The World’s Youngest Poor Country

The economic rise of China has spawned a cottage industry that churns out such recent books as When China Rules the World and The Beijing Consensus: How China’s Authoritarian Model Will Dominate the Twenty-First Century.  And the lead article in the January/February 2010 issue of Foreign Policy magazine contends that China’s economy in 2040 will reach $123 trillion – a staggering figure that is nearly three times the total amount of global economic output in 2000.

Amid such forecasts, Rob Salkowitz, a Seattle-based entrepreneur and writer, has written the most contrarian of books.  Young World Rising explores the interplay of three mega-trends he believes will decisively reshape the contours of the global economy and even world politics: 

• The rapid aging of the developed countries and the relative youthfulness in the population of emerging economies;
• The global spread of information and communication technology (ICT) and social networks;
• The rise of indigenous entrepreneurism around the world as a viable alternative to state-driven economic development. 

What makes this interesting book so contrarian is that Salkowitz places India – but not China – in the vanguard of these transformational forces.  He briskly dismisses China as the “world’s oldest poor country,” one that is on the verge of a serious demographic decline, whose economic model is not conducive to entrepreneurial innovation, and whose political system inhibits the benefits of social technology. 

Young World Rising contains multifaceted themes and draws examples from a number of countries, but what captured my attention is Salkowitz’s premise that India’s bountiful demographic resources will be an important engine of its economic future.

He is certainly in good company in making this contention.  No less a personage than Lord Curzon, the legendary British viceroy of India at the turn of the last century, cited the land’s “teeming multiples of men” as one factor ensuring India a pivotal role in world affairs.  For many present-day observers, the country’s rapid ascent to great power status is rooted in a strikingly favorable demographic trajectory.  Prime Minister Manmohan Singh, who speaks of the dawning of the “Indian Century,” argues that “it is in India’s superb human capital that our advantage lies.”  Likewise emphasizing the relative youthfulness of the population, Mukesh Ambani, one of the country’s most prominent corporate chieftains, believes that the present century is destined to be India’s. 

Prominent Americans have similarly remarked upon India’s demographic advantage.  In his 2008 book, The Post-American World, Fareed Zakaria proclaims that “if demography is destiny, India’s future is secure.”  And President Barack Obama regularly cites India’s demographic strengths – including the prodigious output of brainpower – in exhorting the need for economic and education reform in the United States.  

But two new reports highlight how India’s demographic advantage remains more notional than real.  According to a Goldman Sachs study, India’s Rising Labour Force, an additional 110 million workers will join the country’s workforce by 2020, followed by another 100 million in the subsequent decade.  In the abstract, this eye-boggling demographic expansion will be a critical driver of economic prosperity, adding four full percentage points to India’s already high economic growth rates.  (See press reports here and here.) 

Another new study, The Indian Labour Report 2009  (ILR 2009), notes that the median age in India is an astounding 24 years, with 12.8 million new entrants into the workforce each year.  Overall, the country’s population is projected to climb to 1.4 billion in 2026, with 83 percent of the increase occurring in the working-age population. 

(And looking even farther over the horizon, the Population Reference Bureau projects that the global population will shoot up from the current 6.9 billion to 9.5 billion in 2050, with India accounting for a good portion of the growth.) 

The key take-away in both reports, however, is that the widely-touted “demographic dividend” could well turn into a debacle, since much of the burgeoning growth in the workforce will come from the poorly educated and impoverished districts in the country’s northern heartland.  For example, as ILR 2009 points out, over the next decade, the states of Uttar Pradesh, Bihar and Madhya Pradesh will contribute over 40 percent of the workforce increase but only 10 percent of the growth in national GDP.  

The vast inadequacies of India’s public schools are an immense hurdle in capitalizing on the country’s demographic potential.  In terms of the availability of resources and their effectiveness, the public education system scores poorly relative to the other BRIC countries and to other emerging market countries.  India exhibits the lowest educational indicators in the G-20, and only a pittance of the workforce has received formal vocational training.  Kapil Sibal, the minister in charge of developing human capital, speaks of a “recipe for disaster.  You have a huge national pool of unskilled youngsters who have no avenues for gainful employment.”  

Another signal reason for India’s problems in exploiting its labor advantage resides in the highly-restrictive laws shackling the capacity of large-scale manufacturing companies to absorb surplus rural labor.  According to the World Economic Forum’s 2009-2010 Global Competitiveness Index, India ranks 83^rd in terms of labor market efficiency among a sample of 133 countries (China’s score is 32^nd place).  Because of this rigidity, nearly 90 percent of manufacturing jobs are in small enterprises that as a whole account for only a third of total manufacturing output.  As a result, much of the industrial sector is unable to reap gains from scale economies and remains largely skill- and capital-intensive – a disconcerting anomaly given India’s raw demographic bounty.  

Goldman Sachs warns that, in order to absorb all the new workforce entrants over the next decade, the manufacturing sector will need to create 40 million new jobs.  Yet the share of manufacturing to GDP, which has stagnated in recent years, is relatively low given the country’s stage of economic development.  Manufacturing makes up less than one-fifth of the overall economy, whereas in China it comprises nearly half.  In 2007, India contributed 1.8 percent of global manufacturing output, compared to China’s 12-percent share. 

Both studies caution that India desperately needs to enact momentous labor and educational reforms in order to capitalize on its demographic dividend and secure its economic future.  Whether the country’s political class can muster the requisite will to do so, however, is a perilously open question.