Commentary

Poor States Reap Big Demographic Dividend

Poor states reap big demographic dividend Many have celebrated the census revelation that Indias population increased only 17.64% in the last decade, down from 21.54% the previous decade. Yet, the best news relates to kids aged 0-6.Their numbers have actually fallen 3.08%.

Fewer children translate into a demographic dividend that will send per capita income booming in the coming decades. The biggest dividend came in Uttar Pradesh, where the share of the 0-6 age group in the population declined 4.1%.Substantial decreases were recorded in Rajasthan (3.5%), Madhya Pradesh (3.4%), Chhattisgarh (3.1%),and Bihar (2.3%).

What exactly is a demographic dividend When economic development causes mortality to fall, parents have fewer children. Fewer children means the proportion of workers rises, and of dependents (children and old folk) falls. This raises income per head.

Second, countries can divert funds from spending on children to investing in physical capital, job training, and technological progress. Third, declining fertility means more women can join the workforce, reducing the proportion of dependents further. Fourth, the working years 15-64 are prime years for savings, so more workers means more savings, which then fund more investment.

An IMF working paper by Shekhar Aiyar and Ashoka Mody (The Demographic Dividend: Evidence from the Indian States) suggests that up to 40% of higher GDP since the 1980s may be due to the demographic dividend, rather than economic reform or other factors. It calculates that this dividend boosted GDP growth by 1.46% in the 1980s, one reason for the sharp acceleration in that decade although economic reforms were hesitant and very modest. The dividend was 1.34% in the 1990s. The paper predicts it will rise to 1.74% in the 2000s. Record GDP growth and preliminary census data suggest that the prediction may be vindicated. The authors estimate that the dividend will boost all-India growth 1.98% in the 2010s and 2.04% in the 2020s, before tapering off in the 2030s. Incomes per head will tend to rise faster in the poor states.

Most economists say an additional workforce is useless if it is not educated and skilled. Surprisingly, Aiyar and Mody find that government social spending is not statistically significant, while development spending is. Perhaps this is because private education and corporate training programmes are significantly improving skills, something not captured by the researchers.

The authors say the ratio of people of working age 15-60 rose sharply from 53.7% in 1961 to 62.1% in 2001 in three leading states — Tamil Nadu,Karnataka and Gujarat. But in three lagging states — UP, Bihar, Madhya Pradesh the ratio hardly moved,from 53.1% to 53.4%. Thats an important but rarely noticed reason why the leading states accelerated in GDP while the laggards did not. However, falling numbers of children in the laggard states (in north and central India) now mean that they are about to reap the demographic dividend already reaped by southern and western states. This should help reduce regional inequalities.

Last week i wrote, quite incorrectly, that New Delhis social spending had risen from 1.28% of GDP in 1992-93 to 7.27% of GDP in 2008-09. In fact, the latter figure includes spending by the states, and on not just education and health but other welfare services. This combined figure rose from 5.59% of GDP to 7.27% between 2005-06 and 2008-09. Some critics say the governments education spending barely kept pace with GDP over the last two decades. Since GDP itself grew at a record rate in those decades, education spending must have followed suit.

Forget government spending, says Parth Shah of the Centre for Civil Society, the big change has been an explosion in private education spending. Economic reform has increased incomes, so even poor people can afford to switch their children from terrible government schools and colleges to somewhat better private ones. Indicus Analytics, a research firm, estimates that private spending on education, tuition, books, newspapers and journals was 1.2% of GDP in 2009-10.This could be an important reason why literacy rose in the last decade, notably in Bihar (up 16.82 percentage points), UP (11.45 points), Jharkhand (16.07 points) and Orissa (10.37 points).

Moreover,poor states in the last decade hired huge numbers of teachers and parateachers on contract. Bihar alone hired two lakh contract teachers. They were paid one fifth or less than regular teachers, yet researcher Karthik Muralidharan found they improved learning outcomes, boosting the educational bang per fiscal buck.

The demographic dividend will steadily reduce the number of schoolchildren in the next three decades, easing the teacher shortage and reducing class sizes. But thats no excuse for avoiding radical reforms to improve teacher accountability and performance in government schools.

Swaminathan S. Anklesaria Aiyar is a research fellow at the Cato Institute’s Center for Global Liberty and Prosperity.