Define what is meant by a ‘demographic transition’, and examine whether such a transition might have benefits for economic growth in developing countries.

Define what is meant by a ‘demographic transition’, and examine whether such a transition might have benefits for economic growth in developing countries.

The demographic transition model refers to the transition from high birth and death rates to low birth and death rates as a country develops and industrialises. There are four stages to the model, which predict the population growth of an economy from pre-­‐modern to post industrial times. The model is used to explain recent trends across the world, which includes why population growth is lower in rich countries and why population growth has been so rapid in certain countries. The demographic transition comprises of the mortality and fertility transition, with developing countries moving between stages 2 and 3. In stage 2 of the model, both death rates and birth rates are declining. However, since birth rates are declining at a significantly slower rate to the death rates it leads to rapid population growth. Due to the population growth there have been unquestionable benefits in aiding economic progression within developing countries. It is necessary to look at both the mortality and fertility transition in order to evaluate their respective benefits or, in fact, hindrance for growth in developing countries. To do this it is important to look at several explanations that attempt to justify the impact of the mortality and fertility transition on economic growth. These include, the Malthusian trap, the Solow model and substitution effect.

The graph below shows the four stages of the demographic transitional model and the prediction of the birth rate, death rate and population growth predicted by the model. Stage two clearly demonstrates both declining birth and death

rates

with

a

rapid

increase

in

population

growth.

There are a number of key factors involved in the mortality transition process. Firstly, as a result of an increase in average family incomes it has led to a consumption of higher quality and quantity of food, which has subsequently led to improved nutrition. Moreover, there has been an improvement in public health due to the establishment of new systems, including water supply and medical care. In a developed country these factors appeared to have occurred more or less simultaneously, however in a developing country it has been a gradual process.

The fertility transition refers to declining fertility rates within developing countries. It counteracts the effect of the mortality transition by explaining a declining population growth. Reasons for the declining fertility rate are less intuitive but could be attributed to improvements in family planning and methods of contraception. Some developing countries have resorted to birth control policies, such as China’s ‘one-­‐child’ policy between 1979-­‐2000s or allowing variation in child allowances in rural areas. In China, the fertility rate fell from 2.63 births per woman in 1980 to 1.61 in 2009. This illustrates the success policies could have on the fertility transition.

The Malthusian trap is the idea that when productivity improves, fertility will also increase and will thus place more pressure on resources, such as land. This will eventually lead to diminishing returns to scale, with the ratio of labour to land increasing but productivity actually decreasing. The result of this could be a stable level of GDP per capita, despite technical progress, with a higher population. The Malthusian trap is an explanation as to why the fertility transition might hinder economic growth by leading to a level of income per capita unable to grow, even with technical progress or population growth.

Below is a graphical representation of the Malthusian Trap. The top graph shows the negative relationship between income per capita and population size. The bottom graph shows the positive correlation between income per capita and population growth. It shows that the main impact the technical progress will have is to raise the equilibrium level of population and will have no impact on the steady-­‐state level of income

However, there have been some criticisms towards to the Malthusian trap, with some economists suggesting theories on how economies have escaped the

Malthusian trap. One example is a case study of the industrial revolution where both population growth and income per capita grew simultaneously.

A reason for the escape to the Malthusian trap is given by looking at the Solow Model. In this model there are two sectors, one with a fixed factor of production and another with constant returns to K and L. As a ‘Solow’ sector expands through technological progress, wages will rise in that sector attracting labour. The key factor of the Solow model is that it does not have a fixed factor like land. Hence, the economy is able to accommodate for a growing population, but not at the expense of a decline in productivity.

The Solow model looks at the general equilibrium of an economy. Although the
Solow Model is a way out of the Malthusian Trap the model does not necessarily imply that economic growth will be achieved alongside population growth. The capital dilution effect implies that in order for GDP per capita to remain at least constant as population rises, capital accumulation is essential. Otherwise, a rise in population growth rate will cause a country to converge to a lower growth path. The
Solow predicts that although population growth will have an impact on steady-state incomes, the effects are much smaller than the range of variation of GDP per capita that we see in the data. Subsequently, the Solow model suggests that population growth is not the primary cause of underdevelopment and will therefore not necessarily prevent economic growth. In addition, a demographic transition, where the population size increases, will result in economic growth so long as the marginal product of labour is positive.

An alternative look at the fertility transition is that declining fertility rates will actually raise GDP per head. One reason for this could be a direct impact of declining mortality rates and longer life expectancy. A family might care more about the quality of life of their children or about having a son that will survive childhood. As the mortality rate declines it becomes easier to achieve this with a lower birth rate, thus increasing GDP per head. Therefore a demographic transition could actually help economic growth as people begin to change their views on their children and their preferences.

Furthermore, it is possible to look at the theory of the substitution effect. This states that as income rises, people might want more children but the opportunity cost of having more children will also increase. In response, families may decide to have fewer children but invest more in each of them, for example through education. This means that a fertility transition could help encourage economic growth through an increase in productivity of labour, despite declining population growth as their priorities change.

In conclusion it is clear that there is evidence to suggest that the demographic transition could prevent economic growth in a developing country. The evidence that supports this is namely the Malthusian trap and the capital dilution effect. However, there is stronger evidence that suggests economic growth can be encouraged through the demographic transition. The main factor that will help the developing country achieve economic growth is the development of higher quality institutions within the country. This includes better medical care, education and water supply systems. This is because, as these institutions improve, the physical health of the population will increase and improve productivity. Additionally, the implications of the advanced institutions are a more knowledgeable society who can make better family planning decisions and financial decisions. As the economy continues to develop this will help to increase the quality of labour rather than look towards increasing the quantity of the workforce.