The consequences of declining fertility are many

A below replacement level fertility rate would mean a smaller dividend window than expected

September 17, 2022 12:16 am | Updated 06:59 pm IST

‘After the window where a country reaps the benefits of the demographic dividend, the huge working age population moves to old age, supported by fewer workers’

‘After the window where a country reaps the benefits of the demographic dividend, the huge working age population moves to old age, supported by fewer workers’ | Photo Credit: S.R. RAGHUNATHAN

Though the global population, in terms of numbers, has been steadily increasing — some reports suggest that it could grow to around 8.5 billion in 2030 — there is an interesting aspect to this: average global fertility has been consistently declining over the past 70 years. The average number of children per woman in the reproductive age group has declined by 50%, from an average of five children per woman in 1951 to 2.4 children in 2020, according to the World Population Prospects 2022 by the United Nations population estimates and projections, and prepared by the Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat.

This is the result of speeding up the social phenomenon of demographic transition. Poorer countries seem to be speeding up the transition ladder a lot faster than the richer ones. Britain took 130 years to transition from a fertility rate of five per woman in 1800 to two in 1930, whereas South Korea took 20 years from 1965 to 1985 to achieve the same. The newly released World Population Prospectus notes that the global fertility rate fell from three in 1990 to 2.3 in 2021. Sub-Saharan African countries are expected to contribute more than half the population growth after 2050 and grow through 2100. Most advanced economies have their fertility rate below the replacement rate of 2.1, with South Korea reporting the lowest at 1.05 children per woman.

The Indian setting is no different, with its fertility rate falling below the replacement level for the first time to 2.0 in 2021, according to the latest National Family Health Survey (NFHS). The rate has dipped 10% in just five years.

At the time of Independence, India’s fertility rate was six per woman, and it had taken 25 years to reach five, with the government launching the first ever family planning programme in the world in 1952. India’s fertility further declined to four in the 1990s when Kerala became the first State in India to have a fertility rate below replacement level; slowly, other States followed suit. As reported by the NFHS 2021, only five States have a fertility rate above the replacement rate: Bihar (3), Meghalaya (2.9), Uttar Pradesh (2.4), Jharkhand (2.3), and Manipur (2.2). The steady dip in fertility rates has been explained as an effect of increased use of contraception, more years of average schooling, better health care, and an increase in the mean marriage age of women.

Many economic implications

Countries in the earlier stages of demographic transition find positive effects of lower fertility on income as a major portion of the workforce moves to modern sectors of the economy with fertility dipping. Lower fertility rates can be viewed as both a cause and consequence of economic development. Lower fertility impacts women’s education positively, which in turn lowers the fertility of the next generations. With better infrastructure development, better health care, and education, fertility drops and income rises. The spiral of lower fertility leads to a window of time when the ratio of the working-age population is higher than that of the dependent age groups. This high proportion of people in the workforce boosts income and investment, given the higher level of saving due to lower dependence.

The falling fertility rate will also lead to lower pressure on land, water and other resources and would also contribute to achieving environmental goals. After the window where a country reaps the benefits of the demographic dividend, the huge working age population moves to old age, supported by fewer workers.

Japan was the first country to experience the implications of falling fertility rates. The increasing dependency ratio has led to near zero GDP growth since the 1990s, and the country is facing fiscal challenges to meet rising social security costs. Other Asian countries such as South Korea are now reporting lower fertility than Japan which is now optimistic about having managed the lower fertility without moving to an utter demographic collapse.

A fall in fertility rate beyond replacement level would have a negative effect on the proportion of the working population, which in turn will affect output in an economy. A rise in education and independence among women would enhance their labour participation, which could arrest the fall in labour participation up to a limit. An influx of immigrants from countries with higher population growth could also play a positive part.

The impact of fertility drop on productivity is also highly debated. While a higher level of education and technological advancement in areas including artificial intelligence could increase the productivity of the lower working age population, a paper, “The End of Economic Growth? Unintended Consequences of a Declining Population”, by Stanford economist Charles Jones argues that falling fertility could diminish the creative capacity of humankind. He points to the need for ideas in technological advancement and productivity boost, which even artificial intelligence is still not capable of.

An ageing population will also affect global interest rates negatively as the share of people over 50 years will form almost 40% of the population by 2100. In their book The Great Demographic Reversal: Ageing Societies, Waning Inequality and an Inflation Revival, economists Charles Goodhart and Manoj Pradhan explain how falling fertility will have a positive effect on inflation through higher wages due to lower labour supply and a change in the nature of unemployment inflation trade-off, as now low inflation can be maintained even with low unemployment.

The book also takes a different view on the impact of lower fertility on public finance. Popular theory suggests increased pressure on governments due to a high dependency ratio. The book puts up an alternate narrative of the fall in government debt due to lower savings of households and corporates due to higher dependency and the government thus running on surplus than deficit banking on the logic of accounting and higher inflation.

Dealing with fertility decline

The fall in fertility around the globe has been a result of decades of demographic process, and hence needs scientific and sustainable policies for mitigation. Even though there is looming pessimism about a lower fertility rate, there are ways to get the most out of it and diminish its negative effects. The advancement in health care and better nutrition around the world have increased the life expectancy and productivity of older citizens. Reforms in the labour market to induce more flexibility in the labour market would encourage working women to have more children and non-working mothers to enter the labour market.

Countries across the globe are experimenting with policies to boost fertility. Germany found success in boosting births through liberal labour laws, allowing more parental leave and benefits. Denmark offers state-funded IVF for women below 40 years, and Hungary recently nationalised IVF clinics. Poland gives out monthly cash payments to parents having more than two children, whereas Russia makes a one-time payment to parents when their second child is born. Russia also reinstituted the Soviet-era ‘Mother Heroine’ title, who bore and raised more than 10 children amounting to almost a one-time payment of ₹13 lakh.

In perspective

Though the benefits of demographic dividends are being reaped, the below replacement level fertility rate would mean a smaller dividend window than expected. Although India’s working-age population will continue to grow for many more decades, it would need to keep an eye on fertility dips. Liberal labour reforms, encouraging higher female labour force participation rate, and a higher focus on nutrition and health would ensure sustained labour supply and output despite lower fertility. India, like other countries in the globe, would need to be equipped to aid the patter of more tiny feet sooner or later.

Santosh Kumar Dash is an Assistant Professor at the Gulati Institute of Finance and Taxation (GIFT), Thiruvanthapuram. Sidharth R. is a postgraduate student in Economics at the University of Kerala

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