Wednesday, November 10, 2010

India's Secret Weapon in its Economic Race with China

The eclipse of the G7 by the G20 puts the spotlight more than ever on India and China as the economic superpowers of the future. So far, China has the lead, but India has a secret weapon that will carry it into first place by the end of the century. What exactly? Widely spoken English? That helps India's service sector, but it is not decisive. Democracy? True, democracies outperform authoritarian regimes on average. It is no coincidence that 17 of the G20 are functioning democracies, but China is hanging in there as an exception to the rule. No, the real secret weapon that will carry India into the lead is demographics.

It is not just that sometime around 2030, India's total population will become larger than China's. Total population is an ambiguous factor in prosperity, as those of us know who were raised on the intellectual sparring of Julian Simon and Paul Ehrlich. On the one hand, people are a country's most valuable resource; on the other hand, badly managed population growth can overtax other resources and leave a country populous but impoverished. Rather than total population, it is the inner dynamics of population growth, in particular, the evolution of the dependency ratio, that will make the difference for India and China.

The total dependency ratio is the ratio of the nonworking population, both children and the elderly, to the working age population. Low-income countries with fast population growth have high dependency ratios because they have lots of children. Rich countries with slow population growth have high dependency ratios because they have many retirees. In between these two states, countries go through a Goldilocks period when the working age population has neither too many children nor too many parents to support. The dependency ratio reaches a minimum, and growth potential reaches a maximum. The following chart shows the dynamics of the dependency ratio for India and China, with the United States included for comparison.



As the chart shows, India is just entering its Goldilocks period while China, like the United States, is already leaving. Furthermore, The dip in the Indian chart is more gradual and longer-lasting than the corresponding dip for China. For the next several decades, China will be tacking into the wind while India still has its spinnaker up. Chinese economic growth will slow, while India's, assuming a supportive policy environment, will edge past it.

What explains the difference in population dynamics? The answer can be found in the evolution of the total fertility rate in the two countries. (Total fertility is a measure of the number of children born to a representative woman over her lifetime.) China's total fertility rate dropped from almost six in 1965-70 to under three just a decade later. The famous one-child policy, introduced in 1978, contributed to the decline, but it was already well underway before that. By 1990-95, China's fertility rate had dropped below the replacement mark of about 2.1. In India, by contrast, the decrease in total fertility from six to three took 30 years to accomplish, and fertility is not expected to drop to the replacement rate until sometime in the coming decade. To switch metaphors, China slammed on the brakes, leaving big skid marks, while India made a more prudent deceleration. Furthermore, as Adam Wolfe, among others, has pointed out, China's official data may understate the true rate of decline in fertility, and therefore understate the future demographic drag on the country's growth.

There is nothing inherently wrong with slow, or even negative, population growth, but the transition to it is not easy to manage. The United States is not doing a particularly good job, as we know from the wrenching debate over the impact of social security and Medicare on the budget deficit. China is not doing well either. It has not yet found a social safety net to replace the long-vanished "iron rice bowl" of the Maoist era, and social insecurity, in turn, contributes to other imbalances in its economy. India, too, is not not exactly a Swedish-style paradise for the young and the old, but at least it has more time to get its act together.

In short, India, by all indications, is likely to be the world's largest economy at the end of the 21st century. It appears that President Obama knew what he was doing when he endorsed India for a permanent seat on the UN security council during his recent South Asia visit. He wasn't just maneuvering to put together a coalition to contain China, as some commentators suggested. Instead, he was backing the probable winner in the global economic race.

Follow this link to view or download a short slide show with additional demographic data for India and China.

7 comments:

  1. India and China have been in news for their economic race for the past many years now. Both the Asian countries are seen as global financial powers, specially after how the two countries are performing given the global economic crisis. Although China is receiving tough competition from India, I still feel it might take some more years to surpass China in terms of financial power.
    Chinese economic growth

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  2. Unfortunnately not.
    It appears you have not read the article:
    "Doubts over India's 'teeming millions' advantage"
    It says in pertinent part:
    See:
    "About 50% of all Indian children are undernourished, a large percentage of them born with protein deficiency (which affects brain development and learning capacity, among other things). This is hardly the ideal foundation for a productive workforce, as the likelihood of a malnourished child growing up to be an able adult is rather dim.

    There is also the question of whether the population has the skills and knowledge to take on India's future work. Literacy has improved dramatically over the years - just 14% of the population was literate in 1947 versus about 64.8% today - but many who are classified as literate can barely read or write. And 40% of those who enroll in primary schools drop out by age 10. The curriculum in the schools, especially the government-run ones, does not prepare the child for the domestic job market, let alone the global one. The huge "workforce" might not be qualified to do the work.

    Moreover, India's rich and educated classes are preferring to have small families, so the additions to the population are coming largely from the poor, illiterate sections in society."
    http://www.atimes.com/atimes/South_Asia/HE05Df01.html
    Doubts over India's 'teeming millions' advantage

    Us has as similar demographic burden. It's young will from the minority-majority generation and over 50% of these are high school drop outs. There is no action today to substantially put an end to this. Meanwhile India is not doing much to change its paradigm either.

    I also do not get why such a bruhaha about US debt of around 11% of GDP when India has around 78% of GDP (about twice the rate of emerging markets). If you want to consider why, consider the fact that tax evading is the norm in India.

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  3. I generally do not like anonymous comments. How can we evaluate the opinion of someone who does not reveal who they are? Why would someone not even bother to make up a pseudonym?

    However, the Asia Times article cited by this anonymous is worth looking at. It contains some important considerations that fall under the heading that I, probably too briefly, tried to express in the phrase "assuming a supportive policy environment." For example, the AT says "There is a danger of India squandering its demographic edge if it does not act rapidly to invest in human capital." Yes. Very true. The favorable demographic situation in India is an opportunity for development, not a guarantee. I hope it is an opportunity that is not squandered.

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  4. Where does Japan fall in on the dependency ratio chart? Is a higher dependency ratio the cause of Japan's decade old economic problem?

    Mark

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  5. Excuse me.

    Yes, dependency ratios are all well and good and you are to be commended on mentioning that children count as dependents as well as retirees.

    But.

    Who cares what the dependency ratio is if everyone is starving? India is set for collapse. There are about 1.3 billion people on land about 1/3 of either the United States or China, and still growing rapidly. Indian billionaires burble about how wonderful cheap labor is, and push to maximize population growth, but when the water and food runs out, it will not end well.

    Remember: when Mao took power he demanded that the Chinese have massive numbers of children. The resulting poverty was so severe that China only survived through the draconian one-family one-child policy. India is past that point. They are screwed. There are over 500 million chronically malnourished people in India, and the harvests are running out, and imports of food are getting more expensive, and the water is running out, and people are still having five kids a pop starting at age 14.

    China's biggest problem will be keeping all those starving Indians from flooding into their country. I wish the Chinese luck.

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  6. Anonymous--

    I am sorry to say that your data is very bad. You should check your data before you make a comment.

    1. India's population is about 1.1 billion, not 1.3 billion

    2. India's area of agricultural land is 91% of the US, not 1/3. It is about 60% larger than China's area of agricultural land.

    3. People in India are not having "five kids a pop" these days. The current number is 2.6 children per couple, only a little above the replacement rate, and projected to fall to the replacement rate within 10 years, despite any efforts of billionaires to "maximize population growth" as you claim.

    Fact: China is the country with the big demographic problem. The delayed effect of the one child policy will be a massive increase in the dependent elderly population supported by very few young workers. The global slowdown in population growth is natural and a good thing; China's forced slowdown solved a short-term problem at the expense of creating a long-term problem.

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  7. Well we shall see. The official statistics in India are extremely suspect. There is, I think, a lot going on there that is not being reported accurately... Factor in demographic momentum and immigration from Bangladesh - which is likely also greatly under-reported - and 5 kids a pop demographic equivalent may not be that far off the mark... Perhaps the population growth in India is starting to slow down, but too late. Remember: a slowing of population growth only frees up resources for more investment etc. when it is NOT due to lack of food. If the population of places like India is stabilizing only because they can't physically support more children, or because women are too malnourished to carry a pregnancy to term, i.e., because they are hitting a ceiling, that is a bad thing indeed.

    If in 20 years, India is doing great, I will admit that I missed the point.

    But I suspect that the opposite will happen, and that India will collapse, not all at once that's usually in the movies, but slowly and erratically into misery and corruption, the central government will lose authority, and the competitive advantages of all that cheap labor will be more than offset by lack of political stability, crime, etc.

    I suspect there is a good chance that both of us will be around in 20 years. Let's see how this worked out.

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