The demographic outlook for the BRICs (Brazil, Russia, India and China) varies greatly. The differences in the projected change in the working-age population are very significant in both absolute and relative terms. This will impact not only economic growth prospects, but also savings and investment behaviour and potentially financial market growth prospects. Brazil and India are demographically in a substantially more favourable position than China and Russia. With the exception of India, demographic developments in the BRICs are becoming, or will soon become, a net negative in terms of per-capita growth. According to Deutsche Bank, the working-age population in India will increase by a stunning 240m (equivalent to four times the total population of the UK) over the next 20 years, compared with 10m in China.
|Stranded train passengers wait outside a railway station in China's southern city of Guangzhou on Friday, Feb 01, 2008. Millions of Chinese were stranded by snow ahead of the Chinese Lunar New Year in 2008 - - Photo: Xinhua|
In December 2009, Finfacts reported that among the large economies in the world, India will continue to have the best demographic trend as measured in terms of age dependency (ratio of old and children: people under 15 or over 65 to working age population - - people 15-64). However, while a positive demographic trend may be a necessary condition for strong growth, it is an insufficient one - - in recent times, the Irish have discovered that the sunny horizon painted by a number of economists who bought into the notion of the primacy of a "demographic dividend," was a prospectus for visionless politicians, provided by fools or individuals in search of a "big idea" to grab public attention.
Meanwhile, Morgan Stanley economists said that while the quality of India's current workforce - - though improving - - it is still clearly lagging, with 34% of the adult population classed as illiterate (as of 2007). However, they believe that the quality mix of the fresh additions to the workforce over the next 10 years is likely to be dramatically different. Currently, they estimate that only about 7-9% of the population moving into the 15-year+ age bracket is illiterate. This ratio could dip to well below 5% over the next few years. The economists say that with the increased focus of the government and private sector in providing higher education facilities, and the rising young population, both India and China have already begun to outpace the US, Brazil and Russia. The out-turn of the tertiary graduates in China has been much larger than India due to the significantly larger delta in population in the 20-24 age bracket in China compared with India.
Last week in China, migrant workers returned to Guangdong province, in China's industrial heartland, after the Lunar Year holidays. The Pearl River delta region north of Hong Kong, which accounts for a third of China’s exports and would be one of the world’s 10 largest exporters if it were a country, hosts an estimated 20m migrant workers. This year with the recovery gathering pace, reports from the region suggest that manufacturing companies are scrambling for staff. However, with other regions of China developing, the grim life of the migrant, many on very low wages with one week free every year to return home to family who believe they are having a great life in Guangdong, is increasingly less alluring.
|A recruiter from a clothing factory in Ruibao town, Guangzhou, holds up a poster with a list of job vacancies on Wednesday, Feb 24, 2010. Photo: China Daily
The China Daily newspaper reported last Thursday that nearly one in 12 migrant workers were not expected to show up in Guangdong province, after the holiday break, according to survey of leading employers. In comparison, one in 20 did not return last year.
There are an estimated 150,000 vacancies in the provincial capital of Guangzhou alone, compared with virtually zero last year during the depth of the global economic crisis, according to a survey by the Guangzhou Human Resource Market Service Center.
The New York Times reports that temp agencies in Guangzhou raised their rate for factory workers last week to $1.17 an hour, from 95 cents an hour before the new year holiday. The rate was 80 cents an hour two years ago, before the global financial crisis temporarily depressed wages and demand. Personnel managers say they are also abandoning the informal tradition of not hiring anyone over 35 - - they say they are now hiring workers up to 40 years old, and sometimes older, despite concerns about whether they can keep up week after week with the rapid pace of Chinese assembly lines.
Many workers have to slave 70-80 hours per week to earn a reasonable wage.
China infrastructural development is also promoting more balanced regional development.
Last December, China unveiled the world’s fastest passenger train service between Guangzhou and the central city of Wuhan, covering 1,100km in just three hours. The Harmony Express line has also cut travel time between Guangzhou and Shaoguan, another developing industrial area in Guangdong’s remote mountain region, to about 40 minutes.
In the US, the recovery of manufacturing has been one of the few bright stars of the recovery and demographics there are also a problem - - in the loss of skilled workers - - even though the sector has lost 2m jobs in recent years. According to the Financial Times, about 19 per cent of US manufacturing workers are 54 and older, roughly the same as for the workforce as a whole, according to the Bureau of Labor Statistics. However, only 7 per cent of manufacturing workers are under 25 years old - - half that of the wider workforce. German engineering giant, Siemens, has about 600 vacancies for engineers in the US.
Deutsche Bank economist Markus Jaeger says the working-age population in India will increase by a stunning 240m (equivalent to four times the total population of the UK) over the next two decades, compared with 20m in Brazil. The working-age population in Russia, by contrast, will decline sharply by almost 20m, according to UN projections. China’s working-age population will peak in 2015 and then gradually decline. By 2030 it will be merely 10m larger than today - - a negligible change given a total population of 1.35-1.45bn. By 2030, India will also have overtaken China as the world’s most populous country.
|Source: Deutsche Bank Research
Jaeger says in the “population dividend” model, it is the dependency ratio (that is, dependent population relative to the working-age population) rather than the absolute increase (or decrease) in the size of the working-age population that is the economically most relevant variable. If the dependency ratio declines, i.e. the working-age population as a share of the total population increases, per-capita growth accelerates. By the same token, a rising dependency ratio is a “drag” on growth. He says interestingly, empirical research suggests that the drag stemming from a rise in the dependency ratio due to rising old-age dependency seems to be somewhat smaller than the “dividend” stemming from an equivalent decline in the dependency ratio due to falling youth dependency.
The economist says it would be wrong to think of this process too mechanistically, however. To what extent (per-capita) economic growth rises also depends - - amongst other things - - on the capacity of the economy to absorb the rapid increase in the working-age population. China, like the East Asian tigers before, has been very successful in this respect, absorbing a rapidly increasing labour force into a productive, export-oriented manufacturing sector. By contrast, Brazil’s inward-oriented economic strategy during the 1960s and 1970s made it more difficult to generate “East-Asian” per-capita growth, as many workers ended up in the low-productivity urban service rather than in the relatively more productive manufacturing sector. The existence of a relatively large, capital-intensive commodity sector did not help, either.
In the “population dividend” framework, changing demographics impact growth through two main channels: labour input and savings. First, per-capita economic growth accelerates on account of rising per-capita labour inputs. Naturally, labour input is determined not only by the share of the working-age population, but also by labour participation rates and hours worked per worker. However, if the working-age population increases as a share of the total population, per-capita labour input increases. If the working -age population declines as a share of the total population, the reverse is true. Second, as the youth dependency “burden” turns into a young adult “glut”, the savings ratio increases, underpinning a savings and potentially an investment boom. Again, to what extent this potential is realized will depend on several other factors (e.g. inflation, economic stability). Empirical support for this relationship is mixed, at best. However, more complex models such as the “variable rate-of-growth effect” model, which includes economic growth as an additional variable, has received a fair degree of support. Jaeger says significantly, Bloom-Williamson (1998) estimate that demographic factors may account for as much as 1/3 to 1/2 of the East Asian economic “miracle” during 1965-90.
|Source: Deutsche Bank Research
The demographic developments in the BRICs over the next 10, 20, 30 years will vary greatly. This will impact not only economic growth prospects, but also savings and investment behaviour and potentially - - if somewhat difficult to quantify - - financial market growth prospects. Brazil and India are demographically in a substantially more favourable position than China and Russia. Brazil’s “demographic window” (defined here, non-technically, as a falling dependency ratio) will close around 2020-25, while in China and Russia it is closing right now. India, by contrast, will enjoy a very favourable demographic momentum for another three decades.
Markus Jaeger says naturally, economic policies can help buffer the negative demographic impact on per-capita (!) growth by, for example, encouraging urbanisation or greater labour participation. This will be especially relevant in relatively rural China and India. More importantly, demographic changes are not the only or even the most important factor determining economic growth. The BRIC economies’ relatively limited capital stock (per capita) and distance from the “technological frontier” mean that all four economies enjoy significant, if varying, “catch-up” potential. Thus, the demographically challenged among the BRICs, unlike Japan, have significant scope to offset the intensifying demographic “drag” by way of technological progress and capital accumulation - - though the latter may be somewhat constrained by downward pressure on savings rates. The fact remains that demographic developments in several BRICs are about to become a net negative. Economists and financial market analysts would be well-advised not to disregard the sharply differing demographic outlook in the BRICs.