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Monday, September 8, 2014

Economics Article

Decoding the Growth Matrix of Chi-ndia


The run up to bagging the position of the biggest economy of Asia has just begun to hotten up. Yes, we are talking of the two of the highest growing emerging economies in the world-China and India. Here we assess the scenarios of economic growth in China and India from the demographic perspective.

The world is in the midst of very rapid demographic change. Not only are developed countries such as Japan and Germany ageing rapidly, but the process appears to be even more rapid in emerging markets. Large developing countries such as China and Russia have fertility rates well below the levels needed to maintain their populations. The impact on future labor supply is much debated - but few economists have focused on the likely impact on global imbalances. 

How demographics come into play?


The current account is the difference between a country's savings and investment rates. Both are influenced strongly by demographics. A rising share of working-age population tends to push up both savings and investment. However, as a society ages, the investment rate is likely to fall faster than the savings rate, thereby generating a current account surplus (or a smaller deficit). This is why Japan has run a surplus for the last 25 years despite a continuous loss of competitiveness (although this phase may be coming to an end). This dynamic is now likely to play itself out in many countries.

 For instance, China currently saves and invests half its gross domestic product (GDP) but, as its workforce shrinks, its investment rate is likely to fall sharply. A rapidly ageing population, in contrast, will probably not lower its savings rate so quickly. This differential will generate ever larger external surpluses, which will transform China from being "the factory of the world" to being "the investor to the world". The case with India is different. While business leaders like D.Shivkumar have made clarion calls for leveraging the demographic dividend, it is still to be seen how its demographic profile affects its saving and investment dynamics. As of now India has a young population. A young population translates into a high propensity to consume and a lesser propensity to save meaning lesser investment.