Reaping the harvest of a demographic dividend

  • Business
  • Saturday, 12 Apr 2003


IT is no big secret that Malaysia has a demographic profile that appeals to investors, and this is represented by among other things, its very young population base.  

Yet, while most people have a vague idea how these attributes will benefit the economy in the long term, I sense that not many fully grasp how potent they could be if properly harnessed.  

Frankly, most people don’t give much of a damn when the time frame you are talking about is a couple of decades, which is rather unfortunate.  

Before we discuss the benefits that these demographic attributes can bring to our economy, let us first identify what they are.  

First and foremost, there is youth. Not only is the population a very young one, but also with some 62 per cent of our countrymen below the age of 30, this is in fact one of the youngest population in Asia.  

The reason for this youthful population can be traced to the relatively high birth rates over the last few decades, and the steady decline in infant mortality rate.  

These youths are generally better educated than their predecessors, thanks to the country’s heavy investment in education. As a percentage of gross domestic product (GDP), Malaysia’s public spending on education ranks one of the highest in Asia, and this has helped contribute to the sharp surge in literacy rate from 58 per cent to 86 per cent over the last three decades.  

Urbanisation has been one of the key drivers fuelling Malaysia’s growth – 62 per cent of Malaysians today live in urban areas from only 34 per cent in 1970 – and this is a trend that will undoubtedly continue.  

As can be expected, urbanisation will bring with it the usual trappings – increasing influence from Western trends via the media, higher lifestyle expectations and greater materialism.  

Throw into the equation a large middle class with improving purchasing power, and you will likely end up with a society that is a lot more consumer-driven than ever before. 

So what do we end up with? A larger workforce through a combination of more school leavers and greater women participation, and a more educated one at that. And a bigger consumer pool with a higher propensity to spend.  

Assuming we can extrapolate from the current situation, the population of tomorrow will continue to have a fairly high savings rate, and enjoy a low inflationary and socially stable environment.  

Infrastructure development will continue to accommodate the population growth, while tax rates should remain reasonable, thanks to the country’s wealth of natural resources and also the government’s prudent policies. 

From here, it should be easy to understand the benefits demographics can bequeath to the economy. The economy’s capacity can be expanded significantly through greater factor input of labour and capital, with no constraint on availability of land.  

Productivity growth should accrue from having a work force better equipped to handle technology. 

The enlarged consumer market will create new opportunities for commerce, while the greater availability of savings will not only increase the supply of capital for investments in projects and technology, but at the same time it will also help lower the cost of capital. 

These economic benefits associated with the entry of a large and better-educated segment of the population into the workforce (and the consequent expansion of the consumer base) is referred to by demographers as the gift of a demographic dividend. 

Economic benefits associated with demographic shifts are by no means a new economic theory, for many of the developed economies have gone through the same experience.  

For example, it is well accepted that the sustained US economic expansion over the last two decades has its roots partly in the economic benefits that the post-war baby boomers brought along with them as they entered their productive ages of 40s to 50s.  

Likewise population experts believe that East Asia’s economic miracle can be partly traced to its beneficial age structure, supplemented by the governments’ policies to educate their people, create jobs and improve health. 

However, while the US baby boomers created a powerful but relatively transient impact on the economy (the surge in birth rates just after the war came in between two periods of low reproduction rates), in Malaysia’s case, the impact of the demographic shift is likely to be initially less powerful, only to gain momentum over time due to the continued movement of its steadily growing population into the workforce. 

Timing-wise, it is interesting that Malaysia may be reaping the fruits of its demographic dividend over a period when many of the developed countries are starting to face problems of the opposite sort – an aging population.  

This is hardly unanticipated because the baby boomers would be moving into middle age at a time when the average life expectancy has lengthened considerably and fertility rates fallen sharply.  

This would of course imply a reversal of the demographic dividend effect, removing one of the sources of economic growth. The shift in ratio between the productive workforce (contributors to the pension system) and unproductive retired population (pension recipients) in favour of the latter will also bring with it adverse financial consequences.  

Already faced with the problem of a mounting fiscal deficit, governments of these countries will have to find a way to deal with their under-funded pension systems before it blows up.  

As an indication, some economists estimate that unless changes are made to the present system, by 2030 the US’ total federal revenues will not be even adequate to cover expenditure on social security programmes, not to mention spending on anything else. 

Various remedies have been offered on how to overcome the problem, including social security reform, deferral of the retirement age, attracting more immigrants of working age, and inevitably, a rise in taxes.  

Any rise in taxes will of course widen further the tax differential between these developed markets and ours, assuming our reasonably favourable tax regime is maintained.  

This will complement the demographic advantages mentioned earlier and serve to enhance the appeal of this market as a destination for foreign direct investments. 

What could spoil this pretty picture?  

First, demographics can be a double-edged sword, as the hoped for demographic dividend could turn out to be a demographic liability if employment opportunities are not available for the growing mass of school leavers.  

As we do not have a social safety net to cater to the unemployed, a high unemployment rate could be quite problematic to deal with. 

Second, aside from the risk of calamities due to war, disease and famine which would of course also affect other countries, the biggest threat to our ability to collect this demographic dividend payout is mass migration of Malaysians, especially the better educated and more productive ones.  

With many of the more developed countries likely to embark on more aggressive immigration policies to counter the trend of their aging population, there will obviously be a challenge to developing countries such as ours to retain its population, especially the elite, against the attractions which these developed countries could offer.  


l Yeoh Keat Seng, is CEO of Commerce Trust 

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