Demographic Shifts and their influence on the economy - Part 1
Part 1 – The key
parameters that influence shifts
Economic demography examines
the determinants and consequences of demographic change, including fertility,
mortality, marriage, divorce, location (urbanization, migration, density), age,
gender, ethnicity, population size and population growth.
Demographic dividend refers to the growth
in an economy that is the result of a change in the age structure of a
country's population. The change in age structure is typically brought on by a
decline in fertility and mortality rates. Demographic dividend occurs when the
proportion of working people in the total population is high because this
indicates that more people have the potential to be productive and contribute
to growth of the economy. In essence, there’s a period in nation’s progress
when longevity is increasing and working age population is large in proportion
to the old age population. The median age is low. This is when the nation is
best positioned to move forward.
In this 6-part series we will
examine the demographic shift in some of the leading economies of the world and
see how India is positioned for the next 2-3 decades. In many ways, India has
an opportunity that it mustn’t muff up.
The background
From 1850 to 2000, in Western
European countries life expectancy rose from 30–40 to 80 years and the average
number of children per woman fell from 4 to 5 children to slightly more than
one.
A study conducted by Miguel
Sánchez-Romero, Gemma Abio, Concepció Patxot & Guadalupe Souto, in 2017
concluded that around 17% of the observed increase in per-capita income growth
from 1850 to 2000 was due to the demographic transition. Around 50% of the
demographic contribution is explained by the increase in the average
productivity per worker (productivity component), which arises from the change
in the population’s age structure and the rise in households’ saving rate. The
remaining 50% is explained by the higher growth rate of workers relative to the
total population (translation component).
There are numerous other
studies that delve into further details. The key conclusions are that working
age population and the ratio of working/ non-working age populations has
profound impact on economic growth and the stability of an economy. A high
ratio means that the society can implement welfare measures which has beneficial
multiplier effect, whereas a low ratio implies that the society is getting
stretched and is forced to cut back on welfare spending which has deleterious
effect on the well-being and ultimately has negative impacts that threaten the
stability of societies.
The global median age has increased from 21.5 years in 1970 to over 30 years in 2019. The global population breakdown by age shows that a quarter (26%) are younger than 14 years, 8% are older than 65, while half of the world population is the working-age bracket between 25 and 65. (Source: Ourworldindata.org)
In 1950 there were 2.5
billion people on the planet. Now in 2019, there are 7.7 billion. By the end of
the century, the UN expects a global population of 11.2 billion. This
visualization of the population pyramid makes it possible to understand this
enormous global transformation.
Population pyramids visualize
the demographic structure of a population. The width represents the size of the
population of a given age; women on the right and men to the left. The bottom
layer represents the number of newborns and above it you find the numbers of
older cohorts. Represented in this way the population structure of societies
with high mortality rates resembled a pyramid – this is how this famous type of
visualization got its name.
“We are at a turning point in
global population history. Between 1950 and today, it was a widening of the
entire pyramid – an increase in the number of children – that was responsible
for the increase of the world population. From now on is not a widening of the
base, but a ‘fill-up’ of the population above the base: the number of children
will barely increase and then start to decline, but the number of people of
working age and old age will increase very substantially. As global health is
improving and mortality is falling, the people alive today are expected to live
longer than any generation before us” - Ourworldindata.org
Until the early 18th century, the world population grew little because high mortality rates offset high fertility
rates. The reproduction rates were very high and 8-10 children per couple were
not unusual. However, child mortality was high, and barely 25-40% of those born
survived to adulthood. The life expectancy was low and premature deaths were
pretty common. Increased knowledge and technological change in the form of
advances in medicine, public health, and nutrition began to lower mortality
rates. Fertility rates also began to decline, and the reasons for this were
more complex. In the U.S. there were shifting preferences for smaller families
because of the rising opportunity costs of having children and the higher costs
of raising and educating them. The shift in population from rural to urban
areas reduced the need for large families to run farms. There were changes in
social norms regarding the use and availability of birth control. The baby boom
in the US after World War II, and the subsequent echo when the baby boom
generation began having their own children, were exceptions to a general
downward trend in the birth rate. Today, the fertility rate in the US is well
below 1.8 births per woman. This is less than the United Nations’ estimated 2.1
replacement rate needed to keep the population stable, and it is considerably
less than the fertility rate in 1900, which was over 3.3.
What is this fertility rate? “The total fertility rate in a specific year is defined as the total number of
children that would be born to each woman if she were to live to the end of her
child-bearing years and give birth to children in alignment with the prevailing
age-specific fertility rates. It is calculated by totaling the age-specific
fertility rates as defined over five-year intervals. Assuming no net migration
and unchanged mortality, a total fertility rate of 2.1 children per woman
ensures a broadly stable population. Together with mortality and migration,
fertility is an element of population growth, reflecting both the causes and
effects of economic and social developments. The reasons for the dramatic
decline in birth rates during the past few decades include postponed family
formation and child-bearing and a decrease in desired family sizes. This
indicator is measured in children per woman.”
In a nutshell, if the
fertility rate is low, more people would be born who would then contribute to
economic activity. If the fertility rate is lower than 2.1, fewer children will
be born resulting in fewer working hands in the future. Moreover, as longevity has
been continuously increasing (as healthcare standards and nutritional standards
keep improving) and is already pretty high, lower fertility rates would create a higher proportion of the elderly and the non-working segment of the population.
As these demographic changes
have played out, the average life expectancy in the US, for example, has risen
and the population has aged. Average life expectancy at birth is now nearly 80
years old, 30 years higher than it was in 1900. The median age of the US
population is approaching 38 years old, nearly 10 years older than in 1970. By
2050, the UN projects that the median age in the U.S. will be 42 years old and
that the number of people age 65 or older per 100 of working-age people, those
age 15 to 64, will be more than double what it was in 1970. That is a stunning
change in a relatively short period of 70 years.
This is not just a US
phenomenon. It is a universal phenomenon that is playing out differently (in
terms of timing) across various countries on the planet. For example, in India,
the average life expectancy was just 30 years at birth at the time of
independence. It increased by 60% by the time the 1971 census was conducted.
Since then it has steadily grown and is estimated to be 70 years at the moment.
It was 67 years in 2011, 63 years in 2001, 58 years in 1991, 54 years in 1981,
48 years in 1971, 42 years in 1961, and 32 years in 1951. Increasing life
expectancy is a good thing and India has room to improve since most developed
countries have a life expectancy in excess of 80.
The current fertility rate in
India is estimated to be 2.2. Over the years it has declined – 5.9 in 1951, 5.9
in 1961, 5.5 in 1971, 4.77 in 1981, 3.96 in 1991, 3.24 in 2001, and 2.51 in
2011. The decline was slow during the first 30 years and has accelerated since
then.
The median age in India is
estimated to be 29 years. As is evident from fertility rates and longevity,
this has also increased significantly over the last 70 years. However, high
fertility rates kept it low for a long time. It was 21 years in 1951, 19.3
years in 1971, and 20.2 in 1981. Since then it has started increasing
significantly as fertility rates dropped fast and longevity kept increasing –
21.1 in 1991, 22.7 in 2001, 25.1 in 2011, and 29 years now. It is estimated that
this would increase to 32 by 2031 and 38.5 by 2051. This kind of increase would
lead to a very significant increase in the proportion of the elderly (those
above 65 years of age). It is also evident that the current demographic
dividend of a young population is disappearing fast and is likely to disappear
during the next two decades.
While India and The US are
still relatively “young” most of East Asia (including China), and Europe are
already aged and are soon going to see a rapid fall in population, with or
without immigration. These are large regions representing nearly 30% of the
global population. On the other hand, most developing economies of Asia and
Africa are still growing.
Demography is something that
cannot be “fixed” in a short time frame. It plays out over long periods and has a profound impact. A few examples below illustrate this point –
· North America enjoyed a demographic dividend
from the early 1960s to the mid-1980s as the Boomers entered the labour force.
Births increased noticeably during the post-war years and was maintained at
high levels for some time and then subsequently decreased. As these babies
became adults, the region experienced tremendous growth that continued till the
end of the century. Growth has tapered off since then.
· Japan has been slightly different. High
fertility rates in Japan over the 1930s and much of the 1940s resulted in rapid
labour force growth over the 1950s and 1960s. This was earlier than in North
America. This increase in labour force was happening at a time when population
growth in Japan was slowing, thereby increasing wealth. The growth trajectory
was strong up until the 1980s. It was a golden era in Japanese economic
performance. However, the low fertility rates were slowing labour force growth
and hence economic growth by the time this period ended. What the world saw was
a long period of stagnation during the last 30 years. Japan is now facing a
situation where 28% of its population is already over 65 years of age and the
population has started shrinking.
In the subsequent parts of
this series, we will look at some of the countries and their experiences in
detail. Subsequently, we shall look at India and where it is headed.
Part 1 – The key parameters that influence shifts
Part 2 – What has been the Japanese Experience
Part 3 – Greying and aging before it gets rich
Part 4 – The two dominant economies of the world over the last 150 years
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