Laloo Yadav’s demographic dividend

Laloo Yadav, who as Chief Minister presided over 15 years of economic and social stagnation in Bihar, is suddenly being lionised as a management guru. As Railway Minister, has transformed Railway finances and performance.

The middle class remains shocked that Laloo has fathered nine children, worsening the population explosion (viewed by this class as one of India’s top problems). Yet economists are now unanimous that rising population is giving India a “demographic dividend” that will soon help it grow faster than China. Seen in this light, Laloo Yadav’s contribution to the demographic dividend may outstrip his contribution to the Railways.

To try and enforce a two-child norm, many states have enacted laws disqualifying people with more than two children from getting Government jobs or contesting panchayat elections. I view this as a violation of civil rights as well as economic sense. But the Supreme Court has upheld these laws, in neo-Malthusian ignorance of the demographic dividend.

Some readers wonder how the much-reviled population explosion could possibly morph into a beneficial demographic dividend. Let me explain.

Developing countries go through three demographic phases. In phase 1, improved income and health slash the infant mortality rate, and a baby boom (or population explosion) ensues. It worsens the dependency ratio—the number of dependents per income earner. This creates a Malthusian scare about population outstripping incomes. Politicians call for draconian steps to curb the population.

In phase 2, births plummet as incomes and contraception improve. The baby boomers, once regarded as a population curse, grow up to create an unprecedentedly large army of income-earners, boosting GDP. The dependency ratio improves dramatically: there are relatively more hands to earn and fewer mouths to feed.
This is the first demographic dividend. It is estimated to have improved per capita income in Latin America and East Asia by 0.5-0.6% annually between 1970 and 2000 (meaning billions of dollars per year).

A second demographic dividend follows. With improved health, baby boomers expect to live long lives, and so save large sums for retirement. This higher saving finances additional investment and accelerates GDP growth. This is the second dividend.

The size of the two dividends depends on economic policies. Good policies accelerate the virtuous circle of incomes, savings and growth, yielding huge dividends. But poor policies may mean economic stagnation and no dividends.
In East and South-east Asia (which grew very fast between 1970 and 2000), economists Ronald Lee and Andrew Mason estimate that a whopping 44% of the increase in per capita income arose from demographic dividends.

In phase 3 of a country’s development, the dividend starts disappearing. A growing desire for small families means that the baby boom is followed by a baby bust. When the baby-boomers begin to retire, the baby-bust generation does not produce enough replacements. The proportion of non-earning old people rises sharply, and tends to reduce income per head.

China will reach this phase in a decade or so. It went through Phase 1 in the 1950s and 1960s. Then, after Mao decreed a one-child policy, it enjoyed a handsome demographic dividend from the 1970s onward. But the baby bust caused by the one-child policy means that in a decade, the proportion of workers will fall and of retirees will rise sharply. This will reduce GDP growth. China’s population will peak around 2030 and then shrink.

India entered Phase 1 in the 1950s, when population growth accelerated to 2% annually from 1% earlier. Phase 2 began in the late 1980s: population growth began slowing. This is now down to 1.5% annually, and is still falling. India’s economic policies have improved just at the right time, boosting the two demographic dividends. That is an important but much-ignored reason why Indian GDP growth has soared to record heights in recent few years.

In many countries, the demographic dividend lasted four or five decades. In India’s case it could last much longer, maybe a century. Why? Because, while much of India has taken to contraception and the birth rate have to fallen below replacement level in states like Kerala and Tamil Nadu, it remains high in the backward states of Bihar and Uttar Pradesh. China’s population will stop growing by 2030, and so will that of some Indian states, but India’s overall population is projected to keep rising till 2100 or longer, thanks to UP and Bihar.

Many Indians regard this as a curse. But another way of looking at it is that Uttar Pradesh and Bihar will keep giving India a demographic dividend long after other states have ceased to. China and other countries will fall short of working-age people and desperately seek young immigrants from abroad. But in India, Uttar Pradesh and Bihar will produce more than enough workers for all states.

So, don’t laugh at Lalloo Yadav for having nine children. If each of his children in turn has nine kids, that will greatly increase India’s demographic dividend. It is said that God works in mysterious ways. So does Laloo.

What do you think?