Sunday, February 10, 2008

Growth Tigers and Demographic Dividends

The East Asian Tigers

The East Asian development experience has often been central in placing the issue of age structure back on the economic agenda, and is certainly the example which is most frequently cited in support of the age transition demographic dividend hypothesis, since in many ways the south east Asia "tiger" countries provided the first modern example of relatively poor economies finding the path to relatively rapid economic development (although astute observers might have been struck by importance of the earlier Japanese example),

In the case of the 'tigers' the most striking feature is how, as the transition progressed, a successful export-oriented growth-strategy produced more than enough jobs to absorb what was a rapidly growing workforce. At the same time, a relatively stable macroeconomic environment – at least until the financial crisis of the late 90s – provided what seemed to be a fertile and attractive investment environment.

Ongoing work by a number of researchers has continued to find that a significant part of the impressive rise in Asian savings rates can be explained by the equally impressive decline in dependency burdens, and that some at least of the notable difference in savings rates between what was in the 1990s a sluggish South Asia and a booming East Asia can be attributed to differences in their relative dependency burdens. If this view is accurate then it also fuels the rather optimistic hypothesis that some of the savings gap between the two regions should reduce as youth dependency rates fall in South Asia over the next two to three decades.

The debate over the East Asian "miracle" really begins with the work of Alwyn Young, who, in a couple of extraordinarily provocative papers (Young, 1994, 1995), attempted to demonstrate that the rapid economic growth that was only too evident in the region was principally attributable to increases in factor inputs - notably labor, capital, and education - rather than to general improvements in total factor productivity. If Young was right, then the key to understanding the rise in income levels in East Asia lay in understanding the driving mechanisms behind such a growth in inputs.

All of the Asian Tiger economies enjoyed a surge in savings and investment during the high-growth period. The private savings rate in Taiwan, for example, rose from around 5% in the 1950s to well over 20% in the 1980s and 1990s. (It is perhaps worth noting that much of the debate surrounding the savings issue has focused on Taiwan since the data on household savings in Taiwan is fairly comprehensive).

As predicted by the life cycle hypothesis, savings rates in Taiwan were found to vary by age, being highest for households whose heads were in the 50-60 age range. Using this data Bloom and Williamson found changing age structure to be a plausible explanation for the increase in aggregate saving which took place. In support of their argument they cited a number of previous studies (both "historic" and more recent ones) that had also found a strong connection between these two variables (Fry and Mason, 1982; Higgins, 1998; Higgins and Williamson, 1997; Kelley and Schmidt, 1996; Leff, 1969; Mason, 1987, 1988).

In terms of prior work, Higgins and Williamson (1996, 1997) had estimated the largest demogrphic macro impacts. Higgins and Williamson attempted to estimate the effect of changes in population age distribution on changes in, rather than levels of, the savings rate as it deviated around the 1950–92 mean. Thus East Asia’s savings rate in 1990–92 was 8.4 percentage points above its 1950–92 average due to the transition to a much lower dependency burden. Similarly, East Asia’s savings rate in 1970–74 was 5.2 percentage points below its 1950–92 average due, in part, to the size of the dependency burden.

They found the value of the total demographic swing to be a sizeable 13.6%, a swing which would appear to account for almost the entire rise in the savings rate in East Asia over the 20 years in question. The figures for Southeast Asia are similar, but not quite so dramatic. Southeast Asia’s savings rate was 7.9% higher in 1990–92 than the 1950–92 average and the mean was 3.6% between 1970–74. The total demographic swing was 11.5%, a smaller figure than for East Asia, but still apparently sufficient to account for the entire post 1970 rise in the Southeast Asia savings rate. Since the demographic transition had been slower in South Asia, the more modest changes in the savings rate were, more or less, to be anticipated.

Higgins (1998) also carried out an econometric investigation of the relations between national age distributions and savings and investment rates for a sample of 100 countries, using both time-series and cross-section data. Once more the results point to substantial demographic effects, with increases in both the youth and old-age dependency ratios associated with lower saving rates.

Perhaps more important for the agenda it would set for subsequent work, the results pointed to differential demographic effects on savings supply and investment demand, and thus, to a role for demography in determining the residual between the two: net capital flows or the current account balance.

In particular, Higgins found that high youth dependency rates demonstrated a strong relation with current account deficits, with young nations being found to join the ranks of the capital exporters as they mature. The estimated demographic effect on the current account balance had exceeded four percent of GDP over the last three decades in many of the 100 countries studied.

This Hiigins paper (which was based on his earlier doctoral thesis: he was one of Jeffrey Williamson's students) is best interpreted as extending the youth-dependency thesis Coale and Hoover (1958) had advanced almost forty years earlier, moving-on from an exclusive focus on saving rates to an analysis which incorporates the knock-on impacts for investment and the current account balance.

His finding that maturing nations tend to graduate from reliance on capital imports also has important implications concerning the possible evolution of the global savings pool in the decades which lie ahead. In particular, currently developing nations should be expected to be increasingly able to finance their own investment needs — a prospect which stands in in stark contrast to the pessimistic prognoses of the early 1990s ( For example, Depak Lal, 1991)

Higgin's other major result offered further confirmation that population dynamics accounted for a substantial share of East Asia’s economic miracle - a component equivalent to between 1.4 and 1.9 percentage points of East Asia’s total annual growth in GDP per capita from 1965 to 1990 (or as much as one-third of observed economic growth during the period) . Using a modified definition of "miracle" (and assuming, as Higgins does, that hypothetical "steady-state" growth in East Asia was a rate of about 2% a year) as being everything in excess of steady state growth, or about 4.1% (subtracting the notional 2 from the acieved 6.1 % growth rate). Population dynamics could then account for almost half of this observed difference or miracle. Now accounting for one-third or one-half of the East Asian growth certainly does not explain everything, but it does suggest that population dynamics may have been the single most important determinant of this 'extra' growth.

Within Asia itself, the evidence also suggests that demographic divergence contributed significantly to economic divergence during this same period.

Deaton and Paxson (2000) however throw something of a bucket of cold water on all of this since, using household savings data for Taiwan, they find that changes in age structure account for only a modest increase in the overall savings rate, perhaps 4 percentage points. They argue that the rise in the aggregate savings rate has not been mainly due to changes in the age composition of the population but, rather, to a secular rise in the savings rates of all age groups.

Accepting this finding at face value, the question then arises as to why savings rates should have risen at each age. One possible - and intriguing - explanation, proposed by Lee, Mason, and Miller (2000) is that increased savings rates are due to rising life expectancy and an increasing need to fund retirement income. In support of this idea Tsai, Chu, and Chung (2000) show that the timing of the rise in household savings rates does indeed match the recorded increases in the life expectancy of the population.

With a fixed retirement age we would expect such a savings effect. However, Deaton and Paxson (2000) argue that in a flexible economy, without mandatory retirement, the main effect of a rise in longevity will be on the span of the working life, with no obvious prediction for the rate of saving. Bloom, Canning, and Moore (2004) formalize this argument to show that under reasonable assumptions the optimal response to an improvement in health and a rise in life expectancy is to increase the length of working life, though less than proportionately, with no need to raise saving rates at all (due to the gains from enjoying compound interest over a longer life span).

Schultz (2005) has also argued that the estimated magnitude of the dynamic aggregate relationship identified by Higgins and williamson may be appears smaller than reported, as well as suggesting that the HW effect may be sensitive to the choice of econometric methods used to describe it. referring directly to the Deaton and Paxson finding that savings behavior at the household level does not demonstrate sufficient life cycle variation, he asks whether there might not be alternative explanations for the observed trends in savings? One possibility explanation for the empirical regularities would be the substitution of savings for children, and this in fact could be explained within a household lifetime demand framework.

There may also be a demographic effect as a longer prospective life span can change life-cycle behavior, leading to a longer working life or higher savings for retirement. Recent empirical literature on economic growth does indeed provide compelling evidence that health status, longevity and the age distribution do indeed have strong connections to economic growth (Bloom, Canning, and Graham, 2003; Bloom, Canning, and Moore, 2004, Kinugasa, 2004, Kinugasa and Mason, 2005, Mason 2005).

While in theory a longer life span should be associated with a longer working life, in practice this may not be the case. Bloom, Canning, and Graham (2003) find that, even allowing for age structure effects, longer life expectancy is strongly associated with higher national savings rates across countries, which suggests that there is a savings effect.

While the optimal response with perfect markets may be for workers to have a longer working life as their health improves and they have longer life expectancies, mandatory or conventional retirement ages, coupled with the strong financial incentives to retire that are inherent in many social security systems, seem to result in early retirement and increased needs for saving for old age.

Also old age "dependency" is something of a misnomer. Lee (2000) shows that, in all pre-industrial societies for which he was able to assemble evidence, the flow of transfers is from the middle-aged and old to the young. In developed countries, on the other hand, both the young and the old benefit from government transfers, and the net pattern of transfers is towards the elderly. However, at the level in the United States and elsewhere, elderly households in fact make significant transfers to middle-aged households, undoing to some extent the effects of government policy. This seems to suggest that the dependency burden of the elderly is a function of the institutional welfare systems that are in place rather than an immutable state of affairs.

Beyond East Asia, a number of other studies appear to have leant more support to the demographic dividend idea. Bloom and Canning (2003a), for example, look at the case of Egypt. Between 1965 and 1990 Egypt’s working-age population grew at the rate of 2.61% per annum. This rate was about about 30 % faster than the growth rate in the dependent population and is closely comparable to the corresponding rates of population change among slow-growing South Asian countries. By contrast, the working-age population of the East Asian countries grew at approximately ten times the rate of the dependent population during the "miracle" years, as the "baby bulge" cohort entered the prime-age worker group. In East Asia this was also associeted with a drop in fertility beyond the replacement level. Using simple econometric regressions Bloom and Canning estimated that - not unexpectedly - during the early phases of Egypt’s demographic transition age changes contributed a modest, but not insignificant, 0.4 percentage points to Egypt’s economic growth rate during 1965–1990.

The Celtic Tiger

Ireland is a small, open, trade-dependent economy and is one of the fastest growing economies in the developed world. It constitutes around 1.8% of overall output in the Eurozone. Its relatively high level of openness is reflected in the degree of international mobility of labour and capital in the Irish economy as reflected by both strong migrationary flows and high levels of foreign direct investment. Its high level of susceptibility to movements in external trade is signalled by a high share of combined exports and imports of goods to Gross Domestic Product (GDP) which was just under 150% in 2004 and the fact that its GNP is significantly lower than its GDP.

In recent decades the Irish economy has been transformed from being an agricultural and traditional-manufacturing based one, to one which is increasingly focused on the hi-tech and internationally traded services sectors. In 2004, the services sector accounted for 66% of total employment, industry for 28% and agriculture for just 6%. Over the last decade, unprecedented economic growth has seen the level of Irish real GDP almost double in size.

There have been many reasons advanced for Ireland's success, and these include EU membership and access to the the European Single Market; low corporation tax rate and a large multinational presence, a high proportion of the population of working age; increased participation in the labour market especially by females; a reversal of the trend of emigration toward immigration; sustained investment in education and training. Of these, the last four are clearly all factors which relate to Ireland's recent and somewhat belated demographic transition.

Throughout the twentieth century, Ireland was widely recognized as a demographic outlier in Western Europe. The Irish demographic regime was characterized by high rates of out migration, especially female migration, late marriage, high rates of permanent celibacy, low rates of cohabitation, low rates of non-marital fertility, and very high rates of marital fertility. Although Ireland did experience some decline in fertility in the first half

of the twentieth century, the decline was considerably less than those that took place elsewhere in Europe. In 1950, in spite of continuing late marriage and substantial permanent celibacy, Irish total fertility was still 3.3 (a level which was among the highest in Europe). Throughout the 1970s, Irish total fertility rates were still above three births per woman level, however, during the 1980s Irish fertility began to change dramatically. Coleman (1992) and Murphy-Lawless (1997) have chronicled this rapid change which meant that by the end of the decade fertility was approaching replacement level which is where it has stayed more or less to the present time.

Between 1976 and 1994 Ireland managed to increase its real income per adult from 50 percent of the U.S. level to some 60 percent. From 1994 onwards things changed surprisingly quickly, and its relative performance literally took off. It rose by 18 percentage points during the past six years to 2000 to reach 78 percent of the U.S. level.

In the case of Ireland, the decomposition of real GDP per working-age adult into its productivity and

employment-rate components brings out a startling fact. The growth in Irish productivity has been very

rapid, not just in the past few years, but over the entire 1976-2000 period, averaging 3.3 percent annually.

Productivity growth rates of 3 percent or more sustained over such an extended period have been a rare

occurrence in the postwar period, and particularly during the last quarter century. In fact, since 1975,

only Korea (among OECD member countries) has experienced faster productivity growth than Ireland.

However, if the Irish boom of 1994-2000 was not due to an acceleration of productivity (more output per worker),

it must logically be attributed to the other source of growth in GDP per adult, namely an exceptionally

strong increase in the employment rate (a larger fraction of adults at work). Like many other EU member countries Ireland suffered a major employment slowdown during the years between the mid-1970s and the mid-1990s, a feature which largely overshadowed its positive productivity performance. Since 1994, however, the burst of employment in Ireland has not only erased previous job losses, but it has pushed the country’s employment rate to levels which are now significantly above the European average. (Fortin, 2002).

The Irish employment boom has had little parallel in postwar Europe. Some European countries - Austria,

Denmark, the Netherlands, Norway, Portugal, and the United Kingdom - did see their unemployment rate fall appreciably during the decade.of the 90s, but none of them dropped from such a high initial level (16 percent in 1993 to less than 5 percent today) or so rapidly. Second, the dramatic increase in employment was able to draw on a very large pool of women who had never previously been in the labour force. The number of Irish women in the labour force has increased by 65 percent since 1993. Third, the rate of job creation has absorbed a very large flow of immigrants who were attracted (or attracted back) to Ireland by the boom.

As indicated above, since 1976 the growth rate of Irish productivity (output per employed worker) has been strong, registering an averaged rate of 3.3 percent per year. One important important factor underlying this increase has been the continuous shift of economic activity and employment from the relatively low productivity primary sector to the more productive parts of the secondary and tertiary sectors. A measure of the change is to be seen in the fact that Ireland’s primary sector was still employing 40 percent of workforce in 1960; a percentage had fallen to a mere 9 percent by the end of the century.

Another factor worthy of note in the Irish case has been the fact that, from the 1960s onward, Ireland has witnessed a rapid and radical change in education policy and priorities. in particular succesive governments have sought to facilitate free secondary and low-cost higher education. Interacting with a late baby boom produced as a by product of the fertility transition, this policy move has made available a plentiful supply of well-educated young workers and indeed Ireland now has one of the highest educational participation rates in the world - 81% of Irish students complete secondary-level education and approximately 50% go on to participate in higher education.

From 1960 to 1990, the growth rate of income per capita in Ireland was approximately 3.5 percent per annum. In the 1990s, the growth rate jumped to 5.8 percent, which is well in excess of any other European economy. This boost in the growth rate coincides closely with the falling dependency rate in Ireland. Thus, the raw data are consistent with the view that demographic change contributed to Ireland’s economic surge in the 1990s. Bloom and Canning (2003b) examine this argument more closely and argue that the economic boom that occurred in Ireland in the 1990s is well predicted by estimates derived from a standard age-structure econometric model. As part of their analysis, they also show how the growth in the working age to total population ratio was matched by the increase in labor supply per capita.Economic growth in Ireland was also fueled by two additional demography-based factors that increased labor supply per capita: (i) between 1980–2000 there was a substantial increase in female labor force participation rates, particularly in the 25-40 year old age group, and (ii) the decline in youth cohort sizes and rapid economic growth of the 1990s led to a reversal of the traditional outward migration flow, resulting in net in-migration of workers, made up partly of return migrants but also for the first time of substantial numbers of foreign migrants.

It is important to note that Ireland, like the “miracle” economies of East Asia, had in place economic and social policies that favored its taking advantage of the demographic shifts it experienced. Two key policies appear to have been at work in Ireland. First, in the late 1950s, there was recognition that the “closed economy” model of development had failed in Ireland. This led to new policies with an emphasis on encouraging direct foreign investment in Ireland and promoting exports. Second, from the mid-1960s, free secondary education was introduced, leading to a large increase in school enrollments and subsequent expansions in higher education. The resultant high levels of education, combined with export-oriented economic policies, seem to be powerful factors in ensuring that the benefits of the demographic transition are realized.

Turkey: Europe's New Tiger?

The Turkish economy has, in the past, notoriusly suffered from very high levels of macroeconomic instability. However, following an extraordinarily dramatic economic crisis in the years 2000-01, and a subsequent series of structural and financial reforms Turkey has suddenly converted itself into Europe's fastest growing economy, and at the time of writing (January 2006) the outlook for future economic stability and medium-term economic growth look extremely good indeed.

In the years between 1994 and 2001 Turkish economic growth averaged a mere 2.8% and the economy experienced a number of severe crises. However since early 2001, in an uninterrupted output expansion which has now lasted 15 quarters output per worker in Turkey's manufacturing sector has increased by 37.8%, lowering unit labour costs by 38.8%, in the last four years and dramatically improving Turkish competitiveness in international markets. The rate of total factor productivity growth in Turkey surged from 0.5% per annum in the 1990s to the impressive rate of 4.8% per annum achieved over the last four years: This productivity spurt provides the bulk of the explanation for the surprising newfound resilience of the Turkish economy and is able to account for no less than 55% of the rise in real GDP that has taken place. And this growth in GDP has been impressive, with real GDP growing at an annual rate of 7.4% over each the last fifteen quarters. In this sense it can safely be asserted that Turkey's productivity revival reflects a permanent shift toward a higher growth plateau and forms crucial part of the feedback-loop between economic stability, the declining cost of capital, and the increase in investment spending

At the same time it is important to remember that Turkey is still a relatively poor country and that a comparatively large share of its population is still employed in agriculture.Turkey’s GDP per capita income is low, but its economic catchup potential is considerable. Measured at market prices, Turkish GDP per capita was $3,400 in 2003, a level comparable to that of Bulgaria and Romania, and far below say even that of the Czech Republic and Hungary, who each roughly have a GDP per capita of around $8,300. However, a more accurate measure of per capita wealth is normally thought to be GDP per capita measured on a purchasing power parity (PPP) basis. Measured in this way Turkey’s per capita income amounts to around $6,700, again, broadly comparable to the current EU accession candidates (Bulgaria, Romania), and a level which is only around 20-25% of that of the largest EU economy, Germany. A low per capita income is a double edged issue, since it means a low standard of living and it suggests there is substantial room for “economic catch-up”, which implies considerable room to improve productivity through the virtuous circle of technological innovation and investment.

Alongside all this growth, Turkey's consumer price inflation rate has also declined sharply from an average of 77.5% in the 1990s to an 7.7% annual rate of in December 2005 ( single digit inflation for the first time in three decades). Estimates of inflation for 2006 and 2007 are also farly benign (in the 4% range for 2006 and the 3.5% range for 2007) and the Turkish central bank is thinking of setting inflation targets, 5% for 2006 and 4% for 2007 and 2008. The fact that inflation targeting is under consideration is indicative of the new institutional framework for monetary and fiscal policy which has been introduced. To this should be added extensive product, labour and financial markets reform, while the more selective use of infrastructure industry and agricultural support has added yet another dimension to a process which has effectively opened a window of opportunity which may well allow Turkey to genuinely escape from the boom-and-bust cycle of the past, and embark on a path of sustainable higher growth and stronger employment..

The ‘age of stability’

Overall, demographic developments in Turkey are now strongly conducive to higher economic growth. The last two decades have seen a continuous fertility decline and Turkey is now on the point of entering entered into the last - or 'second transition' - phase of its demographic transition. The latest nationwide Turkey Demographic and Health Survey (TDHS) reveals the current TFR as being close to reproduction level, although there is still a clear and significant west-east regional disparity, with the more modern Western part of Turkey now well inside the below-replacement camp.

Turkish population trends can be immediately seen by taking a quick glance at recent changes in some basic demographic indicators. The Turkish population increased by a factor of five over the last 70 years, with improvements in health services and living standards bringing about a steady decline in both child and adult mortality. The Crude Death Rate declined from around 30 per thousand in the 1940s to 7 per thousand at the start of the new millenium. (Yavuz, 2005). The second half of the 20th century also witnessed dramatic declines in fertility rates. In the early 1970s, the Total Fertility Rate was around the 5 children per woman mark, while current fertility as estimated in the last - 2003 - Turkey Demographic and Health Survey is thought to be just above replacement (2.2). As a result, the age structure of the population has been changing rapidly .

In addition, since the early 1950s, Turkey has also experienced substantial internal and external migration which has been associated with an extensive urbanization process. This urbanization is ongoing and continues to profoundly change the spatial distribution of the Turkish population which is now predominantly concentrated in urban settlements. Intensive migration between regions, in particular from the Kurdish east to the west and south, and from the interior to the coastal regions, together with the aforementioned migration from rural to urban areas have been the key factors in shaping the social structure of modern Turkey.

Also, and after decades of being known as a source country for substantial emigration, Turkey is now facing increasing challenges to its inward migration and asylum policies. Turkey has, in fact, long been a country of immigration and asylum. From 1923 to 1997, more than 1.6 million people migrated into Turkey, mostly from the Balkan countries. During the Cold War, thousands of asylum seekers fled to Turkey from the Communist states of Eastern Europe and the Soviet Union. The overwhelming majority of these migrants were recognized as refugees, and were resettled to third countries such as Canada and the United States by the United Nations High Commissioner for Refugees (UNHCR). In the late 1980s however, this pattern began to change, as increasing numbers of asylum seekers began to arrive from Iran and Iraq, as well as from other developing nations. In the years between 1988 and 1991 Turkey also experienced a mass influx of almost half a million (mostly Kurdish) refugees from Iraq, as well as large numbers of Albanians, Bosnian Muslims, Pomaks (Bulgarian-speaking Muslims), and Bulgarian Turks in 1989, 1992-1995, and 1999.

Today, officially sanctioned immigration into Turkey has to all intent and purposes become nonexistent. However, since the early 1990s Turkey has seen the arrival of a new form of "irregular immigration" involving nationals of neighboring countries, EU nationals, and transit migrants. Turkey allows nationals of Armenia, Azerbaijan, Georgia, Iran, Moldova, Ukraine, Russia, and the Central Asian republics to enter the country more-or-less freely - either without visas or with visas that can easily be obtained at airports and other entry points. A large number of these migrants are involved in small-scale trade. However, many subsequently overstay their visas and enter the 'shadow economy' working as domestic workers, commercial sex workers, or general labourers, especially on construction sites and in the tourism sector (the parallel with what is happening in Spain is most striking).

It is very difficult to give a reasonable estimate of the numbers of such irregular immigrants in Turkey. However, figures ranging from 150,000 to one million are often cited. To these groups must be added the victims of trafficking, particularly women. These are migrants who have either been coerced or deceived into traveling to Turkey for commercial sex work, and remain in Turkey against their wishes. There is also an increasing number of EU member-state nationals engaged in professional activities who are settling in Turkey, particularly in Istanbul, as well as European retirees in some of the Mediterranean resorts. They, too, constitute a relatively new phenomenon in terms of immigration into Turkey, and their numbers are estimated to be in the 100,000-120,000 region.

This situation marks a complete turnaround in Turkey's status as a migration country. As early as 1961 Turkey negotiated the first migration recruitment agreement with the then Bonn-based Federal Republic of Germany. Subsequent agreements with the Netherlands, Belgium, Austria, France, and Sweden were to follow during the years between 1964-67. At the present time about 3 million people of Turkish origin are estimated to live in Western Europe, making Turks the largest single migrant population in Europe. 4.8% of the Turkish population could be classified as European migrants. The largest Turkish population resides in Germany (2 million migrant Turks). In the 60s, 70s and 80s the Turkish government supported emigration due to the high level of unemployment and the need for the economic support which came with it in the form of remittances. During the late 1990s, migration to Europe has been mostly relegated to the spouse-selection of Turks by exising Turkish emigrants, political motives (Kurds), and undocumented labour migration.

For a variety of reasons a good deal of Turkish migration has not been in the form of permanent emmigration. In part this has been a result of policies implemented by the German and other EU governments, and in part it reflects the aspirations of the Turks themselves. New Turkish emigrants outnumbered return migrants during 1973-81 and 1986-94. Migration patterns showed more return migrants than emigrants during 1982-85. The balance between emigrants and return migrants was 17,347 emigrants (to Germany) in 1994. During the 1990s, the most popular destinations for Turkish migrants were the Commonwealth of Independent States, followed by North African and then Persian Gulf countries. Most recent migrations are project-related among semi-skilled and skilled male workers.

Turkey is currently the 17th most populous country in the world and the median age of the population is 27.7 years. The Turkish population is projected to increase, though the rate of population growth is now set to slow over time. The UN envisions an average population growth rate of 1.1% a year in its medium-variant scenario. More importantly, the population is young and around 70% (and rising) of the population is of working age (15-65 years old). A more rapid increase in the population of working age compared with the dependent population should help boost private savings from the currently modest levels. Labour force growth is expected to average around 1-2% over the next decade. As was the case in Asia in 1970-904, this “demographic dividend” has been and will continue to be a considerable factor in boosting Turkish GDP growth.

Turkey is already a fairly open economy, both in terms of trade in goods & services and portfolio flows, especially when adjusted for the size of the economy. Imports and exports combined represent more than 60% of GDP (and rising). Export growth has been phenomenal over the past decade with exports of goods rising from around 20% of GDP in 1994 to 30% in 2003. With continued economic reform and closer economic integration with the EU, the Turkish economy will become even more open in trade terms, which should benefit efficiency and growth. We expect exports to reach 40% of GDP by the end of the decade.

On the other hand the quality and level of education in Turkey has been modest when compared with other rapidly developing economies. However, Turkey has made sizeable progress in this area in recent years, especially as regards basic and intermediary skills. Primary school enrolment is close to 100%, which puts Turkey at a level comparable to Central and Eastern European countries. But at a level of 55-60%, secondary school enrolment ratios are still comparatively low. Only a gradual increase in the secondary school enrolment ratio is the most likely scenario given the government’s limited fiscal resources, although priorities may well change here. So there still remains plenty to be done. Improvements are modest and slow: while overall literacy levels are low, youth literacy levels are still only 'fair'. However, in stock and flow terms, even this modest improvement is indicative of future growth, and therefore a better indicator than the overall literacy levels. After all, it is these teenagers that will soon enter the labour market, steadily replacing as they do their on-average less well-educated parents and grand-parents. This being said, overall Turkey’s human capital endowment still compares unfavourably to other emerging market economies (see World Bank Education Index table). Additionally, Turkey has a very well-educated, often foreign-trained elite and a number of first-class universities churning out highly-skilled graduates.

To be edited and continued


Life Expectancy and Model Limitations

Despite having achieved a certain degree of recognition and empirical successes, the variable rate-of-growth effect model is unlikely to provide a complete theoretical framework for understanding the behavior of saving rates and capital flows over whole course of the demographic transition. In particular, the variable rate-of growth effect model describes only one possible relation - that of a hypothetical steady-state relationship between dependency and saving rates - a shortcoming which in part from its life-cycle theory ancestry.

Continuing demographic change over the past half century, however, suggests that we look more to transitional dynamics if we want to more fully understand the observed correlation between dependency and saving rates and capital flows.

In this vein Higgins and Williamson (1996) show that the variable rate-of-growth effect model can be subsumed under the standard textbook neoclassical growth model, suitably modified to incorporate an overlapping generations population (see e.g., Blanchard and Fischer, 1988). The standard growth model is, in essence, simply an open-economy, steady-state version of the latter. The textbook overlapping generations model need only be augmented by adding a third period of life - childhood alogside old age — in order to accommodate a more comprehensive study of dependency effects.


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