Demographic dividend or damp squib?

CHARAN SINGH

The global economy is passing through a demographic crisis, with its growing ageing population. India, has an obvious advantage here, and could provide the world with skills and manpower. 

India has the world’s youngest workforce with a median age way below that of China and the OECD countries. The rest of the world, especially western countries, are ageing rapidly because of low fertility rates and increased longevity. Consequently, according to the Union government , the global economy is expected to witness a skilled manpower shortage of around 56 million by 2020. Thus, the ‘demographic dividend’ in India needs to be exploited to meet the skilled manpower requirements in India and abroad. 

The demographic dividend not only implies increased labour supply but also a challenge in finding capacity in the economy to absorb and productively employ extra workers. To make a larger number of people employable would necessitate large investment in human capital. Investment in educational and vocational training needs to be strengthened if India has to successfully reap the benefits of the demographic dividend.

In 2011-12, according to the Centre, in nearly 18 per cent of households in rural and 6 per cent in urban areas, there was not a single member in the age-group 15 years and above who could read and write a simple message with understanding. Similarly, the recent report by the National Sample Survey Organisation states that during the survey period of July 2011 to June 2012, nearly 25 per cent of males and 29 per cent of females in the age range 5 to 29 years did not consider education necessary to eke out a living. 

Again, nearly 25 per cent males in the rural areas and 33 per cent in urban areas reported that they did not attend educational institutions because they needed to work to supplement the household income. In the case of nearly 30 per cent females, the reason was that they had to attend to domestic chores.

In the case of vocational training, the situation is worse. Amongst persons aged 15 to 59 years, only 2.2 per cent reported to have had formal vocational training; 8.6 per cent received non-formal vocational training. As expected, the situation in rural areas was worse than that in the urban areas. Amongst rural males, the most significant share of vocational training was driving and motor mechanic work while for females, it was textiles-related work.

High expectations

The demographic dividend is expected to result in nearly 20 million people joining the workforce annually in the next 10 years. With the rising level of income, the expectations of people, especially the young, are also rising. The next generation of farmers want to be part of the growth India story and therefore out of the agriculture sector. To absorb such a large labour force, it is necessary to plan for appropriate vocations and employment opportunities. Narendra Modi recently observed that India will now need large number of ITIs, and a new ministry of skill development and entrepreneurship would coordinate the skill development needs of the country. The Pradhan Mantri Kaushal Vikas Yojana has been announced to encourage skill development for youth by providing monetary rewards. While all these efforts are encouraging, the fact remains that skill development strategy has yet not been successfully implemented. 

India’s workforce of nearly 484 million in 2012 could increase to 850 million by 2025, accounting for nearly one-quarter of the global workforce. MSMEs, with their flexibility and low cost, easily adapt to new technology and can help in strengthening the manufacturing sector. In fact, MSMEs have the potential to absorb the increasing labour force while helping to realise the potential of the Make in India strategy. The need is to explore new areas for MSMEs.

(The writer is the RBI chair professor of economics, IIM-B)

Waking up to the BRICS

Samir Saran

In his 2001 paper titled “Building Better Global Economic BRICs”, economist Jim O’Neill of Goldman Sachs calculated that “if the 2001/2002 outlook were to be extrapolated, over the next decade, China would be “as big as Germany” and Brazil and India “not far behind Italy” on a current GDP basis. Cut to 2013; Jim O’ Neill’s expectations seem modest. Last year, China was the world’s second largest economy, Brazil ahead of Italy and India just one rank behind in terms of current GDP. In purchasing power parity (PPP) terms, all the BRIC countries were within the top 10, with China and India at second and third position respectively. BRIC, in Wall Street lingo, is an “outperformer.”

Despite the crippling financial crisis, BRIC has done better on pure economic terms than most expectations. But the acronym is today representative of much more than an investment narrative alone. With the inclusion of South Africa, BRIC became BRICS, giving a pluralist and inclusive veneer to an economic idea. This group now has a significant political dimension, as is evidenced by the increasing number of converging positions on political issues.

In a follow-up paper in 2003, titled, “Dreaming with BRICs: The Path to 2050,” Goldman Sachs claimed that by 2050, the list of the world’s largest 10 economies would look very different. It is remarkable then, that in 2014 the list already looks radically different, and it is clear that it is time to “wake up” to the BRICS.

NDB versus existing banks
In this context there were at least two concrete arrangements inked at the sixth BRICS Summit in July, which will have a large economic and political impact. These were the Contingent Reserve Arrangement and the New Development Bank (NDB). Conversations and reportage on these two were shrill, coloured and obtuse in the run-up to the Summit. It continues to follow in the same vein. Indeed the NDB is at once the most celebrated and critiqued outcome of the Fortaleza Summit. Now that we are a few weeks away from its public conception, it is time for a reality check on this widely discussed BRICS achievement.

The first reality is the NDB can neither replace nor supplant the role of the existing development banks. The NDB will not be able to compete with the reach and expanse of existing institutions such as the World Bank, which has a subscribed capital of over $223 billion. The bank borrows $30 billion annually by issuing Triple-A rated debt in international bond markets. Such easy access to capital markets on the back of high promoter creditworthiness allows the bank to have a lower cost of funds. Other development finance institutions enjoy similar financial backing. The Asian Development Bank (ADB) too has a large balance sheet, backed by 67 member nations and a subscribed capital of $162 billion.

In contrast, the NDB will require over half a decade before it can accumulate the stated capital base of $50 billion from within BRICS and another $50 billion (approximately) from other countries and institutions. Indeed, in the immediate term, only a modest $150 million has been promised by each of the BRICS countries. A contribution of $1,850 million thereafter, staggered over five to six years, will require some doing as the BRICS countries are grappling with weak balance sheets, fragile current accounts and other domestic imperatives.

Then, there are other questions that will need to be answered in the days ahead. If China is unable to dominate this institution, will it prefer to prioritise investments through its (proposed) Asian Infrastructure Investment Bank? How soon can the central banks of the member countries devise arrangements to act as depository institutions for the NDB? And, how will the NDB raise funds in different countries? What will be the currency or currencies of choice? All important posers which can be addressed if the resolve is unerring. 

Development finance
The second reality is, in spite of its modest economic weight in the initial years, the NDB can change the ethos of development finance irreversibly. Rather than replacing or supplanting existing development finance institutions, the NDB will seek to supplement existing resources. In fact, the World Bank President, Jim Yong Kim, has welcomed the idea of the NDB and acknowledged its potential in infrastructure development and the global fight against poverty.

An important difference could be in the way conditions and restrictions are imposed on loan recipients. Bretton Woods Institutions such as the World Bank have been known to impose conditions for lending that create structural mismatches between project funding, demand and supply. As recently as last year, the World Bank Group decided to restrict funding for new coal plants in developing countries, deciding instead to invest greater resources in “cleaner” fuels. Of course, the World Bank would be well advised to reconsider this decision given lifeline energy needs and the energy access realities in developing countries such as India.

The NDB’s mission must be to create a business structure where borrowing countries are given greater agency in prioritising the kinds of projects they would want funded. Over a decade, this could become the demonstrator project through which the relationship between donors and recipients, lenders and borrowers, will be rewritten. Hopefully this will be in favour of developing economies and will enable the reimagining of economic pathways. 

Location and ownership
The third reality — perhaps, the most debated — is that the location of the NDB is immaterial when governance and ownership is equally shared. Location has frequently been confused with ownership, skewed by our imagination of existing institutions such as the World Bank. According to its Articles of Agreement, major policy decisions at the World Bank are made through a Super Majority — 85 per cent of votes. Vote shares in turn are determined by the level of a nation’s financial contribution. With around 16 per cent voting share at the World Bank, the U.S. has a de facto veto. Conversely, BRICS, with 40 per cent of the global population and a combined GDP of $24 trillion (PPP), collectively accounts for a mere 13 per cent of the votes at the World Bank.

As such, the concentration of voting power and headquarter location in Washington DC in the case of the World Bank is merely a coincidence. Japan dominates the functioning of the ADB with a 15.7 per cent shareholding, despite the headquarters being located in the Philippines.

It is also useful to note that previous World Bank presidents have been U.S. citizens and the International Monetary Fund’s (IMF) list of managing directors is composed entirely of Europeans. Even the ADB’s presidents have been Japanese citizens, with almost all of them having served in the Finance Ministry in Tokyo. In this regard, the NDB, with its intention of rotating leadership, seeks to overhaul the existing governance framework prevalent in the international development finance institutions. Through equal shares of paid-in capital in the NDB, there is a clear intention of creating an alternative model that focusses on voting-power parity. The smallest country can negotiate at par with the biggest country.

Will BRICS create a framework that is as democratic in sharing governance space with other investors and stakeholders? This will be something to watch for as the systems and structures evolve. The notion that the NDB has been “Shanghai-ed” is perhaps a shallow understanding of this exciting new initiative.

With an equal voting share, all five countries have to be on board to move in a particular direction. Admittedly, this can be hugely inefficient and troublesome. Therefore, it is incumbent upon BRICS members to ensure that this initial at-par equity in governance does not unexpectedly allow for a super majority like gridlock, restricting decision making because of a lack of consensus. The NDB must be dynamic and lithe, much like the BRICS grouping itself. It would be useful for BRICS members to institute a professional management body for steering everyday operations of the NDB as well as all non-policy related decisions, including those dealing with project funding.

And most importantly, as discussed earlier, BRICS members should democratise the bank’s functioning if new stakeholders are included in the future. They must find ways to engage the recipients and beneficiaries in its decision-making apparatus. If anything, the NDB must be a template for change, not a mirror to the existing hegemony of money.

(Samir Saran is vice-president at the Observer Research Foundation)

Is China changing?

C. P. Chandrasekhar

While still at the top of the GP growth table, the Chinese economy seems to be on a long-term traverse from a trajectory with extremely high growth rates to one where growth is more moderate. According to the National Bureau of Statistics (NBS), Chinese GDP growth, year-on-year, which had fallen from 8.1 per cent in the first quarter of 2012, to 7.6 per cent in the second and 7.4 per cent in the third quarter, had bounced back to 7.9 per cent in the last quarter of that year. But the good news may not be this sign of revival, but rather that GDP growth rates in China seem to be in long-term decline. As Chart 1 shows, growth spiked in China when the government launched a $585 billion stimulus package in response to the 2008 crisis, which drove the year-on-year quarterly growth rate from 6.6 per cent in the first quarter of 2009 to 12.1 per cent in the first quarter of 2010. An important source of that acceleration in GDP growth was a spike in debt-financed construction activity at the provincial level, facilitated by an easy credit policy encouraged by the government.

The deceleration in growth began when the government decided that the rise in growth rates had gone too far. In a two step process starting in the second quarter of 2010, year-on-year quarterly growth rates have fallen from 12.1 per cent in the first quarter of 2012 to below 10 per cent between quarters ending September 2010 and September 2011, below 9 per cent in the subsequent two quarters and below 8 per cent in the last three quarters of 2012. China's annual rate of GDP growth of 7.8 per cent in 2012 was also among the lowest it had registered in 13 years.

One reason why slowing growth seems positive in China's case is because high rates of growth were seen as being associated with overheating, reflected in a combination of bouts of consumer price inflation and a housing price bubble. Periodically the government had to rein in demand through administrative measures that curbed bank lending and investment expenditures by public sector corporations. However, the problem being structural, and linked to investment decision-making and financing in China, recurred once central government surveillance was relaxed, necessitating another round of administrative intervention. The long term slow down may be indicative of the beginnings of successful structural adjustment to address the problem.

An indication that this transformation is underway is partly provided by data showing that the importance of investment in driving GDP growth has been declining while the role of consumption has been increasing. With investment contributing more than 50 per cent of GDP in recent times, China had emerged as the classic instance of an economy with excess investment, where investment was not induced by perceived market demand and not demand constrained to the same degree as in a conventional capitalist economy. According to the Financial Times (October 18, 2012) "The ghost cities, empty apartment buildings and unused convention centres that dot the country are the physical manifestations of this excessive investment, and investors remain concerned that much of it will translate into bad debts for the banking sector."

Now there is evidence of a shift from investment to consumption. Data from the NBS indicate that during 2011 and 2012 consumption expenditure contributed 56 per cent 52 per cent of growth respectively, while investment contributed 49 and 50 per cent. The global recession had resulted in a negative contribution of 4 and 3 per cent from net exports. These figures compare with an 88 per cent contribution of investment, 50 per cent of consumption and a negative 37 per cent from net exports in 2009. The Chinese government that has been making a strong case for “rebalancing” growth welcomes this shift to consumption as the principal stimulus to growth.

Evidence suggesting that this trajectory was unsustainable was also coming from the financial sector with incomplete data pointing to a major role for credit from China's version of the "shadow banking" sector in financing a investment, housing and construction boom. Shadow finance varies from credit from loan sharks to small and medium businesses to investments in real estate and "prestige projects" of provincial governments with funds mobilized through financial trusts and wealth management products marketed by banks to rich investors. Since these investments promise high returns the projects involved are risky and unlikely to yield promised returns. The resulting instances of financial failure is forcing the government to rein in this activity as well, since estimates of the volume of investments made with “shadow finance” vary from 25 to 50 per cent of GDP. With regulation turning stricter, a slowdown of investment and growth is inevitable.

The reversal of the trajectory of high growth driven by excess investment has another positive side to it. According to figures on inequality (measured by the Gini coefficient which varies from 0, reflecting a situation of complete equality, and 1, or extreme inequality, with just one person in the population having all the income) released by the Chinese government for the first time (Chart 2), inequality rose when growth was high and fell when it slowed. This may be because measures to reduce inequality divert resources away from investment or because reduced inequality favours consumption over investment. In either case the outcome implies significant welfare gains.

According to an article in the online edition of the People’s Daily, “China's first release of the Gini coefficient for the past decade demonstrated the government’s resolve to bridge the gap between the rich and poor.” Though, the Gini has been falling, it is at 0.474, well above the red line of 0.4 set by the United Nations. According to Ma Jiantang, director of the NBS: "The statistics highlighted the urgency for our country to speed up the income distribution reforms to narrow the wealth gap." If that happens consumption may rise and growth slow further. But China’s new leadership seems to think that is the way to go. Slower growth may be upsetting the Indian government, but it seems to be a sign of achievement In China.