How Does Dependency Ratio Affect Economic Growth In the Long Run? Evidence from Selected Asian Countries

Abstract

It has been widely accepted that the structure of population of a country can have significant contribution towards its growth effort. With the proportional increase of relatively older group of people in developed countries alongside the proportional rise of the youth population in the developing part of the world, it is of paramount importance to understand the long term economic consequences of this changed structure of population. Despite having a favorable demographic composition, depending on public investment and policy strategy adopted, economies differ in terms of their ability to attain demographic dividend. The issue is therefore an empirical one which requires appropriate quantitative analysis. Against this backdrop, with the help of a 37-year long panel of 15 Asian countries, this study has made an attempt to understand the long run effect of changing demographic pattern on economic growth of Asian countries. Despite increased importance of demographic composition on labor supply, asset accumulation, savings, hence on the overall growth process, there is no literature focusing on the relationship from a cross-country perspective and while applying suitable methodological tools. Thus, this paper utilized econometric methods of panel data constructed using World Development Indicators (WDI) and Health Nutrition and Population Statistics (HNPS) from World Bank database to understand the linkage between dependency ratio and per capita GDP growth. Following cross section dependence test stationarity property of the variables has been diagnosed employing appropriate panel unit root tests. The short run and long run parameters have estimated with the help of Mean Group (MG), Pooled Mean Group (PMG) and Dynamic Fixed Effect (DFE) estimators. PMG estimates have been preferred over the DFE and MG. It revealed the fact that for the Asian countries Dependency Ratio (DR) does not have any short run impact on Per Capita GDP Growth (PCGDPG) but it has significant long run impact therefore with an increase in working age population in comparison to the non-working group, there is a resulting increase in per capita GDP growth of Asian countries. Since changed demographic composition can only result in higher economic growth, if complemented by effective public policies, this paper provides empirical evidences in favor of such policies of human resource development. Besides, in order to reap the maximum benefit from working age population while increasing investment, it is important to engage them in productive, growth enhancing activities and that requires investment in employment generation.