The effect of demographic bonus on economic growth in vietnam and 5 selected countries

This thesis identifies the factors of demographic bonus that affect to economic growth using panel data of 6 East and Southeast Asian countries in the period 1995-2010 through fixed effe

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES

VIETNAM-NETHERLANDS PROGRAMME FOR MASTER IN

DEVELOPMENT ECONOMICS

THE EFFECT OF DEMOGRAPHIC BONUS ON

ECONOMIC GROWTH IN VIETNAM AND 5 SELECTED

COUNTRIES

By

BUI THAO VY

Academic supervisor

Dr NGUYEN TRONG HOAI

This paper was submitted in partial fulfillment of the requirements for Master’s degree in

Development Economics

Ho Chi Minh City, November 2013

ACKNOWLEDGEMENTS

First off, I would like to thank the entire VNP’s lecturers for their profound knowledge, inspiring spirit and enthusiasm in teaching process Especially, I would like to send my most extreme gratitude to Dr Nguyen Trong Hoai for sharing his professional understanding, perceptive guidance, precious advice and elaborate comments Besides that, I would like to thank Dr Nguyen Thanh Tra and Dr Luca Tasciotti for their valuable recommendations in the early stage

of Thesis Research Design

I would like to express my special thanks to my classmates in MDE17, who contributed a delighted academic atmosphere and supported me a lot in the learning process I feel very lucky when being acquainted and shared unforgettable memories with all of you

I also would like to thank all staff in VNP office for their warm-hearted assistance

Most of all, I would like to thank my parents and my husband for their encouragement and affectionate care

ABSTRACT

Demographic change influences to both economic and society at different aspects, especially in the demographic bonus period These changes are not simple in creating the shift in total population, the age structure but also establishing the new working age cohort Therefore, the role of demographic in economic growth and social stability could not be denied

The purpose of this thesis is to access the effects of demographic bonus to economic growth and to investigate the gap between countries at different demographic bonus stage The subjects used in this paper include Vietnam and five collective countries in East and Southeast Asia

This thesis identifies the factors of demographic bonus that affect to economic growth using panel data of 6 East and Southeast Asian countries in the period 1995-2010 through fixed effect and panel least squared method The demographic bonus dummy variable is also taken into account in this paper in order to examine the gulf between countries have experience in this period and countries have not yet confronted with this unique stage of demographic history It is found that young dependency ratio and labor participants rate have a strong impact on economic growth In addition, all three channels that demographic bonus creates benefit have influence to the economic growth, especially the channel of human capital Dummy variable is also explored that have a significant meaning in the regression model This proves that there is

a difference in income between countries at distinguishes stage of demographic bonus

Key words: Demographic bonus; panel data; fixed effects; dummy variable; East and

Southeast Asia; Vietnam

TABLE OF CONTENTS

ACKNOWLEDGEMENT………2

ABSTRACT……….3

CHAPTER 1: INTRODUCTION 1.1 Problem statement……… 9

1.2 Research Objectives……… 10

1.3 Research Questions……… 10

1.4 Justification of the thesis……… 11

1.5 Organization of the thesis……….11

CHAPTER 2: LITERATURE REVIEW FOR DEMOGRAPHIC BONUS 2.1 Key concepts……… 13

2.2 Theoretical literature……… 14

2.3 Conceptual framework……… 16

2.4 Empirical literature……….19

2.5 Chapter remarks……….27

CHAPTER 3: DEMOGRAPHIC TRANSITION IN EAST ASIA AND VIETNAM, DATA AND METHODOLOGY 3.1 Demographic in East Asia and Vietnam……….29

3.1.1 East and Southeast Asia……… 29

3.1.2 Vietnam………32

3.2 Data……… 34

3.3 Analytical framework……….35

3.4 Research methodology……….36

3.5 Chapter remarks……….44

CHAPTER 4: FINDINGS AND DISCUSSIONS 4.1 Descriptive statistical analyses for demographic bonus……… 45

4.2 Empirical results……….46

4.3 Chapter remarks……….50

CHAPTER 5: CONCLUSION AND POLICY IMPLICATIONS 5.1Conclusion………51

5.2 Policy implications……… 52

5.3 Limitations and directions for further studies……….54

5.3.1 Limitations………54

5.3.2 Directions for further studies……….55

REFERENCES……… 56

APPENDICE……… 62

LIST OF TABLE

Table 2.1: Summary of empirical studies………24

Table 3.1: Vietnamese age structure, 1979-2009……… 33

Table 3.2: Vietnamese population projection, 2010-2050……… 33

Table 3.3: Data sources……….34

Table 3.4: Variables’ expected signs………43

Table 4.1: Data descriptive statistics………45

Table 4.2: Estimation results……… 48

LIST OF FIGURE

Figure 2.1: Relationship between demographic bonus and economic growth……… 17 Figure 3.1: Share of Working-age population in East Asia and selected countries……… 31 Figure 3.2: Economic growth in 6 selected countries………32

ABBREVIATION

CPI: Corruption perceptions index

DB: Demographic bonus

GDP: Gross domestic products

HDI: Human development index

IMR: Infant mortality rate

IV: Instrumental variables

OLS: Ordinary least squares

UN: United Nations

UNFPA: United Nations Population Fund

TFR: Total fertility rate

TI: Transparency International

TLS: Two stage least squares

WB: World Bank

WDI: World development indicators

Chapter 1: Introduction

1.1 Problem statement

The transition of population age structure is one of the top concerns of not only demographers but also the economists all over the world because many direct and indirect relationships between demographic factors and economic growth will contribute to form the prosperity and the wealth of a nation The shift in age structure will be different from country to country and different from time to time Many developed countries in Western Europe and North America reached their demographic bonus in late 19th and early 20th century ( Lindh and Malmberg, 1999) and this period also could be seen as the noticeble mark in their process of motivate economic growth Adversely, some countries in Asia and Africa could not exploit the ‘real bonus’ from demographic bonus period and this problem become an encumbrance in their way of economic development Therefore, the effect of demographic bonus on economic growth is ambigous if countries which have experience in this period do not have a right combination of appropriate policies This issue is mentioned in Bloom and Canning (2001) that demographic bonus is not automatically come with free bonus

With the smoothly co-ordination of social and economical issues in the right policies, demographic can accelerate the economic growth through the channels of public health, education and economic policies that foster the labor market, trade openness and capital accumulation from savings Some countries in East Asia which have experienced the demographic bonus period and succeeded in alleviating poverty problem (Tahir, 2011) could be lessons for Vietnam in the process of population transition and economic growth

According to data and calculation from the United Nations Population Fund (UNFPA), Vietnam now is in the period of demographic bonus This period will last within 30 years in average and

is considered as a unique event in the long demographic history of a given country As a result, Vietnam should afford in making suitable policies, governor management ability and coordinating between different parts of economy to take benefit from this rare period Besides, lessons from the previous successful countries in experiencing the demographic bonus period could be taken into account

The early and recently researches on the relationship between demographic factors and economic growth both use variety of methods and they also lead to different results However, the proportion of studies which support the effect of demographic factors, especially demographic bonus on economic growth take a larger part than the contrary studies and the familiar methods used in these papers are descriptive statistic or econometrics method Thanks

to the heritance of the previous studies, this paper examine the effect of demographic factors on economic growth especially in the period of demographic bonus in East Asia and test whether there is any difference in countries which experienced demographic bonus with countries without demographic bonus In addition, the effect of demographic policy on economic growth in the bonus period aslo put into consideration After having draw the impact of demographic factors and policies on economic growth, the policies and lessons for Vietnam will be implemented

1.2 Research objectives

The specified objectives of the study are to

(i) Examine the effects of demographic factors on economic growth in 6 selected countries included Vietnam cover the period from 1995 to 2010

(ii) Test the difference between the countries which has experienced in the demographic bonus period and the countries without this period

(iii) Draw some policy implications that Vietnam could learn from the previous successful countries

1.3 Research questions

This thesis is intended to deal with the main research question is “What is the effects of demographic bonus on economic growth?” In order to answer the main question, two sub-questions will be employed elaborately (i) Does age structure significantly impact to economic growth? and (ii) Do demographic bonus and its channels affect to economic growth simultaneously?

The scope of the paper will be limited in using the data of 6 selected countries in period

1995-2010 to examine the effect of demographic bonus to economic growth However, this collection

was based on the different demographic bonus period among countries and these countries have some develop patterns similar with Vietnam In turn, Vietnam could learn from both successful and unsuccessful countries in the demographic bonus period

1.4 Justification of the thesis

This thesis attempts to embrace the effect of demographic factors, especially demographic bonus on economic growth Based on this result, the paper will contribute to the researches of the relationship between economic and demographic bonus which are not attached special importance as it deserves

This study also try to use data of 5 selected countries which have some familiar economic characteristics with Vietnam but different in demographic transition and growth level In addition, the exploitation in updating data to the year 2010 for each country and the combination of different demographic variables from previous studies will expand the information about the trend of demographic transition

The demonstration from the thesis is useful for not only demographists but also policy makers Hence, they are able to have a comprehensive overview for the relationship between demographic bonus and economic growth As a final result, the proposal of practical policy recommendations will be considered in order to accelerate Vietnam economic growth and improve living standard as well

1.5 Organization of the thesis

The rest of this study is organized into four chapters Chapter 2 presents the key concepts used

in the paper, theoretical literature of the impacts of demographic bonus and its channel on economic growth, conceptual framework and empirical studies which were considered at both global and country level as different methods Chapter 3 shows an overview of demographic transition in different regions in the world and Vietnam, data, research methodology and analytical framework Chapter 4 will analyze the empirical results from different models and specify the effect of demographic bonus as well as other demographic factors on economic growth and give some quantitative analysis of these elements The conclusion, suggestion of

some practical policy, limitation of the study and the further researches will be discussed in the final chapter

Chapter 2: Literature reviews for Demographic Bonus

2.1 Key concepts

Demographic bonus (DB) is a special stage of demographic transition in which a numerous rural society with high fertility and mortality rates changes to urban industrial society with low fertility and mortality rates At an early stage of this process, fertility rates fall, leading to fewer young population in the total size As a result, the labor force temporarily grows more rapidly than the population dependent on it, freeing up resources for investment in economic development and family welfare during this bonus period occurs Besides that, thanks to the development of technology and science, the human well-being will be improved and the life expectancy becomes longer than ever before Other things being kept constant, per capita income grows more rapidly and the country that experienced this situation will receive the benefit in both economical and social aspect (Ronald Lee and Andrew Mason, 2006)

In another definition, Demographic Bonus is revealed by United Nations (2008) as occuring when total dependency ratio including children (aged 0-14) and the elderly (aged 65 and over) is less than 30 % and 15% of total population, respectively This means that a person of non-working age will be supported by more than one working-age persons Demographic bonus are also known as Demographic Dividend, Demographic Gift or Demographic Window of Opportunity

In this research, the definition of United Nations (2008) will be used for calculation of Demographic Bonus period With a clear and precise ratio defined by United Nations, it would

be more convenient for making comparisons among countries and using in the econometrics model later

The terms economic growth and economic development sometimes are used misleadingly, but they are basically different Economic growth is considered as an increasing in national or per capita income and product without any reasons A country, however, wants to achieve economic development, it has to satify much more conditions including improvements in health, education, environment and other aspects of human welfare This means that economic developmenent belongs to a higher level and a larger concept than economic growth but it could

not be dissent that no sustained development can occur without economic growth In this study,

we just take into account with the relationship between demographic bonus and economic growth

2.2 Theoretical literature

The linkage between population, labor force and economic growth was mentioned from the early stage of economic science Despite the lack of a dominant theory, alomost ecomic growth studies argued that the differences in income level across countries are due to differences in many elements from endowment factors to productivity factors and technology, a combination of any two or all of them Nevertheless, all economic growth theories, whether in primitive or complex form, always mention about the role of labor force

This relationship was explored by many famous economists under different models (Adam Smith 1776; Harrod Domar 1939-1946; Cobb Doughlas 1947; Solow 1956) In these theories, labor and population played as an essential factor beside capital stock and technical level in economic growth Basically, the core of every economic growth models lies behind a series of production function At the level of microeconomics or individual firms, these production function relates the number of employees and machines, land or real estate comparing with the output of the firm At the national or economy level, production functions describe the relationship between country’s output and its total labor force and capital stock One of the famous model which was based on these production functions is the fixed coefficient production function of Harrod – Domar (1939-1946) This model also concerned about labor and capital in the relationship with economic growth However, the weaknesses of Harrod – Domar are the rigid assumptions of fixed capital-to-labor, capital-to-output and labor-to-output ratios As a result, these assumptions makes the gap between the model and real world more broaden because that it is very strict to keep capital, labor and output grow at an exact same rate Until Solow (1956), the fixed-coefficients production function was dropped and developed into neoclassical production function Like Harrod-Domar and other previous economists, the main elements of Solow model were labor and capital But these factors became more flexible and it could substitute for each other in the economy and growth process So according to the neoclassical growth model, population growth would prevent economic growth because of capital dilution However, Keynessians and recent studies have challenged the above opinion, they proved that

population growth has no effect on economic growth if the growth rate of the total population was used as the only demographic variable in the economic growth models In addition, these economists plused that the demographic factors will matter the level of per capita income, especially tha age structure, the human capital and life expectancy (Coale & Hoover, 1958; Bloom & William, 1998)

From the point view of the eocnomists who have supported the idea of demographic factors

affecting the income level, demographic bonus could be archieved through three main channels: labor supply, savings and humand capital

The channel of labor supply is delivered through the changes in population size and age structure At the demographic transition stage, the ratio of working age population to total population will increase once children born during the earlier stages of this process enter in the labor force which brings potential workers and thus lowering the ratio of dependent population Demographic bonus may also have contributed to economic growth by providing women an opportunity to participate in the labor market Women could find themselve a job because of smaller number of children to take care of (Bloom, Canning and Sevilla, 2002)

In the second channel, an analysis of the relationship between the high fertility rate and the savings rates by Coale and Hoover (1958) explains why the aggregate savings rates have been depressed by higher fertility with the resulting higher proportion of children in the total population In another paper represented by Leff (1969), the impact of dependency ratios on national saving rates was corroborated Recently, Kelly and Schmidt (1996) argued that working people tend to have a higher level of monetary output and also higher level of savings between the ages of 40 and 65 which ultimately make an overall increase in the national savings In other studies of Higgins and Williamson (1997) and Lee et al (2000), they illustrated the same results with Kelly and Schmidt and stressed that in one way these savings can be further risen up by having less number of children

The final channel, human capital could be seen at the last but not least factor that accompanies with demographic bonus process and contributes to the economic growth This element is characterized by increased life expectancy and having fewer children in connection with the improved health of women More explicitly, demographic bonus creates human capital in three ways Firstly, with the longer life expectancy, the attitudes of people tovwards education, family

future, retirement and position of women will be changed as a better way Secondly, more educational opportunities are created for fewer children which in turns make them more productive and effective employers in the future labor force Lastly, the decrease in number of children in the family and society finally enhances the health of women as well as their participation in the labor force, which contributes to the economic growth (Kalemli – Ozcan, 2002) Other papers concerning this aspect are Croix and Licandro (1999); Ryder and Weil (2000) and Zhang and Lee (2003) They claimed that there was always a trade-off between quantity and qualtity of labor force during the demographic transition period However, a country will receive the highest benefit if they have a well preparation for quality of population while waiting for demographic bonus occurs

The impacts of these three channels above on economic growth could be reviewed through famous theories about economic growth If the relationship between labor supply and level of income could be found in any economic growth theories from the early stage of economic science to recent modern eocnomic models, the linkage between savings and economic growth have been mentioned in many researchs As is well known, the Solow – Swan models (1956) predict that a rise in the savings rate positively affects the level of per capita income The same results illustrating the connection between savings and per capita level have also been presented in other studies under several different levels (Sato, 1966; Barro and Sala-i-Martin, 1995; Romer, 1996) The role of human capital in economic growth have been emphasized in both theoretical and empirical studies, such as those of Nelson and Phelps (1966); Lucas (1988); Romer (1990); Barro (1991); Sala-i-Martin (1992) and Barro & Lee (1992) These studies suggested that all of three channels above were important determinants of growth process So, the relationship between demographic bonus and economic growth could be demonstrated indirectly through three essential determinants of economic growth: labor supply, savings and human capital

2.3 Conceptual framework

The contribution of demographic bonus to economic growth is an indirect stimulation through three main channels: labor supply, savings and human capital which directly affect to the per capita level The relationship between demographic bonus and economic growth through these channels are illustrated in the diagram below

Figure 2.1: Relationship between demographic bonus and economic growth

Demographic transition will operate continuously and it reaches demographic bonus point when

the dependent population only accounts less than the working-age population Children born in

the early stages of the transition will enter the working-age population automatically, and this

mechanism creates the potential for labor market in particular and economy as a whole In

addition, this movement of youth population will lower the ratio of dependents to non dependent

people In the other hand, women would be released from the responsibility of familial activities

because of the fewer number of children they have to take care This innovation provides

women more opportunity to participate in the labor force The combination of two impacts above

eplains for the increase of labor supply when demographic bonus phenomenon occurs

Other factors: Openess to trade, Corruptions

perceptions index,…

Bloom, Canning (2002)

Kelly & Schmidt (1996)

Kameli &

Ozcan (2002)

Harrod Domar (1939-1946)

Coale and Hoover (1995)

Barro & Lee (1992)

The findings of Kelly and Schmidt (1996) shown that the young and elder had a tendency of consumption higher than the level of whom in working-age population Besides that, improved health and longer life expectancy make saving more important A healthy person has to plan for the future if he or she wants to maintain the standard of living in the retire period ahead Moreover, with the baby-boom generation in the previous stages of demographic transition, all government seem to have many policies to tighten the fertility rate growth So, with the fewer children born, those countries and families which experienced the demographic bonus period could save more instead of investing in young people as the previous generations

Demographic bonus may also affect on human capital because of decreased mortality and improved health Parents with fewer children now pay more attention to invest in education for their sons and daughters As a result, labor force with higher educational level and longer life expectancy would become more productivity and in turn receiving higher wage and better standard of living It is obviously seen that the economy will absord these merits and last the growth process longer

In the right hand side of the conceptual framework above, the three mechanisms including labor supply, savings and human capital, in turn, are the important elements in the contribution of economic growth The linkages between these elements and economic growth have been discovered in many studies along the development of economical science The first factor – labor supply is one of the most essential that occurred in most of economic models from the early stage of economic history to nowadays The most notably works in this field included the literature by Harrod Domar (1939-1946), Solow (1956), Lucas (1986), Romer (1989) and Mankiw & Weil (1992) These efforts mainly tried to examine the relationship and how to extent the labor force impact to the economic growth The second factor – savings, is also an indispensable part in any economical research The influence of savings on per capita level could be found in some typical works of Solow & Swan (1956) and Barro & Sala-i-Martin (1995) The final factor – human capital, is a new element that has been received more and more concerning nowadays because it becomes a vital key in the openning the door of economic growth

However, there are many other different determinants affected to the economic growth So, in order to examine the impact of demographic bonus on economic growth under comprehensive point of view, it would be better if the other factors are taken into account with demographic factors simultaneously

in East Asia The role of the change in age structure has been shown to have a much more significant effect on economic growth throughout Asia than these above factors This means that demographic characteristic could be seen as a miracle ingredient in the marvel economic growth of East Asia (Bloom & Williamson, 1998)

At the global level, the study of Malmberg and Lindh (2004) used age structure projections to forecast the economic growth of different parts of the world The focus in their research is to evaluate the forecasting performance of demographically based models and ultimately answer the question about the gaps between the developed and developing world The authors estimate demographically based models of income as a function of some important demographic factors including age structure, urbanization and life expectancy The combination

of the results from their estimation and UN projections of age structure will be exploited the forecast global income levels up to 2050 They collected averaged data of 82 countries for the period cover from 1950 to 1990 in the regression step and then use this result for the next step

to forecast the income of different countries throughout the world In their study, per capita income was used as proxy for economic growth and age structure as proxy of demographic transition, life expectancy and mortality rate as proxy for human capital In detail, the model they have chosen to estimate contains per capita income as dependent variable and life expectancy, population size of the largest city, age structure and mortality rate as independent variables After constructing and estimating the demographically based model, they also created interaction variable between age structure and life expectancy to capture the different levels of mortality between countries The main findings in Malmberg and Lindh ‘s study is that countries with the shorter life expectancy, the effect of age structure on income level depends on the balance between children and young adults and countries with higher level of life expectancy would have a good economic prospects whether having or not high share of working age population Their findings stressed that changing life expectancy can alter the demographic

structure effects Additionally, the forecasting results in this research showed that developing countries have a tendency of grow faster and start converging to the income levels of the developed nations The strong points of Malmberg and Lindh ‘s study are investigating the direct effects of demographic factors to per capita income and focusing on the different life expectancy levels between countries However, the lack of control variables in the model makes the effects

of demographic factors on economic growth becoming vague and lack of comprehensive

Similarly to the research of Malmberg and Lindh (2004), Kogel et al (2004) also concluded that age structure took a significant role in the output per working age person The authors applied instrumental variable methods to control for the endogeneity fo demographic variables and then they combined the estimated coefficients of the regression on economic growth with probabilistic population projections of India to forecast the growth potential moving with the India’s changing age structure The model used in this study differs from the model in Malmberg and Lindh (2004) from dependent variable to independent variables In Kogel et al (2004), output per working-age person is exploited as dependent variable and independent variables consist demographic variables such as youth dependency ratio, annual average growth of working age population, life expectancy at birth and control variables including indicator of rule

of law, ratio of exports and imports to output, openess to trade, and economic zones dummy variables From this model, it is obviously seen that the proxy of economic growth is output per working-age person and the proxy for demographic bonus measured by youth dependency ratio, proxy for labor supply illustrated by annual growth of working age population and life expectancy is used as a proxy fro human capital They run regression for 97 developing and developed countries averaged over the time period between 1960 and 1995 Finally, they concluded that there was a negative and significant effect of youth dependency ratio to economic growth and the forecast result showed that India would reach today’s level of output per working age person of Singapore in 9 years The interesting marks in Kogel et al (2004) paper are the instrumental variable method and the relationship between age structure and social infrastructure However, Kogel et al just focused on the youth dependency ratio, and ignored the impact of elderly denpendency ratio which plays an essential role in the well-being

of a nation

At the country level, in their early working papers, Lee and Mason (1997) explored the effects of demographic transition stages on aggregate saving and then on productivity growth rate as a comprehensive review for Taiwanese case They concluded that the change in demographic

situation in Taiwan from a high level of fertility and mortality to the low one has an essential role

in the contribution of the rise in the saving rate, and ultimately creates the growth in capital output ratio In this paper, Lee and Mason extended the life cycle saving model constructed by Tobin (1967) to find down the role of changing demographic structure on life cycle and national saving First, they applied the basic model of Tobin at the steady state and their own baseline set of assumptions to make the comparative statics for Taiwanese experience in the period from

1950 to 1990 In the baseline set of assumptions, they strictly defined the life expectancy, total fertility rate per woman, interest rate, productivity growth rate and time preference rate Based

on the results of comparative statics, in the next steps, they did a dynamic simulation as well as the projections to the year 2100 of savings and capital accumulation with the changing in age structure during the demographic transition In the simulation, the authors set up two scenarios

in which adults only concern about the current demography situation and the other case is that adults also embrace their future fertility and mortality rate The most important lesson from this paper is the authors’ concern about the impact of demographic transition to saving rates as a channel lead to the growth of total capital output

More recently, Lee and Mason (2007) have also showed that changes in age structure have had

a very substantial effect on Taiwan’s income growth However, the gains from demographic bonus are not equally shared by all age groups, children and young adults have benefited the most while the elderly have benefited the least They used age-specific data from annual income and expenditure surveys of Taiwan between 1978 and 1998 and overlapping families model to analyze the intergenerational familial effects This model allowed them to investigate the effects of the family dependency ratio and the population dependency ratio seperately All regression estimates for the per capita income of each generation (children, workers and pensionners) were used Ordinary Least Squares method After that, they used the coefficient estimates to construct a series of counter-factual simulations that allow dependency structures change in accordance with their observed historical trends In conclusion, they found that both the population age structrure and the family age structure influence the income level although the population age structure had a dominant effect The difference of this study compared with previous studies is that it considered the possibility of the effects differ by age groups on income per capita and took into account the integrated analysis of population and family level Nevertheless, measure of familial dependency ratios in this paper was ambiguous and need more refined to archive the larger estimated effects

One of the lastest studies of Bloom and Finlay, who have many papers and reseachs concerning demographic aspects, is to reexamine the role of the demographic transition in contributing to cross-country differences in economic growth through to 2005, with a particular focus on Asia (Bloom and Finlay, 2009) They constructed a model that illustrate the relationship betweeen economic growth and age structure, then they estimate the parameters of the model derived in previous stage to project the contribution of future shifts in working age and population growth rates to economic growth throughout Asia Bloom and Finlay used the convergence model outlined by Barro and Sala-i-Martin (2004) and constructed a 5-year panel dataset from 1960 to 2005 using country level data of a global sample which includes 102 countries The methods used in their study were Ordinary Least Squares and Instrumental Variables method They estimated the coefficients of the best model, geographic and demographic specification model, using an instrumental variables estimator Their expectation is that the growth of population and the growth of the labor forcce could affect the growth of income per capita and the results in their model indicate that even when controlling for potential reverse causaltiy, the growth of labor force has a positive and significant effect on economic growth In the final stage, they used the cofficients from their best model to calculate the contribution of the growth of the working-age shate, growth of the labor force and growth of the population to economic growth in Asia Their conclusion is that demographic factors remain an essential contribution to economic growth in Asia and wil continue in the future These results are consistent with their previous study (Bloom et al., 2000) The best model in Bloom and Finlay ‘s study includes the demographic variables such as working-age shares, labor force to working-age population, life expectancy, education level, population density and population growth Other control variables are geographic variables, capital stock in the base year, trade openess and institutional quality It could be seen easily that the growth of income per capita in their model was used as a proxy to measure the economic growth, working age share and labor fore as proxies for labor supply, life expectancy and education level as proxies for human capital We could learn the significant and important variables from their model and construct our own one later

In Vietnam, the relationship between demography and economic growth recently have been reseached by Minh (2009) The estimated results from her study indicate that Vietnam could utilize the opportunity from the changing of age structure, especially in the demographic bonus period Minh also proved that the change in demograhics has contributed up to 15% of

economic growth during the period 2002 to 2007 This research was based on the data of demography of 61 provinces across Vietnam with the period time from 2002 to 2006 and ordinary least squares method Dependent variable in regression model is growth rate of GDP per capita and explanatory variables includes working ratio intitial level, working ratio growth, youth ratio, old ratio and investment ratio The advantages of this research are concerning both youth and elderly dendenpent population and the study focused on the provincal level However, by the use of few demographic proxies and few control variables, it is vulnerable to examine the relationship between dynamic demographics and economic growth as a comprehensive view

These above empirical studies are all used different econometric methods to examine the linkage between demographic factors and economic growth, especially focus on the change of age structure Besides that, this connection is consolidated by many descriptive statistic researchs such as those of Phang (2006) and Nasir (2011) In the paper of Phang, the benefits from demographic bonus was evaluated how and to what extent it affected the Korean economy After that, the author used future fertility rates in the population projections of Korea and United Nations Population Division to predict the movement of Korean population and its impact on economy in the future The main remarks in Phang’s study were that Korean economy and society have got dividend from the demographic transition during the second half

of the twentieth century and in future, this bonus would change into a burden when the labor force and young population becoming older The responsibility of Korean government is very important in preparing many policies in order to confront this obstacle on their growth process Results in the paper of Nasir (2011) was consistent with the findings in Phang (2006) The author concluded that demographic bonus motivate the economic growth, especially in East Asia region because these countries underpin their merits through the combination of many policies

The following table summarizes the empirical studies above in a more evident way

Table 2.1: Summary of empirical studies

1 Lee & Mason

(1997)

Tobin (1967) life cycle saving model + dynamic simulations

Taiwanese demography data

in the period 1950

to 1990

Demographic transition in Taiwan with the lower fertility rate and mortality rate, significantly consolidated the increase in the saving rate through the steady state comparative analysis The contribution of the change in age structure to the growth of savings and capital accumulations is strengthened via dynamic simulation analysis

In both scenarios, the saving rates first increase and then decline as a forecast projection

by 2050 However, the capital output ratio will rise more than

10 times as compared to the base year 1950

2 Kogel et al

(2004)

OLS method, Instrumental variable method, Probabilistic population projections to forecast growth moving

Cross section of

97 developing and developed

countries averaged over the period between

1960 and 1995

From the result of the OLS and Instrumental variable method, the authors concluded that age structure had a significant effect

on output per working age person Based on the combination of coefficients in the instrumental variable model and probabilistic demographic

projections, Kogel forecasted the India’s economic growth until 2035 and calculated the number of years it would take India to reach the level of output per working age person in some developed countries

3 Malmberg &

Lindh (2004)

OLS method +

UN projections of age structure to forecast global income levels

Cross section of averaged data of

82 countries from

1950 to 1990

The estimate results show that life expectancy has an important role in the level of per capita income and it also affects

to the demographic structure Besides that, the forecasting models illustrate the convergent trend in economic growth around the world in which developed countries will have a slow or even a negative growth tendency while developing countries have a speeding pace

in their develop race

4 Phang

(2006)

Descriptive statistic

Korean demography data from 1950 to 2004

Demographic transition period provided young population and and labor force for Korean economy throughout the second half of 20th century Thus, this lead to the result that Korean economy had a rapid growth and society had been improved substantially However, this baby boom generation will become older in the first half of the next century and may create burden for

social and economical environment The author emphasizes the important role

of policies and management power of government

5 Lee & Mason

(2007)

OLS method + Overlapping families model

Age-specific data from annual

expenditure surveys of Taiwan between 1978 and

1998

The author used the coefficients

in OLS models to build different counter-factual simulations to examine the effects of family dependency ratio and population dependency ratio on annual income The results explored that the changes in age structure have a very substantial effect on Taiwan’s income growth especially in both family and population level But the benefit from demographic bonus is different between age groups

6 Bloom &

Finlay (2009)

Instrumental variables method

Panel data of 102 countries on averaged 5-year from 1960 to 2005

The results from the best model

of their estimation proved that the demographic factors have positive and significant effects

on economic growth Furthermore, the coefficients from the best model used in calculating the contribution of demographic factors to Asian economic growth show that the long effect from these factors will last until next decades

demography data

Change of age structure affects

to economic growth and it has

in Vietnam measured as average from 2002

to 2006

contributed up to 15% of economic growth in each province over the period from

2002 to 2007 Additionally, different age groups have different impacts on growth Old population has positive effect while young population has the reverse effect

8 Nasir (2011) Descriptive

statistic

Demography datas of three contrasting

regions: Eastern Asia, Central America and Oceania from

1950 to 2010

Demographic dividend has contributed in the process of poverty reduction in three contrasting demographic characteristic regions Besides that, demographic dividend will create the best effect through three channel including labor supply, savings and human capital Author also concludes that East Asia is the most successful region in taking benefit from demographic dividend period

2.5 Chapter remarks

The concepts and relationship of demographic bonus and economic growth which have been employed deliberately through many theoretical and empirical studies above contribute to the persuation of this research The main theories lie behind these thereotical and empirical works are eocnomic growth, life-cycle and demographic transition hyphotheses Through these theories, the impacts of changing in age structure on economics are investigated and this creates the roof base for many later empirical studies about the relationship between demography and economics In addition, the previous eocnomists discovered that there are

three channels that demographic bonus, a special period of change in age structure, could contribute to the economic growth These channels consist of labor supply, savings and human capital If the first two channels are the popular topics in economics researchs, the last channel, human capital just have been took into account recently

In the empirical researchs, these three channels are illustrated through different proxies that could be easily measured However, the popular proxies for economic growth are the growth of output per capita or the growth of income per capita The demographic bonus proxy is usually illustrated through the dependency ratio The channel of labor supply is described by the ratio of labor force to total population of the ratio of labor force to working-age population Proxy for savings is popularly total savings of a country or economy Finally, the proxies of human capital are life expectancy or education level

From the lessons of these emprical studies above, the suggested research model used in this paper also includes of the growth of total output per capita as proxy for economics growth, depency ratio as proxy for demographic bonus, labor force ratio to total population as proxy for the channel of labor supply, total savings as proxy for the channel of savings and the proxies for human capital channel are life expectancy and education level The hypothesis behind this model is to test the relationship between demographic factors and economic growth, especialy

in the period of demogrphic bonus

CHAPTER 3: DEMOGRAPHIC TRANSITION IN EAST ASIA AND VIETNAM, DATA AND RESEARCH METHODOLOGY

Literature review, conceptual framework and empirical literature have been mentioned in the previous chapter The comprehensive overview of the demographic transition in different regions in the world which had variety of demographic patterns and experience in the long developing history and the changing in age structure of Vietnam will be viewed in this chapter Besides, data and research methodology used in this thesis also be described in this part

3.1 Demographic transition in East Asia and Vietnam

3.1.1 East and Southeast Asia

Recent decades, all East Asian countries are in the different stages of age structure changing which starts from the high total fertility rate and infant mortality rate to the low rates This change created a boom generation of working age population that led to capital accumulation and finally, had a positive impact on economic growth The relationship between demographic transition and economic development in Asian countries was proven through many studies such

as Bloom et al (1998), Canning et al (2000), Mason (2001) These authors have been seemed

to follow the optimistic theory that population change can motivate economic growth and they called the period that demographic bonus leads to rapid economic growth in Asian countries as

a miracle phenomenon

After the World War II, the improvements in health and standard of livings occurred around the world This process happened largely through many upgrading programs concerning sanitation, safety water, preventing popular contagious diseases According to World Population Prospects: the 2000 Revision from the United Nations, most of drugs and vaccines such as penicillin, tetracycline and bacitracin which used in treatment of dangerous diseases were discovered and launched from the late 1940s Therefore, the infant and child mortality rate from the 1950s and henceforth declines significantly In East Asia, there was a rapid decrease in this rate which fell down nearby four times within the second half of 20th century from 182 per thousand children in 1950 to 52 per thousand children in 2000 The result from dropping rate of infant mortality leads to the falling in fertility rates In conjunction with these events, the family planning programs were also introduced in many Asia’s developing countries at that time This

combination would assist the decline in total fertility rate but its result has a certain lag time As

in a study of Mason (2001), the change in level of fertility rate in East Asia took at least 30 years

to switch from a high rate to the lower one Additionally, in a paper of Nandakumar et al (2001), total time for a whole process may take over 50 to 75 year period which is seemed to be the fastest demographic transition until now In the early stage of this transition period, an Asian woman, on average, had six children but this number is only two today During the lag time for changing in fertility rate adapted with the falling in infant mortality rate, a generation called ‘baby boom’ would be created

The demographic transition in East and Southeast Asia was recognized as one of most important factors in the mystery growth of this region In the period from 1960 to 1990, income per capita of countries in East and Southeast Asia increased over 6 percent per year as recorded data in a research of Bloom et al (1998) The reason could used to explain this phenomenon is that when the baby boom cohort joins to the workforce, the proportion of dependent population to total workers would decrease substantially This advantage accompanied with the improvement in education, health status and environment of liberalized trade, this generation entries into the labor market and then contributes to the development of economic production In the period from 1960 to the late years of 20th century, the growth speed

of working age population was acknowledged as fourfold faster than dependent population in East Asia The figure 3.1 illustrates that the share working age population in East Asia and 6 collective countries in this thesis have similar developing pattern From the forecast of United Nation, this ratio of East Asia increases to reach a peak in the year 2010s and then decrease gradually to the year 2050s As a result, the working age share will take a larger part than dependent population in a period lasting nearby 100 years for all of countries which are the objects of this study The figure 3.2 shows the shift in GDP per capita growth of these above countries The same pattern with a certain lag time between the change of working age share and economic growth yields that they have a specified impacts to each other

The change in population in general and the change in age structure in particular motivated the economic growth in East and Southeast Asia Simultaneously, the income growth in these countries also adjusted population growth and total dependency ratio through the declining of fertility rate This two side induction leads to the high saving rates and the improvement in education quality because of parents has fewer children to take care of than the previous generations (Mason, 2001) Results from the papers of many authors who concern to this problem such as Bloom and Williamson (1998), Mason (2001), Bloom and Finlay (2007)

concluded that the demographic bonus takes a part of one-fourth or two-fifths of East Asia’s phenomenal growth

The demographic dividend may change into a burden for the countries which do not have a full preparation to take the advantage from this period The decrease in infant mortality coincided with the fall in other age’s mortality will improve life expectancy and the dramatically slow growth

in population will create many challenges for these countries when baby cohort ages retire and enter the aging population

Figure 3.1 Share of Working-Age Population in East Asia and selected countries

East Asia China Indonesia Korea Singapore Thailand Vietnam

Source: United Nations, World Population Prospects: The 2012 Rivision

World Development Indicators 2012

Figure 3.2 Economic growths in 6 selected countries

China Indonesia Korea Singapore Thailand Vietnam

Source: World Development Indicators, 2012

65 and over) went down substaintally Besides that, the proportion of working age people occupied a noticeable larger part than denpendency ratio

Table 3.1: Vietnamese age structure, 1979-2009 (%)

Source: Vietnam Population and Housing Census 1979, 1989, 1999 and 2009

According to definition Ronald Lee and Andrew Mason (2006), demographic bonus is the period that the labor force grow more rapidly than the dependent population Another defintion of demographic bonus extracted from a paper of United Nations (2008) is a span of time when the very young (aged 0-14) and the elderly (aged 65 and over) account for less than 30% and 15%

of the population respectively It is obviously seen that Vietnamese population has been entering the demographic bonus since 2009 Figrue 2 shows the projection for Vietnamese population from 2010-2050 The growth rate of elderly becomes more dramatically after 2020 and Vietnam will confront with the burden of aging population This tendency lasts until 2040 and the elderly ratio excess 15% of total population and the process of demographic debt will begin From these statistics, Vietnam could take advantage in its demographic bonus period lasting in 30 years from 2010 to 2040

Table 3.2 Vietnamese population projection, 2010-2050