Demographic dividend: An opportunity to accelerate growth

While listening to a speaker at a seminar mention demographic dividend I was reminded of my school days more than half a century ago. We were then taught that a major challenge to economic development [of then East Pakistan] was its high population growth. The challenge was thought to be serious enough to be dubbed 'population bomb' by some western experts.

The government took up the challenge seriously and devoted much of its effort to reducing population growth. One of the largest departments of the government with employees working all over the province took up the challenge of reducing population growth through family planning. Billboards emphasizing the need for family planning dotted the province. However, there was not much visible progress at the time.

The First Five Year Plan of Bangladesh maintained the urgency of containing population growth. In 1978, population was declared as the number one problem for the country. All subsequent plans laid emphasis on reducing population growth rate. As a result, the contraceptive prevalence rate (CPR) increased from less than 8 percent in the 1970s to 62 percent and the total fertility rate (TFR) declined from about 7 in the 1970s to 2.3 in more recent years.

The increase in the CPR and decline in the TFR since the 1990s were due to not only the family planning drive, but also to major socio-economic changes taking place in the country. These changes resulted in considerable reduction in the population growth rate since the 1974 census.

However, a change in attitude has taken place in more recent years. The reduction of population growth rate lost its earlier emphasis, resulting in the deceleration of the rate of increase in CPR and TFR. Population apparently is no longer viewed as a serious problem, much less a bomb; rather it is regarded as an asset; population has assumed the new title of human resource. Being a resource or asset, the inclination should be to maximize its utilization. Hence, the reduced interest in population control.

Chart 1: Annualised intercensal population growth rate

Source: M. A. Islam and BBS

Around the end of the millennium a term that became popular in western academic circles found its way to economic discourse in Bangladesh. The historical trend of demographic change from high birth and death rates to low birth and death rates was believed to generate a demographic windfall in the form of accelerated growth for countries undergoing such a change. This was termed demographic dividend or bonus.

The first dividend could accrue when nations transformed from high birth and death rates to high birth and low death rates with a concomitant increase in the share of young working age population. The second dividend could be harvested at a mature stage with both low birth and low mortality rates.

How do a high birth rate and a low death rate lead to dividend? Actually such a demographic change offers only a 'window of opportunity' that could be exploited to reap the dividend if the concerned nations take appropriate measures.

According to the traditional demographic transition theory, the first phase of development of a country is characterized by high birth and death rates such that population grows very slowly, if at all. This phase can last a very long time. The second phase is marked by improvement in health standards with greater awareness of health issues, and widespread use of antibiotics and vaccines, and the consequent elimination or sharp reduction in epidemics such as cholera, smallpox, etc., all of which contribute to a dramatic reduction in mortality, especially infant mortality.

These health related innovations lead to a demographic transition from a regime of high death rates to a regime of low death rates, but the fertility rates and the birth rates do not show much reduction during this phase. These imply not only an acceleration of the population growth rate, but also a disproportionate increase in the young working age population of the country. If these people are employed in productive activities, it should result in a decline in the dependency ratio (defined as dependent people per 100 working people) and an increase in per capita income.

According to a well-established consumer theory, the working age population, provided they are productively employed and earning incomes, are net savers while the dependent people are net dis-savers. Hence, a drop in the dependency ratio may cause an increase in the overall saving ratio of the nation.

If this saving, made possible by the transition in age structure of the population, is productively invested it would increase employment and also raise the productivity of the workforce, especially if an adequate part of the saving is deployed in education and skill formation of the young people. This leads to the acceleration of economic growth and consequently an improvement in the standard of living. This is the first demographic dividend due to the demographic transition in the second phase.

Chart 2: Evolution of birth, death and fertility rates

Source: UN Population Division

In the third phase of demographic transition the birth rate starts declining as the fertility rate falls with lower mortality of children. The death rate also continues to decline albeit at a slower rate. Consequently, population growth rate starts decelerating. But the dependency ratio may not increase as children born in the earlier phase come of age and enter the workforce, and the lower fertility rate may encourage greater participation in the workforce by women. When the dependency ratio starts increasing again, this phase comes to an end.

Eventually both birth and death rates fall to very low levels such that the natural population growth rate also falls to very low levels. At this stage the average age of the population increases and the share of elderly people in the population increases markedly. Saving falls and so does investment. Consequently economic growth rate slows down considerably. This tendency is somewhat attenuated by the higher productivity made possible by earlier investment and asset accumulation. The higher productivity could be the source of a second demographic dividend that could be sustained indefinitely.

The demographic experience of Bangladesh conforms well to the classical demographic transition model as described above. Throughout the nineteenth century and the early decades of the twentieth century the country experienced low population growth rate (Chart 1). The birth rate was high but this was matched by a high death rate; both these rates were well above 40 per thousand till the 1940s and the fertility rate above 6 per woman.

This phase could have come to an end by the 1930s but for the Second World War. The population growth rate had increased sharply during the 1930s, reaching a decadal average of 1.7 percent at the time of the 1941 census. The war policy of the British government led to one of the most devastating famines in the country's history in 1943. It killed off a large section of the population such that the population growth rate in the 1940s plummeted to a level lower than that of the nineteenth century.

Chart 3: Saving, Investment, Dependency and Growth Rates

*GDI, GDS and GDP are Gross Domestic Investment, Saving and Product respectively.

Source: BBS, UN

It jumped more than four-fold during the next decade to 2.25 percent per annum (1961 census), and increased further to 2.53 percent annual average during the period till the 1974 census. Since then, population growth decelerated continuously and stood at 1.43 percent per year by the time of the 2011 census.

The demographic trend of Bangladesh suggests that the first phase of demographic transition lasted until about the 1920s after which the second phase kicked-in albeit there was a reversal in the 1940s. The birth rate started falling fairly rapidly from the 1990s which helped to reduce the population growth rate. This might be regarded as the beginning of the third phase.

The death rate fell to a very low trough by the end of the last millennium, but the birth rate was still relatively high. A projection by the UN shows that by another nine years (2025) Bangladesh will have added 18 million people to the total. The population is projected to increase to its maximum of 2027 million in 2055 whence it will decline to 1695 million by the end of the century.

Demographic dividend could accrue when the proportion of the working age population in the total population starts increasing or conversely when the proportion of the non-working population, i.e. dependency ratio, starts falling. According to UN estimates, the dependency ratio, defined as the number of people in the age cohorts 0-14 and above 65 (believed to be non-working) per 100 working age people, was at its peak in the 1970s. Since then, it declined continuously and by 2015 it decreased by 44 percent (from 93 to 52).

Although falling from the 1970s, the dependency ratio did not fall significantly below its 1955 level until the mid-1990s. Thus it seems plausible to assume that the window of opportunity to reap demographic dividend cracked open at that time and has been widening since then. Since the dependency ratio is likely to continue to decline till 2040 before rising again, it is possible that the dividend period could last another two to three decades.

It is sometimes overlooked that the demographic dividend or bonus is not automatic but, requires an environment suitable for its generation. The dividend arises only because the number of working people increases disproportionately to other age cohorts. However, an increase in the number of working-age people does not necessarily imply a corresponding increase in the number of working people. The conversion of working-age people to actually working people requires considerable investment in health and education and additional capital in order to create new employment opportunities. If a country fails to do so, working-age people will swell the ranks of the unemployed and underemployed.

Since the unemployed working-age people and the vast pool of the under-employed earn less than what they consume, they do not reduce dependency in the true sense since they have to be supported by others. Unemployment and underemployment of working-age people is a huge economic waste and a personal tragedy by themselves, but additionally high unemployment and underemployment could engender frustration and anger to the extent that it could fuel destructive social and political unrest with large-scale economic losses.

In this event, the demographic bonus could turn into a demographic curse, or indeed a population bomb. Hence, a country going through a demographic transition must plan ahead to ensure that there are adequate opportunities for working-age people when they enter the labour market.

How did the Bangladesh economy perform during the demographic transition? Some relevant data are available for only a few decades. It is difficult to compare the national income data of earlier decades with the data of later decades since the methodology, accuracy and scope of data have changed greatly over time. However, there is little doubt that the saving ratio was very low all through the 1960s, 70s, and 80s.

The investment ratio was higher than the saving ratio, though low in absolute magnitude, due to the inflow of considerable foreign aid and also remittances in the later decades. Both saving and investment ratios gathered momentum in the 1990s and continued to increase (Chart 3). The rising investment ratio played a crucial part in raising the economic growth rate over the last quarter of a century.

The trends of these variables suggest that the performance of the Bangladesh economy was consistent with the demographic transition model. The saving ratio was low when the dependency ratio was high, and it increased steadily as the dependency ratio started declining in the 1990s. Investment also increased with the increase in savings, permitting higher economic growth, which increased from about five percent in the 1990s to more than six percent in the new millennium.

It seems plausible to assume that part of this higher growth of the new millennium was due to the changes in the age-structure during this time. The pertinent question then is not whether Bangladesh reaped demographic dividend, but whether it exploited the window of opportunity as well as it should have.

The East Asian countries are known to have best utilized the demographic opportunity which enabled them to have high economic growth for a considerable period of time. According to a study, the first dividend achieved by the East and South-East Asian countries was six times greater than that achieved by the South Asian countries (0.1 against 0.6 percent per annum).

In order to achieve a high economic growth rate the East and South-East Asian countries invested heavily in human resource development, in particular education and health. Government expenditures on education and health (as percent of GDP) in most of these countries were considerably higher than what was spent in Bangladesh and South Asia (Tables 1 and 2). Investment in human capital together with supporting investment in physical infrastructure and capital deepening was instrumental in raising the productivity of workers which was the bedrock of sustained economic growth in the East and South-East Asian countries.

The failure to adequately support human and physical capital development in Bangladesh has led to a huge pool of unemployed and under-employed working age people as well as low productivity of the employed workforce. This has not only resulted in late and reduced accrual of the first dividend, but also likely compromised the prospect of a high second demographic dividend in future. Our growth rate could be significantly less than the potential over the long term depriving a large section of the population of the freedom and comfort of a higher standard of living.

It is possible to improve upon the situation since the country is likely to be in the first dividend phase for another 2-3 decades. If the government takes a keener interest in human resource development and significantly raises budget allocation for this sector, then with supportive policies, including substantial investments in creating adequate number of decent jobs, the nation could still recoup part of the loss. It will be then better prepared for the time when the rise in aged population will force the dependency ratio up. The current trend of low investment in human resource needs to be reversed.