Demographic Dividend – An Understanding


Ajit Kumar AJIT KUMARWISDOM IAS, New Delhi.

The phrase ‘Demographic dividend’ was coined by David Bloom.Demographic dividend occurs in the late stage of demographic transition characterized by declining fertility & increasing life expectancy, the large base of children accumulated in the initial stage of the transition have move to the working age group. The direct benefit includes relative rise in the number of bread winners and with fewer children to bring up more women join work force.Indirect but vital benefit for the economy of the country is the effect this transition can have on savings.
In the initial stages of demographic transition, fertility rates fall, leading to a labor force that is temporarily growing faster than the population dependent on it. All else being equal, per capita income grows more rapidly during this time too.
This dividend period generally lasts for a long time - typically five decades or more. Eventually, however, the reduced birth rate reduces the labor force growth. Meanwhile, improvements in medicine and better health practices leads to an ever-expanding elderly population, sapping additional income and putting an end to the demographic dividend.
In effect a demographic dividend occurs due to a demographic transition whereby falling birth rates change the age distribution of a country so that fewer investments are required to meet the needs of the younger sector of the population. During this period the labour force temporarily grows more rapidly than the population dependent on it, releasing resources for investment in economic development and family welfare and resulting in faster per capita income growth.[1]
This dividend period is not permanent rather it lasts approximately five decades or more. It is not automatic either and some countries that take advantage of the released resources and use them effectively will receive greater benefits than others. Those that don’t capitalize on the opportunity may in fact be in a weaker position[2] and faced with the problem of a youth bulge - a demographic trend where the proportion of persons aged 15-24 in the population increases significantly compared to other age groups - which paired with limited employment opportunities may contribute to increased poverty, hunger, malnutrition, poorer health, lower educational outcomes, child labour, unsupervised and abandoned children, and rising rates of domestic violence.
Demographic  Dividend generally occurs twice.
First Demographic Dividend
The first demographic dividend is the result of increase in working age population while the
number of children in subsequent birth cohort become lesser and lesser. This is quantified in terms of economic support ratio, that is, the number of effective producers (earners) per effective consumer. The first term is the economic support ratio, which capture the first demographic
dividend.
Second Demographic Dividend
The prospects for a second demographic dividend are relatively promising because population ageing leads to an increase in the demand for wealth needed to maintain consumption levels at old age for several reasons.
As life expectancy increases people expected to live longer retirement than in the past, as a consequence individuals save and accumulate wealth. Though there is some overlapping period the ending phase of first dividend period is the beginning of second dividend. The second demographic dividend, is embedded in income per effective worker.
In short, the first dividend yields a transitory bonus, and the second transforms that bonus into greater assets and sustainable development. These outcomes are not automatic but depend on the implementation of effective policies. Thus, the dividend period is a window of opportunity rather than a guarantee of improved standards of living. The dividends are sequential: the first dividend begins first and comes to an end, and the second dividend begins somewhat later and continues indefinitely. They certainly overlap.
Transmission mechanisms
(i) Labor supply 
The young sector of the population born during periods of high fertility are no longer dependent and can become workers, provided that effective policies have enabled them to be educated and trained. Women relieved of child caring responsibilities are free to enter the labour market; they tend to be better educated than their older cohorts and are consequently more productive.[4]
(ii) Savings 
The transition away from a young age distribution tends to result in greater personal and national savings as working age adults have a tendency to earn more and the capacity to save more than the very young. When persons born during periods of high fertility move into their 40s they have a greater ability to save as their own children are more independent and require less support. Growth in personal savings serves as a partial resource for industrial investments that assist economic growth.[5]
(iii) Human capital 
Having fewer children enhances the health of women and enables their greater participation in the workforce. Increased financial and personal independence can also improve their general well-being. Having fewer children reduces the pressure on parents to provide. Less children means family income can be spent on better quality food for infants and young children as well as education resources and towards the prolonging of education for children to improve their life prospects.
Managing the Demographic Dividend
The degree of benefit gained from the first dividend depends greatly on key features of the economic life cycle. The productivity of young people depends not just on the availability of jobs but on their capacity to take up employment opportunities. In this regard experiences, both positive and negative, during Early Childhood, including those related to Early Childhood Care and Development and overall child wellbeing can have a strong influence on a country's labor supply, their human capital as well as the number of people dependent on government welfare services later on in life.
The timing of childbearing and maternity and paternity policies are also factors which influence individuals degree of participation in the labour force.
Productivity at older ages is influenced by factors of health and disability, tax incentives and disincentives and most importantly, the structure of pension programs and retirement policies.
Demographic Dividend in India
Declining fertility rates have changed the age structure of India's population, resulting in a "bulge" in the working age-group. This "demographic dividend" has improved the dependency ratio leading to the hypothesis that the bulge in working population will lead to an acceleration in growth.

Monday, 29th Dec 2014, 08:57:26 AM

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