Sunday, February 6, 2011

Just what the doctor ordered for BIMARU

Demographics is destiny.  The fate of nations is often written in the language of population pyramids and median age.  So they say.

Imagining India, Nandan Nilekani's book that was one of my favorite reads of last year, takes an interesting twist on the 'demographic dividend' cliché.  Before we get to the twist, let us make the basic argument for a demographic dividend in India.

The median age of the Indian population today is 25.9, making it one of the youngest large countries in the world.  Brazil's is 28.9; China's is 35.2 (increased rapidly from a few decades back, due to the one child policy); Russia's 35.8; the US is 35.8 and Japan is the second oldest country in the world with a median age of 44.6 (Monaco is the oldest at 48.9).

[For a full listing of median age of different countries, see here.]

Historically, when a young population has met enabling government and adequate capital, the results have often been spectacular.  As Nandan writes -

In 2020, India is projected to have an additional forty0seven million workers, almost equal to the total world-shortfall.  The average Indian will only be twenty-nine years old, compared with the average age of thirty-seven in China and the United States, forty-five in Western Europe and forty eight in Japan.  [...]

India already has the second largest reservoir of skilled labour in the world.  It produces two million English speaking graduates, 15,000 law graduates and about 9,000 PhDs every year.  And the existing pool of 2.1 million engineering graduates increases by nearly 300,000 every year.

A talented pool of workers, along with abundant capital and investment, presents us with immense opportunities for creativity and innovation, which can in turn lead to rapid gains in productivity growth and GDP.  This had once enabled Europe to emerge as a centre for manufacturing innovation in the nineteenth century; similarly, at the peak of its dividend between 1970 and 1990, the United States saw the birth of new technology-based industries that determined the direction of the global economy over the past few decades.  Such an opportunity - to emerge as the new creative power and a centre for new knowledge and innovation - now lies with India.


So that is the standard 'demographic dividend' argument made about India.  What is the twist?  Well, the twist is what Nandan calls 'India's double-hump:  The camel in our demographics'.

Demographer economist Ashish Bose first coined the term 'BIMARU' in the 1980's in a one-page summary of a large population report sent to then Prime Minister Rajiv Gandhi.  BIhar, MAdhya pradesh, Rajasthan and Uttar pradesh have long been the sick members of the Indian family.  In recent times, their perennial illness seemed to also catch on to Orissa, making the new, equally sickening acronym BIMAROU.  Ashish's new take on the demographic evolution of the country, vividly captured by Nandan's phrase 'double-hump' is this -

While India as a whole is young, and the population pyramid looks healthily like a true pyramid, it is not the same story across the country.  The states in the South were remarkably young a few decades back, and have tended to dominate the growth story in India in the last two decades - think Bangalore, Hyderabad, Chennai, Kochi.  But now, the demographic story there has largely played out.  The real dividend now is (surprise, surprise) in the BIMAROU states.

As demographers such as Tim Dyson and P.N.Maribhat have shown, if we peel India's demographics like an onion, we end up with two very distinct areas within the country - a north that, thanks to its recent high fertility, stays remarkably young over the next two decades, and a south which faces rapid ageing.  By 2025 north India's population will still be very young, with a median age of just twenty-six.  But the median age in the south would be about thirty-four - similar to Europe's in the late 1980's.

This means that India's demographic dividend is actually a double hump, one of which is already nearly exhausted.  The first hump in the dividend came from the south and has been 'expensed' in the economic growth that the south and the west of India experienced as early as the 1970s, when their infant mortality began to fall.  In the northern states, however, infant mortality has only just started to trend down.

As a result, it is the second, larger hump in India's dividend which is yet to peak, and which will come from the northern states - and primarily from the BIMARU regions.  Ashish has estimated that the share of BIMARU states alone in our population growth between 2001 and 2026 will be around 50 percent, while the share of the south will be only 12.6 percent.  As a result, over the next decade, the north should begin to ride the crest of its dividend, towards higher growth.
So, is this just a lot of hot air, the lazy musings of a septuagenarian economist?  Not quite.  There is some real growth data that has started to support this thesis.  Swaminathan S. Ankileshwar Aiyar, easily one of the most entertaining economic columnists in India, wrote a piece in early 2010, where he asked the question - where are the new miracle economies within India?  No prizes for guessing the right answer.


Historically, the chronically poor states were Orissa plus the BIMARU quartet (Bihar, Madhya Pradesh, Rajasthan, Uttar Pradesh), of which three have been sub-divided. Have these eight poor states participated in India’s boom?

Yes, absolutely. Indeed, five of India’s eight ultra-poor states have become miracle economies, defined internationally as those with over 7% growth. The best news comes from Bihar, historically the biggest failure. From 2004-05 to2008-09, Bihar averaged 11.03% growth annually. It was virtually India’s fastest growing state, on par with Gujarat (11.05%). That represents a sensational turnaround. Nitish Kumar deserves an award for the most inclusive revolution of the decade.

Other poor states have done very well too. Uttrakhand (9.31%), Orissa (8.74%), Jharkhand (8.45%) and Chhattisgarh (7.35%), have all grown faster than the standard miracle benchmark of 7%. [...]

The elephant in the room has always been Uttar Pradesh, a huge, poor state of almost 200 million people. The excellent news is that UP’s growth rate has risen impressively to 6.29% annually. This falls short of the miracle benchmark of 7%, but not by much. [...]

Rajasthan, which grew fast earlier, has slipped down a bit, to 6.25%. The most disappointing performance comes from Madhya Pradesh (4.89 %).
So are the BIMARU states starting to come around from their sickness?  Hell, yeah!

I must say though -  I find the sense of fait accompli that underlies conversations on demographic dividend in India somewhat frustrating.  Indeed, demographics is a powerful force.  But it isn't everything.  Just because one has a good demographic story going, one can't sit back and start counting the moolah.  Indeed, several economists have been consistently questioning the entire foundation of the demographic dividend thesis recently.

Reverend Malthus was the one who made the most infamous demographic prediction in economic history when he said that "Population has the constant tendency to increase beyond the means of subsistence."  May I am really behind on my newspapers, because I haven't heard of human civilization collapsing under the weight of population just yet.

Why didn't Malthus' demography driven prediction come true?  One word - productivity.  As population increased, if there had been no scientific innovation, and human economic productivity levels had been held at the same levels, his dire prediction might indeed have come true.  What changed the story is the massive increase in productivity led by the industrial revolution.  Michael Mandel makes this point powerfully in his essay in Business World here.

The point is not that demographics are unimportant.  Indeed, there is enough data to prove that they are a tremendously powerful force.  But they aren't enough by themselves.  If that were not so, economists over the world would have been talking about the huge demographic dividend in Nigeria!

The BIMARU states could well be the future of India.  There is enough early evidence to suggest that they are taking on that destiny.  But they could still lose the plot from here.  So M/S Nitish Kumar, Mayawati, Naveen Patnaik, Ashol Gehlot, Raman Singh and others - Here is a humble request from an optimistic Indian - you have a great thing going on.  Please don't screw it up!

5 comments:

  1. The BIMAROU states may face several challenges and the others may still end up being the economic drivers.
    I can think of two here:
    (1) Improvement in productivity: BIMAROU will grow fine as long as it is driven by non-government factors. But on things that come under state's scope, West/South have consistently been better at delivering results. I wonder how much of the current growth in BIMAROU is owed to the state govt.
    (2) Population migration to other states: I wonder how this would be captured in demographic predictions. Also, how much of the income flows back to the parent states.

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  2. Very interesting post. Knew about the higher growth rates in the BIMARU states, but the post put a lot of the implications and possibilities into focus.

    p.s. Anecdotal evidence (unverified)of improved economic conditions in Bihar trickling to the bottom of the pyramid - a cabbie recently mentioned to me that a lot of Biharis in Bombay are returning to Bihar since there are now a lot of employment opportunities in Bihar too, and conditions there have improved overall.
    A friend also told me of a scarcity of maalis in their locality in Delhi since all the Bihari maalis had gone back to their villages as there was work in nearby towns now.
    Most impressive shift ! Hats off to Nitish Kumar for making this happen.

    p.p.s. May I run this post on the 'Escape Velocity' blog (http://escape-velocity-blog.com) ?

    If not, may I at least run it on entropymuse, which is a personal blog ?

    Zen

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  3. @Zen - Great anecdotes on shortage of Bihari labor. Here is another - I met a real estate builder yesterday and asked him whether building projects are getting completed on time. 'No, every single project will be delayed at least by a year', he tells me. Why? 'Much of the labor used to come from Bihar. But now, there is severe shortage because they are all going back home!'
    And yes, feel free to run it on your blog.

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  4. @ Jayesh - Yes, good governance is certainly a big part of converting the demographics into a real dividend. And things are getting better in places like Bihar on that front. As for migration - as the multiple anecdotes in the comments section show, the dynamics of migration are also changing rapidly.

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  5. Seems true...most of the diamond workers from Surat (Gujarat) have migrated back to their natives (especially Bihar) as they are seeing and are being offered better jobs and pay in their native state..!!

    I also heard some rumours that...(I might sound funny here)..Bihar government is paying some kind of unemployment benefit in cash to its people and hence Bihari's are leaving industrial jobs in states like Gujarat and going back to their native state...as unemployment cash benefit paid by the Bihar government + earning from their ancestral farming earns them more than what they would take home working in any factory or industry outside their home town / state..taking into consideration the cost of living and expenses...I do not know how far this is true but this might be a strategy by Mr Nitish Kumar to call back the semi-skilled and skilled manpower in his state and grow their own state rather than any other..!!

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