Triggers behind demographic shift

It is said that one-third of the countries in the world have already completed demographic transition — the shift from high birth and death rates to low rates. The resultant rise in labour productivity has spurred economic growth, as resources per capita have increased.

The key finding of this paper by Oded Galor (“The Demographic Transition: Causes and Consequences ” http://www.nber.org/papers/w17057 ) is that it is the quality of children, and not their quantity, that now determines the reallocation of resources, thereby enhancing human capital formation.

What, then, were the possible triggers that led to this demographic transition? Thus, was the onset of the fertility decline an outcome of the rise in income during the course of industrialisation?

Was it triggered by the reduction in mortality rates? Was it fuelled by the rise in the relative wages of women? Or was it an outcome of the rise in the demand for human capital in the second phase of industrialisation?

Galor rejects the argument made by some researchers that following industrialisation, the rise in income led to a decline in fertility along with an increase in the investment in each child. He says this theory appears “counterfactual”.

For instance, in 1870, “England and the Netherlands were then the richest countries in Western Europe, enjoying GDP per capita of $3,190 and $2,760, respectively.

In contrast, Germany and France, which experienced the onset of a decline in fertility in the same decade as England and the Netherlands, had a significantly smaller GDP per capita of $1,840 and $1,880, respectively.

Moreover, Sweden and Norway's GDP per capita were only about 40 per cent of that of England in 1870, Nevertheless, the onset of the fertility decline in these economies occurred in the same decade as in England.”

The simultaneity of the demographic transition across West European countries that differed significantly in their per capita incomes, therefore, goes to show that high income levels had a limited role to play in triggering the demographic transition, he says.

Technological Progress

Galor argues that it is technological progress in the second phase of the industrial revolution that brought about a rise in parental income and demand for human capital, which brought about two major changes in population growth. One, higher income eased restrictions on household budgets, thereby freeing more resources for quality of children rather than quantity, leading to enhanced quality of the overall population. Technological progress also led to reduction in fertility, generating a fall in population growth and rise in the level of education.

The author cites the varying process of development in the United Kingdom and India over the 19th and 20th centuries. “During the nineteenth century, the United Kingdom traded manufactured goods for primary products with India. Per capita industrialisation in India significantly regressed over this century whereas per capita industrialisation in the UK accelerated.

The process of industrialisation in the United Kingdom led to a significant increase in the demand for skilled labour in the second phase of the industrial revolution, triggering a demographic transition in the 1870s and a transition to a state of sustained economic growth.

In India, in contrast, the lack of demand for skilled labour delayed the demographic transition and the transition to a sustained-growth regime to the second half of the twentieth century.”

Therefore, it can be said that the growth of international trade and its impact on the demand for human capital played a big role in inducing a rise in fertility and a decline in human capital formation in non-industrial economies, and a decline in fertility and a rise in human capital formation in the industrialised economies.

Of course, religious movements such as Judaism and Protestantism as well as the decline in gender gap in wages also contributed to triggering the demographic transition.

Old-age security

Some researchers have suggested that old-age security reasons may also have triggered the demographic transition.

They argue that in the “absence of capital markets which permit inter-temporal lending and borrowing, children serve as an asset that permits parents to transfer income to old age.

Hence, the establishment of capital markets in the process of development reduced this motivation for rearing children, contributing to the demographic transition.”

Galor, however, feels that although old-age security could have affected the level of fertility, it appears to have played a minor part in the onset the demographic transition.

“First, since there are only rare examples in nature of offspring that support their parents in old age, it appears that old-age support cannot be the prime motivation for child rearing.

Second, institutions supporting individuals in their old age were formed well before the demographic transition.”For instance, parents in England, as far back as the 16th Century, stopped relying on support from children in their old age.

Moreover, cross-sectional evidence shows that in the pre-demographic transition era, wealthier individuals had a larger number of surviving children, says Galor, ruling out the decline in old-age support as a major force behind reduction in fertility during the demographic transition.

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