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Reaping demographic dividend

BARKAT-E-KHUDA dnt/M.G. Quibria
POLICYMAKERS and social scientists optimistically discuss the demographic dividend as if the benefits are imminent and within grasp. However, many developing countries, including Bangladesh, will not be able to achieve this economic benefit without appropriate policies and substantial investments in a number of areas. Indeed, as recent development history suggests, the demographic dividend is wasted if such policies and investments are not in place.
Demographic dividend is the surge in economic growth that may result from a decline in a country's mortality and fertility and the subsequent change in the age structure of the population. This decline is often accompanied by an increase in average life expectancy, which increases the size of the working-age population.
Economists have identified four distinct ways the benefits of demographic dividend can be achieved. The first is the increased labour supply; however, the magnitude of this benefit will depend on the ability of the economy to absorb and productively employ the additional workers. The second is through increase in savings (resulting from reduced dependency ratio) which, if and when invested, leads to higher productivity. The third is human capital. Fertility declines result in reduced economic pressures at home, thereby enabling parents to invest more in children's health and education, leading to healthy and educated labour force. The fourth is the increase in domestic demand resulting from the rise in per capita income and the reduced dependency ratio.
Some of the most compelling evidence of the demographic dividend comes from East Asian countries. Those countries benefitted from the knowledge, experience, and technology of other countries which had already passed through the demographic transition. The Asian Tigers were able to take advantage of the demographic dividend because of their appropriate social and economic policies - including openness to trade and foreign investments, and flexible labour markets - and substantial and continued investments in human capital, including education and public health. About one-third of economic growth between 1965 and 1990 in the East Asian countries is attributed to demographic dividends.
The critical questions facing Bangladesh are: where will productive jobs, vital for economic growth, come from? What have been the sources of growth in Bangladesh, and how do they compare with other fast growing Asian economies? Also, will Bangladesh be able to make adequate investments in education and health to ensure a healthy, skilled and productive workforce? Currently, Bangladesh spends around $16 per capita (two-thirds of this comes from out-of-pocket spending), which is less than one-third based on the latest WHO estimate.
In Bangladesh, between 2000 and 2010, the total working age population and the total labour force each increased by about 2 million annually. However, total employment increased by only 1.5 million annually. Most of the increase is in the informal sector due to relatively limited number of jobs created in the formal sector. The employment structure of Bangladesh is characterised by
the predominance of the low-productivity, low-wage, informal sector (absorbing around 80% of the total labour force), which cannot contribute much to poverty reduction. Like in many developing countries, the official statistics on the unemployment rate is quite low (4.5%); however, it conceals the considerable under-employment (17-34%), which is of greater concern. The situation is even more precarious when it comes to the case of employment of college and university graduates. If the economy cannot significantly enhance its employment generating capacity, the ranks of unempoyed and underemployed will soon reach alarming levels.
Recent empirical growth studies suggest that, in general, for fast-growing Asian countries, capital deepening and improvements in production efficiency were the two main sources of growth. Indonesia and Korea relied much more on capital deepening. Bangladesh did not have as much growth in capital per worker as these countries. Also, the low skill level and the associated low labour productivity of Bangladeshi workers act as impediments in the process of economic growth of the country.
A sizeable increase in production-efficiency has been achieved in several middle-income countries on account of workers migrating from low-productivity sectors like agriculture to high-productivity sectors like manufacturing. However, the situation is not similar in Bangladesh, a low-
income country. Agriculture continues to operate at low productivity, though employing around one-half of the country's labour force, while contributing only around one-fifth to the GDP. In contrast, high productivity financial, information and communication, and engineering services employ only a tiny share of the labour force.
Turning next to industry, we see greater differences. Bangladesh's share of employment in industry is below that of most other Asian developing economies. Also, its share of value added in industry has not kept pace with its share of employment. In contrast, in Indonesia the share of value added has kept increasing as the share of employment has increased. Of great concern is that while workers are being added to industry in Bangladesh, albeit relatively small numbers, the productivity of the jobs continues to be low. While the share of employment in services has been growing, the share of value added is lower than in most other Asian developing economies.
However, the crux of the problem is that while industry and services are creating jobs, these have been relatively low-productivity jobs. As a result, per capita income in Bangladesh has not benefited as much from inter-sectoral migration of workers out of agriculture as other Asian countries have.This begs the question: How many workers will industry and services sectors in Bangladesh have to absorb in the next decade? Bangladesh's challenge is to create the conditions for faster growth of productive jobs in manufacturing and in services in the formal sector. Otherwise, the demographic dividend could turn into a huge demographic burden.
The writers are, respectively, Professor of Economics at University of Dhaka, and Visiting Senior Fulbright Fellow at Bangladesh Institute of Development Studies, Dhaka.