Economic slowdown after demographic dividend: Are we prepared?

There is no alternative to a skilled workforce for the economic development of any country. The more skilled and trained the labor force, the brighter the prospects for the country's economic development. No matter how advanced mechanical power becomes, if the person operating the machine is unskilled and immature, development cannot be achieved. If the workforce is adequately trained and skilled, it can become the greatest asset for a country. Conversely, if that workforce is untrained and unskilled, it can be considered a liability for the nation. The total workforce of a country can generally be divided into four categories: children, youth, adults, and the elderly. Typically, individuals under the age of 18 are considered children. Those between 18 and 35 are considered youth, those between 35 and 60 are considered adults, and those above 60 are considered elderly. Among them, the 18 to 60 age group is known as the working-age population.

According to economists, when two-thirds of a country's total population is working-age, this situation is termed a demographic dividend. A demographic dividend occurs only once in a nation's lifetime. Some argue that it happens once in a thousand years. A nation that can effectively and strategically utilize the benefits of the demographic dividend can claim supremacy in the global economic arena. However, if a nation fails to capitalize on the benefits of the demographic dividend effectively and strategically, it may never reach the pinnacle of progress. There are many examples worldwide where nations have failed to utilize the demographic dividend, resulting in the nation not achieving the desired level of development. A demographic dividend does not recur in a nation's lifetime.

Currently, Bangladesh is experiencing the demographic dividend. According to many economists, this phase began at the start of the current century and will continue until 2035. After that, the opportunity of the demographic dividend will no longer be available. Although various economic development stories are shared from different levels of the government, there isn't much detail on how this development is happening. Given that Bangladesh is currently in a demographic dividend phase, development is expected. However, this phase does not seem to generate much enthusiasm among policymakers. It's crucial to remember that the demographic dividend phase will not last forever.

Bangladesh is expected to transition to the final list of developing countries by 2026. The World Bank has already recognized Bangladesh as a lower-middle-income country. The government states that Bangladesh will become an upper-middle-income country by 2031 and aims to become a developed country by 2041, 70 years after independence. However, this achievement does not seem easy. To become a developed country, the economic indicators need to be more advanced. GDP growth needs to reach double digits, and the investment rate in the private sector should be at least 40% of GDP. If the current pace of the Bangladeshi economy is not accelerated, the aspiration to become a developed country by 2041 may remain a "daydream."

Japan serves as a vivid example of how an economy can slow down despite utilizing the demographic dividend. After World War II, Japan began experiencing the demographic dividend, which it strategically leveraged to become the second-largest global economic power in a short period. However, a few decades ago, Japan moved away from the demographic dividend, and the number of elderly people began to rise. China experienced the demographic dividend about three decades ago and started surpassing Japan economically. A few years ago, China emerged as the second-largest global economic power, pushing Japan to third place. However, China, too, is now seeing an increase in the elderly population, which may hinder its dream of becoming a developed country by 2026. China's GDP growth rate has already started to decline, dropping from a double-digit rate to 5-6%, and it might fall to 3-4% in the coming years.

According to the World Health Organization (WHO), when 7% or more of a country's total population is over 65 years old, it marks the onset of an aging population. In 1998, China surpassed this threshold, and by 2023, 15.4% of China's total population was over 65 years old. Experience shows that when 15% of a country's population is over 65, achieving a GDP growth rate above 4% becomes challenging. During this time, the average growth rate for high-income countries was only 1.8%. Generally, when a person exceeds 65 years of age, their work capacity and motivation start to decline. Due to demographic issues and an increasing number of elderly people, Spain's per capita GDP relative to the United States fell from 73% to 39% in 2008. Similarly, Greece's per capita GDP dropped from 66% to 27%, and Portugal's from 51% to 32%.

In 1995, Japan's per capita GDP was 154% of the United States, and Germany's was 110%. By 2023, Japan's per capita GDP fell to 41% and Germany's to 64% relative to the United States. Over the past 12 years, Japan's average GDP growth rate was 0.4%, while Germany's was between 1.4% and 1.5%. The question is, how feasible is it for Bangladesh to implement the economic development plans it has outlined? If Bangladesh can become an upper-middle-income country by 2031, it will be a record achievement. Bangladesh became a lower-middle-income country in 2015, so it would take 16 years to transition to an upper-middle-income country. Even China did not achieve this transition in such a short time.

Bangladesh will transition to the final list of developing countries by 2026. After achieving this status, Bangladesh will lose certain benefits in international trade. Specifically, the European Union will cease to provide Generalized System of Preferences (GSP) benefits to Bangladesh after 2029. Without GSP benefits, Bangladeshi products will face a minimum tariff of 12% when exported to the European Union. Since 1976, EU countries have been providing GSP benefits to Bangladesh, making the EU the largest market for Bangladeshi products. Economists have long recommended diversifying export products and destinations, but this advice has not been given much importance. The limited range of products and export destinations remains a significant barrier to our export trade. Most of our export trade comprises ready-made garments, but since these garments depend on imported raw materials, capital machinery, and intermediate products, the value addition to the national economy from this sector is relatively low.

The most promising sector for earning foreign exchange for Bangladesh is manpower export. This sector does not require the import of any materials. Instead, it has created employment opportunities for about 15 million people. However, we are highly indifferent to the manpower export sector. Most of the manpower exported from Bangladesh consists of unskilled or semi-skilled workers. If professionals were sent abroad, the income from this sector could increase by 4 to 5 times. According to a World Bank report, last year (2023), Bangladesh earned 23 billion US dollars in remittances, ranking seventh globally in remittance income. Despite a record 1.3 million new manpower going abroad for employment last year, many expatriate Bangladeshis are sending remittances through hundi (an informal money transfer system) in hopes of getting more money in local currency due to the fixed exchange rate set by the domestic market. Most of the manpower exported from Bangladesh goes to six Muslim countries in the Middle East, where wage rates are relatively low. We have been exceedingly unsuccessful in finding new destinations for manpower export. If trained manpower could be sent in increasing numbers to Europe and other developed countries, the income from this sector could rise significantly.

Efforts are underway to establish 100 special economic zones across various regions of Bangladesh. It is expected that these zones will begin production by 2030. We are filled with dreams of expectation regarding these special economic zones, but have we considered who will work in these zones? Foreign investors will come to Bangladesh with their surplus capital for investment, but they will not bring workers. So, who will work in these factories? We often say that there is a guaranteed supply of cheap and abundant labor in Bangladesh, but have we considered why the wages of our workers are low? Most of the labor available in the domestic market is unskilled and untrained. Naturally, the wages of unskilled and untrained workers will be low. To fully utilize their production potential, foreign investors will import skilled labor from abroad.

The Bangladesh Bank has already made provisions for bringing in foreign labor. Previously, the rule was that any company importing labor from abroad could send 75% of the laborer's wages directly to their home country. The remaining 25% would be used for paying local taxes, living expenses, and other expenditures, with any surplus deposited in a local bank account. When they returned home permanently, they would take the savings from the bank. This law has recently been amended. Now, a foreign laborer can send 80% of their earned wages directly to their home country. The remaining 20%, after paying local taxes and other expenses, can also be sent to their home country. What does this leniency mean? Given the current trajectory of Bangladesh's development efforts, questions arise about the feasibility of emerging as a developed country in the global economy by 2041. Nevertheless, we remain hopeful of seeing a developed Bangladesh.

MA Khalek: Retired General Manager, Bangladesh Development Bank Plc and Writer on Economics.