Using the Demographic Bonus to make Sri Lanka the Wonder of Asia

By Prof. Indralal DE SILVA

Sri Lanka’s population has grown almost eightfold since the first national census of 1871, which recorded only 2.4 million people. The first doubling of the population took place in 54 years, between 1871 and 1925. It doubled again in 35 years between 1925 and 1960. This doubling within a short period resulted in a relatively high rate of population growth. By then we would have achieved a population of 19.2 million in Sri Lanka, that is, exactly double the size reported in 1960.Demographic estimates suggest that the size of the population reached 19.2 million by 2003, a doubling in 41 years.

The growth of the Sri Lankan population during this century has not been uniform. Until 1946 the average annual inter-censal rate of growth never exceeded two percent. However, post-war years reveal a sudden spurt in the rate of growth. The rate shot up to 2.8 percent in the period 1946-53, and remained more or less the same during the period 1953-63. This was when the mortality rate had come down, while the birth rate remained high. However, after 1963 there was a clear decline in the rate of growth while now it stands at about one percent.

Even though the present rate of population is low, Sri Lanka still adds more than 200,000 people to its population annually. The country, covering a land area of 65,610 square kilometres, ranks as one of the most densely populated countries in the Asian region with more than 300 persons per square kilometre by the turn of the century.

As in many other countries, the population of Sri Lanka is not evenly distributed. Some parts within the country are very densely populated while others are less populous. As noted in the population census of 1981, about 57 percent of the population were in the Wet Zone that constitutes only about 21 percent of the total land area of the country. Colombo, the smallest of the 25 districts in Sri Lanka, has a population density, which is about 11 times the national average.

Demographic Bonus

The “Demographic Bonus” is an important component of the age structure transition of the population phenomenon which Sri Lanka is currently experiencing and is also one of the major outcomes of the demographic transition in its final stages. It is a unique feature demanding the immediate attention of policy planners and researchers.

The standard projection computed for Sri Lanka shows that the elderly segment of the population will comprise more than one fifth (22 percent) of the total by 2031, revealing that by the 2030s one in every four of the Sri Lankan population will be an aged citizen. The same projection also reveals that the country is currently undergoing a demographic bonus period, the commencement of which had been in 1991 and about which information had not been provided to Sri Lankan policy planners in the previous demographic and economic planning efforts.

Thus, as much as the ageing of the population is a distressful reality for all Sri Lankans, “the demographic bonus” or the higher proportion of the working age population relative to the dependent population is also a rare reality, bringing good news to the development planning efforts of Sri Lanka in the 21st century. It is a period which can be described as an opening of a golden window of opportunity for Sri Lanka and is expected to last about 26 years commencing from 1991 and prevailing till 2017.

The phenomenon of the demographic bonus proves that every dark cloud has a silver lining. This ideal demographic environment conducive for an economic take-off for the country will last only for another six years. The emphasis of this article is about this good side of population ageing, or what we call the demographic bonus.

In an encompassing atmosphere of political strength, adequate funds and potential outlays, human capital resources and the knowledge economy, the most favourable deployment of the demographic bonus to gain economic acceleration would materialise.

The attention focused on the conducive demographic environment for economic development is with the general expectation, that the legislative process and the policy enactments of the country would introduce timely amendments to the legislative and policy framework, addressing the needs associated with the changing demographic environment of Sri Lanka.

Experience of Asian Dragons

Each country will undergo a period comprising a “window of opportunity” or what we call a “demographic bonus” during the age structure transition. The demographic bonus is the potential accruable gain by the society during the period of demographic transition in which there is a high ratio of individuals in the working age, in relation to the old and young segments in the dependent age categories (children and elders).

Sri Lanka’s labour force

In almost all countries in South East Asia, the “window of opportunity” had a positive impact on economic growth. The general observation about these countries is that the period offering a demographic dividend or a “Window of Opportunity” was parallel with a phase of accelerated economic growth.

Each single country of the newly industrialised countries (Asian Dragons) such as South Korea, Singapore, Hong Kong and Taiwan had effectively used the “window of opportunity” offered by the best demographic environment. In each of these countries, rapid economic take-off had taken place when the dependency burden was the least and the highest proportion of the population age structure was in the working ages. In other words, development had taken place when the “window of opportunity” was available.

Other factors for development

The mere existence of a favourable demographic bonus would be ineffective without a proper environment for economic acceleration. An increasing working age population seeking gainful employment, but with no proper job opportunities will be a dilemma for a country. Nevertheless in a congenial environment of political stability, adequate savings and investment potential, human capital and the knowledge economy, the optimum utilisation of the demographic bonus to gain economic acceleration will materialise.

Political stability

South East Asia’s newly industrialised nations such as Singapore, Taiwan, South Korea and Hong Kong, also known as the “Asian Tigers,” though currently politically stable and have strong governments, had faced severe internal problems in the past. Careful analysis of the socio-political and economic environment of Asian Tiger countries reveal that these nations had overcome internal political problems and had established strong governments with visions for economic development, with set goals, objectives and plans for accelerated economic growth. These governments maintained effective governance and law and order. The people were motivated by these strategies and cooperated with the political leadership and the government.

After 30 years of conflict, Sri Lanka has gained political stability again. At least two thirds of the electoral seats have been won over by the political party in power which reflects the stability of the government. The Government in its long-term plans has declared that it has a vision, set goals and targeted programs and plans for development.

To harvest the demographic bonus, political stability in the country needs to be strengthened. In other words, maintaining law and order in the country with strict discipline, close cooperation with opposition political parties, strategies put in place to bond the friendship with the European as well as Asian countries, would further strengthen the stable environment needed for accelerated development. Such policies will also give guidance to broaden the horizon of Sri Lanka with global linkages.

The presently calm political arena is an ideal opportunity to attract foreign capital investments for development as adequate opportunities have been created for such capital investment.

Savings and investment

Savings and investment practices of the individuals play a major role in the economic development process of a country. According to the Dependency Rate Hypothesis, as the dependency rate increases, the working age population has a heavier family consumption burden, which decreases the family savings rate and the potential physical capital accumulation.

Up to the last decade of the 20th century, the increasingly high dependency burden of the working age population had been a critical feature which hampered the savings habit of the Sri Lankan family unit. The total dependency ratio of the population in Sri Lanka in 2001 was 55 for every 100 persons in the working ages, of whom, 41 were young dependents and 14 old dependents. In 1981 the ratio had been 72 persons, which confirms that the dependency load had been even higher earlier.

High dependence had been a continuous obstacle for the economic growth of the country. Nevertheless, according to the Standard Projection for Sri Lanka, in 2006, with the commencement of the demographic bonus period, the dependency ratio had declined to 54 persons for every 100 in the working ages. The ratio will increase again to 55 dependents in 2011 and then a continuous increase throughout the entire projection period is shown. In a situation of a demographic bonus in a country, when the child and old age dependency is at a minimum level, the level of savings will increase.

The hypothesised close association between savings and investments is that, any increases in savings will contribute towards further investments in a country. Particularly during a demographic bonus period which has a higher proportion of the working age population and a higher capacity of total earned income and potential savings, it is logical to assume that a similar relationship between savings and investments would exist.

In Sri Lanka an ideal environment has been built for investments because of the demographic bonus. During such a period, the working age population (15-59) would increase numerically in relation to other age structure segments in the population. The capacity to save is high in a period of demographic bonus, since the proportion of the working age population is highest relative to the proportions of old and young dependents.

The life cycle hypothesis of savings and investment argues that there is a life cycle pattern of savings, investment and consumption associated with the lifetime of an individual. The presumption in this instance is that a person in his early years of life spends and consumes either by borrowing from others or spending the assets owned by his parents. In his working years, he consumes less than the income and thus makes net positive savings. He invests savings on assets to accumulate wealth, so that he has adequate income to consume in the latter part of the life cycle. Thus when the old age segment of the life cycle commences, the tendency for investments to decline is high. During the time of retirement he uses his savings again, as he consumes more than his income in the later part of his life. These assumptions of the life cycle hypothesis would not be fully valid if he wishes to leave some assets or wealth for his children.

Having an advantageous “window of opportunity” is not the only requirement for a country to take-off to an economic boom. There are other factors that need to be strengthened. Creating adequate opportunities for employment for the increased proportion of the working age population would be a major determinant in increasing the potential earned income.

The policy-makers should make maximum use of this opportunity by preparing strategies to attract direct foreign investment to the country to open industries to ensure the creation of sufficient employment opportunities for youth and to foster the envisaged accelerated development.

The prevailing peaceful atmosphere after three decades of conflict in Sri Lanka is an ideal period to invite foreign investments.

The expected interest of the foreign investors to open factories in Sri Lanka has still not materialised. They prefer India, Bangladesh, Malaysia and Vietnam to Sri Lanka.

In contrast to those countries, the existing labour laws in Sri Lanka, the high salary scales of our workers and the higher cost of production are reasons why this country is not conducive to attracting foreign investment and it is to be noted that these are the areas that the foreign investors make complaints about.

Knowledge Economy

Maximum utilisation of the human capital resources (the invested demographic bonus) through promotion of a knowledge economy is another untapped resource that could be harnessed to promote economic development. The Production Function Model rationalises that increases in capital, labour and improvement in technology will lead to a growth in the national output. The argument envisages that an advancement in technology leads to increases in productivity of factors of production.

Amartya Sen argues that the investment in production of knowledge and education makes workers and machines more productive. A workforce equipped with knowledge and education is referred to as Human Capital and is an important source of economic development. Development today is multidirectional. Knowledge and information no longer flows from countries in the North to South. Innovations, financial flows and business opportunities are flowing from South to South.

In Sri Lanka it is imperative to expect that there would be substantial additions of initial youth entrants to the labour force during the demographic bonus period. This potential labour input to the country’s economic growth could be enhanced by exposing the added labour input to technological and academic education. For such a purpose the technical and technological education facilities in Sri Lanka need to be revised to suit the current market demand. New strategies have to be implemented by the educationists to train the labour force in using high-tech modern equipment.

Another important area of development of human capital is the technological and academic advancement of females to increase their competitiveness in labour force participation. They should be given opportunities in policy developing positions at managerial levels in public as well as private sectors.

The Mahinda Chinthana expects that “Sri Lanka should be the Knowledge Hub of Asia”. This could be achieved easily by generating human capital from the “Demographic Bonus” by increasing calculated investments for the future benefits in education and by imposing radical changes in the tertiary educational courses.

In such instances, knowledge could be used as a tool for future development.

The capability of Sri Lanka to produce skilled specialists to cater to international demands will be a major leap forward for growth in the “Knowledge” economy.

Nonetheless, policies should be in place for the curtailment of the “brain drain” and permanent migration of scarce human capital such as the highly educated researchers, experts, managerial and specialist categories of the Sri Lankan labour force. Youth migration to foreign countries for university education with the objective of subsequent settling down overseas after the completion of higher education may be an initiation of the brain drain dilemma. It is necessary that policy-makers adopt constructive strategy to discourage this trend.

Sri Lanka - Wonder of Asia

Another aspect of human capital development that should be fostered and expanded as an accessory to the current efforts at economic development is engagement of relevant state services as rebuilders of the peaceful society. This will be conducive for achieving Sri Lanka as the Wonder of Asia.

A significant proportion of the working age population, engaged in military and other activities associated with the war, yet capable of providing effective contributions to the development process are still not engaged in the development work in a significant manner. This could be due to physical or psychological damage experienced by these individuals during the prolonged war and other civil disturbances.

An increase in the current retirement age may enhance the numerical value of the invested human capital segment of the demographic bonus of Sri Lanka. The political stability and all the other facets required to foster accelerated development are available and favourable at the moment.

What we need to do is to utilise these resources along with the demographic bonus to make Sri Lanka the Wonder of Asia.

The writer is Senior Professor of Demography (Chair) and Dean, Faculty of Arts - University of Colombo.

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