Demographics lie in the eye of the beholder

There is a good debate on Pakistan’s demographic growth rate. According to the latest census, it is estimated well and rigorously at 2.4% per annum. A critical camp, led by demographers and notable officials far more cognisant of these pyrotechnics than myself, finds this demographic rate of growth too high. For demographers, child quality will improve if the number of children ever born falls further. Of course, but assuming a constrained budget to spend on them. Nutrition, morbidity, education, capabilities, all will increase if the target population is smaller. But only if we assume a resource budget growing by less than the demographic growth rate.

So there are two questions here to consider. An empirical question, of whether Pakistan’s resources are chasing too large a target in our demographic growth rate? Sure, that case can always be made out. But I think there is a theoretical prior, for some economists. Let me make this out. Economists come in two flavours. Macroeconomists, like myself, who fancy viewing the whole economy. Which we call fancily general equilibrium. And micro and meso economists, who fancy that the whole economy comprises smaller bits to be analysed. Which we call partial equilibrium.

My point here is that a partial equilibrium analysis of any problem in the economy will likely yield a different analysis, and policy prescriptions, compared to a general equilibrium analysis. Demographics and Pakistan’s population growth rate affords an excellent example of two differing perspectives. Two differing views, with differing policy implications.

A partial equilibrium analysis of Pakistan’s population growth rate is that held by our leading demographers. As set out above, reducing the target population of children ever born, will increase the budgetary resources per capita, and therefore improve the welfare outcomes per capita. Unassailable logic. Except, it assumes that resource growth is less than the population growth.

A general equilibrium analysis of Pakistan’s population growth rate, however, asks a prior question to the one of maximising resources and welfare: what is an optimal population growth rate for Pakistan or indeed any economy with a similar structure? True a partial equilibrium analysis can ask the same question. But it will view only the demographic problem of maximising resources and welfare, and come up with only one answer, reducing the population growth.

So how is a general equilibrium analysis going to afford a different perspective of the problem of population growth? Answer, by viewing population growth not just as a partial equilibrium problem for demographics, but as a general equilibrium problem for the whole economy. That is it seeks to analyse the problem of Pakistan’s population growth not just from the point of view of the demographics of the country, but also very much from the point of view of the economy of the country.

So what is an optimal population growth rate for the economy of Pakistan? And the answer is pretty close to the existing population growth rate of 2.4%. For one important reason. Economies grow, their output increases, based on not just growth of investment, but critically based on growth of their labour force. Here, there is notion of a critical saddle point of 2%. A population growth rate of 2% per annum implies that the economy’s population growth rate is constant at just a replacement rate. A replacement rate is reproduction of one man and one woman, who can keep reproducing themselves in twos.

Then an economy whose population growth rate is less than the replacement rate of 2% per annum, will eventually stop growing in terms of output. Japan’s output growth is difficult to revive from its two decades’ long stagnation, precisely because of its labour force growth, given by its population growth, falling below 2% per annum. Much of Europe is headed that way. There can be two solutions to the problem. One pragmatic solution would be to raise labour force growth above population growth by allowing migration. Another futuristic solution is to augment labour force growth with capital and robotics. But that is another story. Let’s get back to Pakistan.

So our general equilibrium view of the optimal population growth rate already gives us a lower bound of 2% per annum. Further, if the economy is not to be stationary in terms of output, and to grow, the labour force and so population must also grow above 2%. Early simulations at the Lahore School of Economics Modelling Lab show a major impact on the GDP growth of labour force growth above 2% per annum in a range to 2.5%. So a population growth rate of 2.4% per annum seems eminently suited to generate a good GDP growth for Pakistan.

There are further economic arguments for desiring a population growth in the neighbourhood of 2.4% per annum for Pakistan. One argument is dispelling of the myth of unemployment in a predominantly informal economy. The partial equilibrium camp can cry, what price unemployment. Surely unemployment is a major problem for developing countries like Pakistan. Just look at the poverty, lack of income and welfare. Surely unemployment betokens surplus labour, which can be reduced by cutting the labour force growth by cutting population growth. But I am afraid that unemployment for the poor is a myth. The poor lacking any social protection, cannot afford to be unemployed, cannot afford not to work. So if they cannot find a formal sector job, they are compelled to work in the informal economy at much lower remuneration, for longer hours, in onerous often hazardous working conditions. They are what is termed euphemistically the working poor. So they actually predominate in the labour force of developing countries like Pakistan’s, driving its GDP growth significantly. So the working poor need an economic solution, not a demographic one.

But to end on a positive note to tweak our population growth rate. Why do we need a population growth rate just above the replacement rate of 2% to 2.1%. To give us a youth dividend. A replacement rate of just 2% implies an aging population, one with an increasing share of its population above working age, so requiring more transfers to it from the diminishing share of the working age population. Put simply, an aging population contributes less to the GDP growth, to raising GDP per capita, to getting rich. So a population growth rate a little above the replacement rate of 2% per annum, say, 2.4% per annum, implies more younger people entering the labour force, that can contribute to raising GDP growth, to enriching the country.

Pakistan must get rich before it gets old. Population growth as Mao recognised can be a strength, not a weakness. General equilibrium analysis concurs, giving us some parameters for Pakistan.

Published in The Express Tribune, January 1^st, 2019.

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