debate, namely; optimistic, pessimistic and neutral.
Pessimistic School
The debate can be traced back to the 1790s where the pessimistic school held much sway. Thomas Malthus is seen as the founding father of the pessimist school which foresaw doom if population growth was left unchecked. Their ideas were grounded in the theory of diminishing returns to scale put forward by David Ricardo, the pessimistic approach earning the theory to be named as a ‘dismal science’ (Reinhart, 2007:75). Malthus had stressed that societies with high fertility rates would have lower income levels than those with lower rates because high population levels would drive down the price of labor and increase the price of food. He argued that increase in food production would not be able to keep up with increase in population because while population grew geometrically, food production only increased arithmetically (Malthus, 1798). He believed that nature had its own checks to balance the world’s population. An increase in population would depress wages and lead to a shortage of food. As a result, there would be widespread starvation and famines and the population would come back to equilibrium. The other pessimistic view about high population growth is that of resource dilution. A growing population leads to a dilution of capital since it now needs to be shared amongst more people. Most of the pessimism was directed at the developing economies of the world where high population growth and low income levels existed and the pessimists believed this to be no coincidence.
Optimistic school
The pessimism gave way to a more optimistic view on population growth. While there was a massive growth in population the predicted disasters never materialized. World population had exploded in just 50 years from 2.5 billion in 1950 to 6 billion in 2000, instead of declining per capita income actually has instead grown exponentially (Birdsall et al, 2001). The optimistic school is grounded in the realization of economies of scale and specialization.
Connections were made between population growth, innovation and increasing returns to scale. The line of argument goes that as the stock of human population grows so does the  stock of human capital; which is a major contributor to economic growth (Kuznets, 1967; Simon, 1981). Optimists have stressed that increased population would pressurize humans to innovate and find new ways of sustaining themselves. Following this reasoning, Simon concluded that in the long run, the prices of natural resources tended to decline rather than the other way round. While increasing returns to scale have usually been viewed as the being limited to the manufacturing and services sector, a surge in productivity have also been witnessed in the agriculture sector with the ‘green revolution.’ Esther Boserup, who specializes in the field of food production shows how similar pressure induced innovation in the field of food production. Rising populations have induced humans to innovate and food production technologies have constantly evolved since the beginning of time (Boserup 1965).
The recent green revolution which uses intensive farming, irrigation, fertilizer and hybrid seeds has improved agriculture production markedly around the world.
The Revisionists
Following soon at the heels of the optimists is the more neutralist point of view. Here population growth is thought to neither hinder nor promote economic growth. Countries with weak institutions typically also had high population growth and the effect of these two aspects needed to be isolated. So while rapid population growth had an overall negative effect on the economy, this causation was weakened when one took into account the country specific characteristics of institutions, policies, markets and technology (Birdsall et al, 2001).
Bloom and Canning (2004) contend that this consensus led to population and reproductive health as a potential determinant of economic growth being given a backseat by key development agencies.
Age Structure
Recently a new dimension of demography is being discussed which challenges the revisionist view and places changes in population characteristics as a major determinant of economic growth; age structure. Namely that an increase in the share of the working age group; identified in this paper as between 15-59 years of age, will have a positive impact on economic growth. This theory is influenced by the Life Cycle Hypothesis and the human capital approach (Navaneetham 2002).
The Life Cycle Hypothesis fleshed out by Franco Modigliani in the 1950s posits that the level of income varies systematically over the different phases of a person’s life cycle. In order to achieve a smooth consumption throughout the period of their lives, a person’s level of savings fluctuates over different cycles (Modigliani 1988). Thus, a person’s behavior alters as he/she passes through different age groups, which translates into different economic outcomes over time. A young child is simply a net consumer and investments are needed for the child’s health, education and other needs. However, a person becomes a net producer when he/she moves into the working age group. The person supports his/her dependents and at the same time will save for their retirement when their productivity levels are not expected to be as high. As old age dawns, the person is again a net consumer living off what they had saved in the past.
This micro-level behavior has big implications for the economy as a whole. A country with a favorable age structure, i.e. a decline in the dependency ratio people will be able to save more rather than diverting their excess incomes towards the upkeep of their dependents. It is a common economic assumption that savings equal investment (Keynes, 1936). If all the savings are diverted towards productive investments, faster economic growth will be experienced.
Interestingly the pessimistic school of thought was well aware of the consequences of age structure. However, given that the age structure when they were researching the low income countries was characterized as having a large number of young dependents, they only drew out negative conclusions from their analysis. Coale and Hoover (1958) on studying India and Mexico’s rapid population growth found high fertility and mortality rates. As a result, the countries had high dependency ratio with an extremely young population. They concluded that having a high ratio of dependents who lesser chances of surviving led to resource dilution and non-productive consumption diverted finds away productive investment.
However, age structures do not remain constant and they do change as a country embarks on the demographic transition (explained below in the next section). As the age structure becomes more favorable in the working age populations, conditions become more conducive for economic growth. Depending on the policy environment, this increase in labor supply can generate more output in the economy. Also with fewer dependents, the economy will be able to save more which translates into greater investment rates. The implications of a change in age structure on economic growth can be immense. Bloom and Williamson (1998) attribute almost a third of the East Asian miracle to a favorable age structure i.e. an increase in labor supply.
The next section will explain in detail the demographic transition which causes a change in the age structure of a population. It will also elaborate on how it influences economic growth and the complementary tools which are needed to capitalize on the favorable age structure.
 
 
 

Monday, 29th Dec 2014, 10:07:59 AM

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