Tuesday, April 26, 2005

Demographic sweet spot

Times of India carried a couple of stories about demographic shifts in the world.

The first report is about how a special demographic status awaits India due to its younger population and higher fertility than pretty much the rest of the world, including our big brother to the north, China. One of the consequences is that, by 2020, countries such as Japan and the US will collectively "need" more than 40 million people of working age, while India will have a surplus of 47 million people in this age group.

In what sense does a country "need" people? One version of the answer that I have heard is that the West, due to its social security obligations -- with defined benefits independent of the workers' contributions -- need a certain number, say n, of working persons for each retiree. Older population, lower fertility and an ever increasing life expectancy contribute, over time, to a larger number retirees being supported by an ever-shrinking size of working age population; in other words, a demographic disaster! Thus, these countries "need" young workers to keep their economy going (and growing), so that the taxes they pay can be used for paying for the retirees's social security benefits. In a recent post, Brad DeLong mentioned that "raising immigration by 0.3% of the workforce every year wipes out nearly half of the 75-year Social Security deficit".

While this figure appears modest, it still represents some 800,000 to 900,000 immigrants every year. Where will they come from? The Times article appears to imply that India could be the source.

Some questions that I would like to see answered:

  • Is any of this really believable? Can we actually count on the developed countries to open their arms to welcome so many immigrants every year?
  • Is this a good thing for India? What leverage does this give a country like ours with "surplus workers"?
  • Are there other important ways in which the developed nations "need" people of working age?

Any inputs would be greatly appreciated.