Demographic Dividend, Human Capital and Accelerated Economic Growth: Lessons from Asian countries and its implications for Eritrea

asmarahutBy Teweldeberhan Gebre

Part III

6. Accelerated economic growth: East Asian and ‘Asian Tigers’ countries experience

As discussed elsewhere in part II there are two caveats of demographic dividend: first, its benefits are not automatic and second, it is time bounded and occurs once in the history of nations (Mason, 2002, Bloom, et al., 2003). Demographic dividend is greatly responsive to flexible labor markets and prudent macroeconomic policy environment. An increasing proportion of the economically active labor force can be absorbed and turned into productive assets provided there is significant flexibility and expansion of the labor market, enabling macroeconomic environment, encouraging investment climate, and sound domestic financial markets that provide opportunities for people to save (Bloom, et al, 2003) and invest. Between 1965 and 1990, East Asian emerging economies (Japan, South Korea, Taiwan, Singapore, Thailand and Indonesia) grew faster due to the increased per capita productivity of their labor force and due to enabling socioeconomic and political institutions (Bloom and Williamson, 1997).

To capitalize on demographic dividend the experience of East Asia countries is enlightening for various reasons. Outside the West, the East Asia and the ‘Asian Tigers’ countries were the first countries on the road to successfully complete the transition from high to low fertility. In East Asia the decline in fertility and shift in the age-structure has triggered economic growth leading to a successful development not matched by any. For the last three to four decades East Asian countries’ economic growth was unparalleled not only in the rising of per capita income but also excelled in health, education, and reductions in income inequality and income poverty (Mason , 2002). As in (Mason (2002: 6-11), the three main factors that have contributed to the immense benefits from the demographic dividend of East Asian countries were:

i. Human resource base: East Asian economies enjoyed a strong human capital base in the forms of high levels of literacy, educational attainment and health care services. Some of the advantages of strong human capital base in East Asia were: more healthier and productive workforce, stronger incentives to invest in human capital, and reduced fertility.

ii. Employment growth: East Asia countries managed to stimulate rapid growth in employment and labor productivity. For the three decades between 1960 and 1990, the labor forces increased by an annual rate of 2.7 percent compared with annual 1.9 percent population growth rate, a gap of 0.8 percent annually. This 0.8 percent gap was twice the gap between population and labor force growth in Latin America during the same period. Besides, for the same period East Asia countries were able to achieve strong growth in their labor productivity and wages.

iii. Saving and investment: despite differences in opinions on the links of saving rates and demographic dividend by researchers on the effects of demographic dividend on national saving the effects of saving and investment in East Asia has played critical role. In the late 1950s and early-1960s saving rates in Singapore, Taiwan, South Korea and other East Asian countries were near zero. In the late 1950s and early 1960s gaps capital shortages were temporarily addressed by foreign aid. However, in the 1960s and 1970s domestic saving rates increased to historically high levels and now the East Asia countries are not only able to finance their own economic development but also helping other Asian emerging economies through filling their capital needs.

However, none of these three vital elements stand alone and are not mutually exclusive to each other. Gribble and Bremner (2012) have conceptually put “Asian Tigers” (Hong Kong, South Korea, Singapore, and Taiwan) economic miracle as consequences of population-age structure changes – that can be called as a ‘demographic dividend framework’ (Figure 1). It looks conceptually simple but practically tough if not impossible. In this framework, they presented how different sectors multitude together to deliver the economic successes of these countries during the 1960s and all the way to the 1990s which was later followed by the Latin American countries and potentially throws light of optimism for other regions and countries in seizing the one time demographic transition opportunity.

Figure 1: Framework in policy interventions to facilitate demographic dividend

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Source: Gribble and Bremner (2012)

Asian Tigers have been recognized for their rapid population transition and economic transformation from agricultural to knowledge/technology based economies. However, these countries have different experiences and what is in the demographic dividend framework above does not represent the entire Asian experience. According to Gribble and Bremner (2012), from the above framework, in the “Asian Tigers” two interventions stands out to capture the benefits of demographic dividend:

A. Changed population structure: to kick off economic growth countries must undergo demographic transition as an initial step through low mortality followed by low fertility rates that changes the age-structure of the population and leads to high proportion of the working-age adults against a declining child-dependency ratio. East Asian and the ‘Asian Tigers’ countries have focused in lowering child fertility and child mortality rates through setting voluntary family planning and information services for young men and women. In this regards, education and child survival are the major contributors for the success of family planning and low fertility. In other words, women are more likely to have fewer children when they have choices for desired family size.

B. Created an enabling environment: in capturing the benefits of demographic dividend four major enablers were highly pronounced in the successes of Asian emerging economies. These are: investment in health and education, good governance and conducive policy environment for economic growth.

i. Investment in health: for many reasons demographic dividend requires healthy population. Asians in general and the Asian Tigers in particular have managed to have a developed health system. By doing so, (i) investment in child health sustained lower levels of fertility and improved child survival that encourages family to limit birth and increases demands for family planning; (ii) investment in health increased educational opportunities of children and young people by strengthening their physical and cognitive development; and (iii) investment in health increased a healthy lifestyle in the population that greatly contributes to a highly skilled and economic productivity labour force.

ii. Investment in education: education is key for every aspects of life and young people must be provided with all opportunities to attain higher level of education and required skills to adapt the changing labor markets. Asian Tigers accelerated economic growth for decades via investing in education and skills building with equal opportunities for both boys and girls. For example, according to Mason (2002), before 1960 East Asian women were less represented in the labour force, less educated, and less paid. However, beginning in the 1960 major changes were made by governments of the East Asian in women’s labour participation, education, and pay by removing barriers for gender disparities.

iii. Enhanced Economic Growth: economic policies that promote economic growth contributes to demographic dividend in many aspects. Good economic policies include trade policies, financial institutions that yield a profitable return for investors, labor policies matched with a diversified economy, adjusting salaries in response to the market conditions, tax incentives to encourage domestic and foreign investors, basic infrastructure of ports, roads, transportation, and communication. Changing population age-structure by lowering fertility rates is only a first step but not sufficient condition for accelerated economic growth. Besides, creating an enabling environment through a mix of health, education, and governance, conducive economic policies by these countries were critical to realize their demographic dividend. Last but not least important to benefit from demographic dividend is a responsive policy to the external factors such as the global economic changes, technological advances and adaptations.

iv. Good Governance: to achieve the benefits of demographic dividend good governance is key including to attract domestic and foreign investments in local economies that are critical to create jobs and stimulate economic development. Investment climate in the form of strong legal systems and rules of law including in contract law and financial standards build investors’ confidence in local economy. Asian Tigers and other East Asian countries are known for their good governance including in promoting gender equality and gender equitable environment.

In this regard, East Asian and ‘Asian Tigers’ have had important lessons to share with the developing world such as Eritrea and its peers in Africa. Strong human resource base, high saving and investment rates and successful employment growth were the key elements to capitalize on demographic dividend and accelerate economic growth. However, the underlying benefits of demographic dividend (surplus labour supply, human capital, and saving and investment) through the process of change from high population growth to a dynamically low population growth by reducing child fertility and mortality, cannot be achieved without creating an enabling environment such as above. 

Part IV (Final) continues…