The sweet spot

Published in the Philippine Daily Inquirer (mirabile visu!)

THINKING GLOBAL

The advantages of a large and growing population

By: Dr. Bernardo M. Villegas

June 15th, 2012

Thanks to Governor Amando Tetangco of the Central Bank, the man in the street has now been enlightened about a phrase that used to be limited to specialists in demographics and economic development. Referring to a “sweet spot” that the Philippine population is entering in the next 10 to 20 years, he expressed optimism about the prospects of higher growth for the Philippine economy because of the advantages of a young population both from the standpoints of abundant manpower supply and a large domestic market for goods and services. This sweet spot is made possible by what demographers call the demographic dividend, which is the benefit conferred on a country by a young labor force that is still growing faster than the retired force and the dependent children (those below 15 years of age).  This phrase was coined by Harvard demographer David Bloom. It was first applied to the favorable circumstances faced by such countries as Singapore, Taiwan, Hong Kong and South Korea in the second half of the last century when these “tiger economies” grew at record levels of 10 to 12 percent for more than 20 years, catapulting their respective economies to First World status in just one generation.

Much, although not all, of the economic success of these East Asian newly industrializing countries (NICs) can be attributed to the baby boom that they enjoyed after the Second World War, which resulted in a large pool of young workers in the 1960s to the 1980s that these countries cleverly employed in labor-intensive, export-oriented industries, which jumpstarted their rapid industrialization and rise of the middle class. In fact, Nobel laureate and famous commentator Paul Krugman attributed practically all the success of these NICs to the significant increase in the supply of their manpower (and capital) and not to productivity increase. Although Krugman’s analysis might have  been too extreme (after all, the Philippines also benefited from a large labor pool during  the same period but failed to grow because of mismanagement and flawed economic policies), there is a great deal of truth in the “demographic dividend” hypothesis. A rapid rise of population, if well managed, is a very positive contribution to sustainable and inclusive growth.

David Bloom hypothesized that the demographic dividend lasts for approximately 50 years. Sooner or later fertility rates decline because of urbanization; more investments in education, especially among the women;  and later marriages so that there comes a time when growth of the young labor force slows down and is surpassed by the increase in the number of  citizens above 65 years of age. This is when the “inverted pyramid” sets in and the dependency ratio increases. There are more people in the retired force for every person in the active labor force. As David Pilling, a commentator of the Financial Times, wrote last March 15, 2012, many of our neighboring countries have experienced or are experiencing the end of their demographic  dividend (see “The demise of Asia’s demographic dividend”, FT): “As Frederic Neumann of HSBC points out, many countries in the region are reaching the end of their demographic free ride. China’s workforce will contract from 2017, as will that of Hong Kong. The labour force of South Korea and Taiwan will start to shrink in 2016, while Singapore’s will do so from 2018….Thailand’s demographics will turn in 10 years. Even Vietnam, whose workforce is growing apace, will see a sharp deceleration before too long.”

There are only a few Southeast Asian countries that will continue to enjoy this demographic dividend in the next 20 years.  They are Indonesia, Malaysia and the Philippines, together with South Asia’s largest country, India.  These countries cannot afford to squander their demographic dividend. Governor Tetangco adds a new dimension to the advantages of the demographic dividend that the Philippines is still enjoying. From 2015 to about 2030, when the growth in our labor force will be slowing down and will be surpassed by the growth in the retired population, there is a second economic advantage of a young population. Not only will we continue to have an abundant labor pool. We shall also have a very dynamic consuming class that will constitute a very large domestic market for all types of manufactured goods and services that can fuel high growth of the economy and attract more domestic and foreign investments.

For the former tiger economies in the last century, the signal benefit of the demographic dividend was the availability of cheap manpower for the export-oriented industries. The very small populations of the NICs, however, did not provide the advantages of a large domestic market. The Philippines has the best of both worlds in this crucial period of the 21st century: We will have abundant manpower and a large domestic market. As I wrote in a former article about emerging markets, these are the two features of the economies that will dominate the global economy in the first half of the 21st century. Thanks to Governor Tetangco, our leaders in both the public and private sectors are now better informed about the benefits of a large and growing population.

Last March 15, 2012, an article on emerging markets appeared in The Wall Street Journal. Authored by Eric Bellman, the title of the report is “Nestle Leans on Emerging Economies.” In a visit to Jakarta, the CEO of the world’s largest food manufacturer by sales, Paul Bulcke, said that “an increasing amount of Nestle’s growth comes from emerging markets…The company already generates 40% of its revenue in emerging markets and expects that percentage to climb. Last year its revenue rose 13% in developing economies but only 4.5% in developed markets….Emerging markets are creating a new middle class and they are developing fast, while you look at the developed countries, and they are slowing down because of the debt crises…”

The experience of Nestle is replicated by hundreds of other consumer-oriented multinationals from all over the world. Nestle, maker of such brands as Kit Kat candy bars and Haagen-Dazs ice cream, will agree with Governor Tetangco that emerging markets like the Philippines, thanks to a large population, offer a “sweet spot” in more ways than one to companies in the food and beverage industries.