How to Leverage the Demographic Dividend and Manage Demographic Deficit ?

What is Demographic Dividend and Demographic Deficit ?

We often hear the terms Demographic Dividend and Demographic Deficit being written about and spoken about by experts and economists. These terms are mentioned in the context of how economies in the future can manage either the rising percentage of youth among their population or deal with the ageing population. So, what exactly does one mean by demographic dividend and demographic deficit?.

Demographic dividend refers to the trend or phenomenon wherein a large percentage of the population comprises youth and hence, such countries that have youthful populations can indeed grow since there would be many workers in the workforce for the jobs being created. On the other hand, demographic deficit refers to the trend wherein a majority of the population is old or retired and hence, such economies find it hard to staff their jobs with workers in addition to being burdened with pensions and social security as well as rising healthcare costs for the elderly.

Demographic Dividend and Economic Growth

How does a demographic dividend translate into higher economic growth rates and how does a demographic deficit lead to lower growth rates? As mentioned earlier, whenever there are more youth in the workforce, they can be absorbed into the jobs being created in addition to being hired at competitive rates or even lower wages which leads to increased business volumes and greater profitability which in turn leads to faster economic growth.

For instance, consider the case of India where more than 50 percent of the population is under 25. Considering the huge numbers of working age people in the workforce, domestic and foreign companies can setup their factories and establishments here as they would be guaranteed workers to fill their jobs. In addition, with so many youth who would be contributing to the economy instead of living off welfare, the government can confidently invite domestic and foreign businesses to help in the creation of jobs and faster economic growth.

Demographic Deficit and Stagnation

On the other hand, when economies are comprised of more numbers of elderly, they tend to spend more on pensions, retirement benefits, healthcare costs, as well as are unable to find enough workers for the jobs being created. The best example of this is Japan where the graying of the workforce has meant that economic growth has stagnated in the last few decades as the “replacement rate” and the “replenishment rate” rate wherein the number of youth replacing the number of retired workers has been falling steadily leading to slower economic growth.

Indeed, even China which enjoyed positive demographics until recently has been facing and would also face this problem in the future since its One Child Policy has effectively ensured that there would be lesser youth in the workforce. Indeed, one of the reasons for its recent lifting of this policy is because it does not want to face a future where the elderly are more than the youth in the way in which Japan is facing now.

Demographic Dividend can Turn to Demographic Nightmare

Having said that, it must also be noted that merely having more youth in the workforce is no guarantee for higher and faster economic growth. Indeed, for countries such as India to reap the advantages of the demographic dividend, they must be first create enough jobs and then, also ensure that the youth are “employable”.

In other words, while the supply of workers is guaranteed, the demand for such workers has to be created as well.

In addition, it is not enough for Millions of youth to apply for jobs if they are not suitable for the jobs.

In other words, not only jobs have to be created but also the youth must have enough skills to fill those jobs. In India, research has shown that nearly 70 percent of all job applicants for positions do not have the professional, communicational, and interpersonal skills required for the jobs. Thus, having a lot of applicants for the jobs does not automatically translate into the jobs being filled.

Moreover, if the government in unable to create jobs, the unemployed youth might cause social unrest and social chaos as they would be left without a source of income and hence, might take to the deviant ways and end up causing more trouble than contributing to the economy. Indeed, this is the reason why many experts are cautious about India having to ensure the twin objectives of job creation as well as skilling the workforce. This is the reason why the “Make in India” initiative and the National Skilling Policy that were announced by the current government need all the encouragement they can to ensure that India reaps the advantages of the Demographic Dividend.

Partnerships of the Future

Lastly, there is also the solution of countries with demographic dividend and demographic deficit coming together to partner with each other. The recent case of Japan and India cooperating on the economic front has to be seen in this context. Since India has more youth and Japan has the capital and the expertise but not enough youth, this partnership can be a win-win situation for both wherein Japan invests in India and the latter creates jobs for Japanese companies to grow and prosper.

Thus, it is indeed the case that in the future, we would be seeing more of such kinds of partnerships between nations with youthful populations and nations with older populations that have the money but not the workers and the former which have the workers but not the money.