Demographic dividend or disaster?

A recent op-ed in the Economic Times, titled "Demographic dividend or disaster" analyses the implications for India of projections from a recent Goldman Sachs report titled "Dreaming with BRICs: The Path to 2050" (pdf - 580kb).

China, US and India will be by far the three largest economies in the world by 2050. Each of them will be more than four times as large as the next largest economies - those of Japan, Brazil, Russia, the UK, and Germany. The report estimates that the US' GDP will be $45 trillion, China's $35 trillion and India's about $28 trillion, whereas Japan's will be about $7 trillion.

The principal factor contributing to the huge sizes of the Chinese and Indian economies if they continue on their development paths is demographics. Both countries have huge populations. And since demographics are such an important factor in these projections, let us consider the implications. I will highlight four.

The first is that demographics can be predicted with much greater certainty than almost any other variable that goes into econometric models ...and its contribution to Goldman's projections makes the results worthy of serious attention.

In 2050, even though India's GDP will be more than four times that of Japan, the UK, and Germany, India's per capita GDP will be less than a third of the others. This has two implications.

One is that, on average, Indians will not be able to pay the same high prices for products and services as people in the smaller but richer (on per capita basis) economies. Therefore, for the size of the Indian economy and especially the extent of its growth to provide an attractive market for companies, they have to develop product-price propositions that suit the large Indian market.

The other implication of the demographic boost to the size of India's economy is that India can have a competitive advantage in labour costs that can be sustained through 2050 even as the country becomes one of the three richest economies in the world in terms of gross GDP.

It is estimated that by 2020 the US will be short of 17 million working age people, China 10 million, Japan 9 million, and Russia 6 million, whereas India will have a surplus of 47 million. The emerging youthfulness of India leads to the fourth implication of demography as a principal factor contributing to India's economic growth. The country can benefit from a demographic dividend or suffer a demographic disaster. Unlike other resources such as capital and natural resources that count in econometric models, people have a unique quality - they are, well, people! They have emotions, hopes and disappointments. Moreover, they are "appreciating assets" that, unlike machines and money can improve their own abilities when motivated and provided with the requisite learning environment. Young people can learn. Young people have energy. But young people are easily frustrated and they can be headstrong.

A huge demographic wave is arising, unprecedented in history. To ride it, and not be swamped by it, India urgently needs a dynamic education system as a surfboard.Therefore, it behoves our policy makers to give the highest priority to strengthen the education system. Along with more primary education at the grass roots level, we need more effective vocational and professional education. People want jobs. Therefore education must be continuously tuned to emerging opportunities for gainful employment.

Atanu pointed out in an earlier post that "every damn problem that India faces is exacerbated by the population problem". True both in the short and long term, only differently. Though solutions need to be found in the short term (which can only alleviate the problem to an extent), the real challenge is going to be in the long term - that of educating our workforce of tomorrow who will need jobs to sustain the country's growth.

This means that the demand for both primary and higher education (backed by the readiness to pay for it, even out of future earnings if necessary) will be be huge, along with demand for other basic needs like food, clothing, shelter, healthcare and communication. The state education system neither has the funds nor the efficiency to meet this demand. The unorganised private sector which currently comprises the major chunk of the education sector is ridden with quality and scalability problems. Organised private sector players will have to rise to the challenge sooner or later. The organised private sector is active with multiple large players and multiple models in all other basic sectors (food, clothing, shelter, communication etc.) but not education yet. The Reliance group's foray into education is a very small step (don't know if they have a larger game plan in the education sector).

An incipient liberal awakening in India

Last Thursday, I attended the second Minoo Masani Memorial Lecture at the Bharatiya Vidya Bhavan auditorium in Chennai, organised by the Indian Liberal Group (ILG). The speaker was N. Vittal and he spoke on "Corruption mocks at liberalisation" (I will post a summary of the lecture separately). The ILG seems to be fairly well organised and I plan to become a member of the ILG myself, but they are apolitical in the sense of not formally being or wanting to be a political party.

For a couple of years, I have been thinking about the need/opportunity for a new political party with a liberal stance driven by a new set of people outside the current political class. After learning about the ILG, I did a little bit of googling and came across a very interesting "business plan" (ppt - 350 kb) for a new political party in India - a liberal party.

There is in fact quite a comprehensive web site already up for the Liberal Party of India, which is yet to be launched. This initiative is being driven by Sanjeev Sabhlok and the India Policy Institute.

A workshop and seminar are planned for early January 2004 to propose "India's liberal political strategy: 2004 and beyond" for consideration and as a lead-up to the launch of the political party.

It is encouraging to seem some activity towards building a liberal movement in India.

The Problem with 2200 seats -- Part 2

I am moving the discussion from the comments section of a previous post. Here is Vivek's comment

Actually, I think most applicants wouldn't be the very poor relatively speaking.
I suspect most applicants want the job because they are risk averse...they want the security of a government job. It ok to be risk averse, so can you pay the social cost of it.

By auctioning jobs you ensure the relatively better off among the lot pay to secure employment with perks. You use the money to modernize railways/ capital expenditure of governement (both will create more jobs). And you get rid of the queue. Highest bidder gets to be a gangman.

I think most applicants for the job were poor. I got home late around 11 pm on Saturday night. On the way back, I saw thousands of them sleeping on local train platforms. I did not know what was going on then, but I wondered how the number of homeless could shoot up so abruptly.

Regarding using the money raised from auctioning off the 2200 jobs: I am not sure I understand the arithmetic. Assume that the gangman jobs pay Rs 5000 a month. The net present value of a permanent job paying Rs 5000 a month cannot be more than Rs 500,000 or Rs 5 lakhs. That is an upper limit. Judging by the sample population I saw sleeping on the platforms, I would guess that they would be hard-pressed to come up with even Rs 25,000. But let us generously assume that 2200 of them could bid Rs 100,000 each. So the total sum raised would be Rs 22 crores (Rs 100,00 x 2200 or approximately US $5 million).

Rs 22 crores is probably about 0.001% of the total budget of the railways. It is so vanishingly small that it is not worth talking about. It is much less than the rounding errors usually seen in government undertakings. Precious little imporovement can be done with that sort of numbers.

But all this debate about auctioning is missing a more important point and that is the sheer economic waste of the entire exercise of filling 2200 low-level public sector jobs. Assume that each of the 0.65 million applicants spent an average Rs 400 on the whole exercise of getting to Mumbai from all over India and other expenses. Suppose it cost them 2 days per person. Therefore about Rs 260 million (US$ 6 million) was spent directly. Total days lost was 2 x 0.65 million, or 3,560 person years were lost.

Let's repeat that: Rs 260 million in direct cost and 3,560 person years lost. Assuming that per capita production in terms of purchasing power parity is $1,000, that translates into an opportunity cost of $ 3.5 million.

This is only one of a few thousand futile idiotic wasteful things that the people of poor countries such as India do. Add up the waste, and you could easily cross the $100 billion mark of waste. Is it any wonder that India is poor? I don't think so. India is poor for a set of very easily understandable reasons. Figuring out that set is very important and it is primary to figuring out the solution. One of the most essential tools for the whole exercise is a firm grasp of arithmetic. As John McCarthy of Stanford University repeatedly said, those who refuse to do arithmetic are doomed to speak nonsense. I pray that we teach our students the ability to do arithmetic.

The Indians are coming

The Economist has a story on a new trend in the Indian IT industry, one that might help change its image from being just the sucking sound from the east -- hiring people in America.

This month, two Indian conglomerates, the Godrej Group and the Essar Group, each said they were to buy a struggling American call-centre firm. Wipro, an Indian IT services firm, has announced the purchase of two small American consultancies. Scandent, another Indian group with interests in the IT industry, has bought a minority stake in North American Benefits Network, which administers company health and benefits plans. Other firms flush with cash, such as Infosys, a big rival to Wipro, are said to be seeking deals.

Officials at Nasscom, the Indian software industry's trade group, say that their members have made cumulative investments of $350m abroad recently, most of it in America. Having cut their teeth subcontracting for big western firms such as IBM and Accenture, the Indians now want to build closer relationships with customers—big firms that are outsourcing everything from systems maintenance to accounting. To do that, Indian firms need to offer the ability to run call centres and the like from America as well as from India.