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Demographic factors and economic growth the bi directional causality in south east asia

UNIVERSITY OF ECONOMICS
HO CHI MINH CITY
VIETNAM

INSTITUTE OF SOCIAL STUDIES
THE HAGUE
THE NETHERLANDS

VIETNAM - NETHERLANDS
PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

DEMOGRAPHIC FACTORS
AND ECONOMIC GROWTH:
THE BI-DIRECTIONAL CAUSALITY
IN SOUTH EAST ASIA

BY

VO TAN THANH DIEP

MASTER OF ARTS IN DEVELOPMENT ECONOMICS


HO CHI MINH CITY, November 2015


UNIVERSITY OF ECONOMICS
HO CHI MINH CITY
VIETNAM

INSTITUTE OF SOCIAL STUDIES
THE HAGUE
THE NETHERLANDS

VIETNAM - NETHERLANDS
PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

DEMOGRAPHIC FACTORS
AND ECONOMIC GROWTH:
THE BI-DIRECTIONAL CAUSALITY
IN SOUTH EAST ASIA
A thesis submitted in partial fulfilment of the requirements for the degree of
MASTER OF ARTS IN DEVELOPMENT ECONOMICS

By

VO TAN THANH DIEP

Academic Supervisor:
PROFESSOR NGUYEN TRONG HOAI

HO CHI MINH CITY, December 2015

i


DECLARATION
“I certify the content of this dissertation has not already been submitted for any degree
and is not being currently submitted for any other degrees.
I certify that, to the best of my knowledge, any help received in preparing this
dissertation and all source used, have been acknowledged in this dissertation.”
Signature



Vo Tan Thanh Diep
Date:

ii


ACKNOWLEDGEMENT
Foremost, I would like to express my sincere gratitude to my supervisor, Professor
Nguyen Trong Hoai for his professional knowledge, perceptive guidance and for giving
me valuable opportunities. His guidance really helped me for the direction of the research
and writing of this thesis.
In addition my advisor, I would like acknowledge the love from my family to me over
the last 24 years. A special thank is to my parents for their support throughout my life, to
my sister and my relation in Ho Chi Minh City for valuable support during my studies.
Furthermore, I would also like to thank all lecturers and staff at the Vietnam
Netherlands Program and my VNP 20 classmates.
Most of all, a special thanks go to my better haft – Nguyen Son Kien - for the
motivation, encouragement and affectionate care that he bring to my life.

iii


ABSTRACT
This study has demonstrated new evidence sustaining the idea that variation in
demographic factors is an important determinant of growth in per capita income. Using an
annual panel dataset from 1990 to 2013 at the country-level in the Southeast Asia, this
study is conducted to analyze the following key areas in comparing with current literature.
First, the determination of the impact of a number of the demographic factors on the
economic growth by using a various aspect of demographic factors, including: population
growth, life expectancy, and age structure. Second, the interpretation of the bi-directional
causality among: (i) the population growth and the economic growth; and (ii) the life
expectancy and the economic growth. Furthermore, the two new econometric techniques,
Driscoll and Kraay estimation, and structural equation model, in parallel with the panel
regression technique are applied.
It is noticeable about the following key contribution, including: (i) the specification
of the various aspects of demographic factors on the economic growth is analyzed in the
new context (Southeast Asia) where most countries have experienced the demographic
transition, and have received the demographic dividend; and (ii) the worth analysis of the
bi-directional causality has been recognized since it is one of the first in its line of current
literature that confirms the inverse effect of the economic growth on population growth,
and life expectancy simultaneously.
Key words: Demographic transition, economic growth, population growth, life
expectancy, age structure, Southeast Asia, Panel data, SEM.

iv


TABLE OF CONTENT
Declaration ...................................................................................................................................... ii
Acknowledgement ......................................................................................................................... iii
Abstract .......................................................................................................................................... iv
Table of content .............................................................................................................................. v
List of tables ................................................................................................................................. viii
List of figures ................................................................................................................................. ix
Chapter 1 Introduction .................................................................................................................... 1
1.1.

Problem statement ............................................................................................................ 1

1.2.

Research objective............................................................................................................ 3

1.3.

Research questions ........................................................................................................... 3

1.4.

Research scope ................................................................................................................. 3

1.5.

Thesis structure ................................................................................................................ 3

Chapter 2 Literature review ............................................................................................................ 5
2.1.

Theoretical literature ........................................................................................................ 5

2.1.1.

2.1.1.1.

Demographic factors.......................................................................................... 5

2.1.1.2.

Demographic Transition .................................................................................... 6

2.1.2.

Demographic factors and economic growth ............................................................. 8

2.1.2.1.

The perspective of Malthusian Regime ............................................................. 8

2.1.2.2.

The perspective of Post-Malthusian ................................................................ 10

2.1.2.3.

The perspective of Modern Growth Regime ................................................... 11

2.1.3.

2.2.

Key concepts ............................................................................................................. 5

Demographic transition and economic growth ....................................................... 13

2.1.3.1.

The labor supply mechanism ........................................................................... 13

2.1.3.2.

The savings mechanism ................................................................................... 14

2.1.3.3.

The Human capital mechanism ....................................................................... 14

Empirical studies ............................................................................................................ 15

2.2.1.

Population growth and age structure....................................................................... 15

2.2.2.

Life expectancy ....................................................................................................... 18

2.2.3.

Bi-directional causality ........................................................................................... 19

2.2.4.

Determinants of economic growth, population growth, and life expectancy ......... 20

2.2.4.1.

Economic growth ............................................................................................. 20

2.2.4.2.

Population growth............................................................................................ 21

2.2.4.3.

Life expectancy................................................................................................ 21
v


2.3.

Hypothesis construction and conceptual framework ..................................................... 22

2.3.1.

Hypothesis construction .......................................................................................... 22

2.3.1.1.

Demographic factors and economic growth .................................................... 22

2.3.1.2.

Two-way relationship ...................................................................................... 24

2.3.2.

Conceptual framework ............................................................................................ 25

Chapter 3 Research methodology ................................................................................................. 27
3.1.

Data ................................................................................................................................ 27

3.2.

Model specification ........................................................................................................ 29

3.2.1.

Model specification for one way effects ................................................................. 29

3.2.2.

Model specification for the bi-directional causality ............................................... 30

3.3.

Research methodology ................................................................................................... 32

3.3.1.

Models of panel data regression ............................................................................. 32

3.3.1.1.

The model of Pooled regression ...................................................................... 32

3.3.1.2.

The model of fixed effects estimation ............................................................. 32

3.3.1.3.

The model of random effects estimation ......................................................... 34

3.3.1.4.

Driscoll and Kraay standard errors and panel models ..................................... 34

3.3.2.

The structural equation model (SEM)..................................................................... 36

3.3.2.1.

The causal effect and mediate mechanism ...................................................... 36

3.3.2.2.

The simultaneous (non-recursive) structural equation model ......................... 37

3.3.2.3.

The logic of SEM ............................................................................................ 39

Chapter 4: Empirical results.......................................................................................................... 40
4.1.

Overviews of demographic transition in Southeast Asian ............................................. 40

4.2.

Data description.............................................................................................................. 42

4.2.1.

Descriptive statistic ................................................................................................. 42

4.2.2.

The possible relationship by scatter ........................................................................ 44

4.2.3.

Correlation .............................................................................................................. 45

4.2.4.

Demographic factors by deciles .............................................................................. 46

4.3.

Panel data regression ...................................................................................................... 47

4.3.1.

Diagnostic analysis ................................................................................................. 47

4.3.2.

One-way direction - Driscoll and Kraay estimation ............................................... 49

4.4.

The bi-directional causality estimation .......................................................................... 52

Chapter 5 Conclusions and policy implication ............................................................................. 56
5.1.

Concluding remarks ....................................................................................................... 56

5.2.

Policy implication .......................................................................................................... 58
vi


5.3.

The limitation and directions for further research .......................................................... 61

Reference ...................................................................................................................................... 62

vii


LIST OF TABLES
Table 3.1: Variable descriptions .................................................................................................28
Table 4.1: Summary statistic.......................................................................................................43
Table 4.2: Pairwise correlations ..................................................................................................45
Table 4.3: Demographic variables by GDP per capita deciles ...................................................46
Table 4.4: Variance inflation factor (VIF) ..................................................................................47
Table 4.5: Model comparison .....................................................................................................48
Table 4.6: Diagnostic problem ....................................................................................................48
Table 4.7: Panel regression .........................................................................................................51
Table 4.8: SEM regression ..........................................................................................................54

viii


LIST OF FIGURES
Figure 2.1: Life Cycle Income and Consumption .........................................................................6
Figure 2.2: The process of demographic transition and population growth .................................7
Figure 2.3: Population growth and food supply............................................................................9
Figure 2.4: Population growth and economic growth, in period of 1300-2000..........................10
Figure 2.5: The exogenous growth model ..................................................................................12
Figure 2.6: The endogenous growth model ................................................................................13
Figure 2.7: Conceptual framework .............................................................................................26
Figure 3.1: The causal effect and mediate mechanism. ..............................................................37
Figure 3.2: The non-recursive mechanism..................................................................................38
Figure 3.3: The logic of SEM .....................................................................................................39
Figure 4.1: Demographic factors during the period of 1960-2013 .............................................41
Figure 4.2: The orientation of age structure in Southeast Asian countries .................................41
Figure 4.3: The population pyramids in Southeast Asia .............................................................42
Figure 4.4: Relationship between economic growth and demographic factors ..........................44

ix


CHAPTER 1
INTRODUCTION
1.1. Problem statement
According to United Nations (2015) the world’s population has nearly doubled over
the span of the last thirty years and will boom to over 10 billion by 2050 if the fertility is
constant. As a result of the linkage between population and both the supply and demand of
economic production (Crenshaw et al., 1997), understanding the variation in the factors of
population seems to be a necessity for the process of economic development. In addition,
from the best-known Malthusian theory (Malthus, 1798) to the unified growth theory
(Galor, 2011), how the factors of demography affect economic performance has remained
as a controversial issue that is of the growing interest for economists and policymakers.
From the first demographic transition in history was marked by the declining
mortality in Europe around 1800 (Lee, 2003), most of countries in the world has
experienced demographic transition in different period during the past two centuries. Along
with that, there was a huge number of studies, focusing on the influence of demographic
change on economic growth. In recent decades, Asia, and especially East Asia, were the
interesting entities for the investigation of the linkage between demographic factors and
economic growth. This has portrayed the economic leap forward, which elevated the
position of some Asian countries in the world, was contributed by the enormous alteration
in demography. Proving that, Boom and Williamson (1998) demonstrated a significant
improvement in growth due to impact of demographic change in Asia during the period of
1965 to 1990. However, the situation has changed since the world was diversified into two
different demographic regimes: some countries has been taking advantage of demographic
dividend, while the others has been facing the aging population (Sanderson et al., 2013).
In fact, Asia was not included in the exception, some countries has been receiving
demographic bonus such as China, India. On the other hand, some developed countries,
like Japan, Korea, Hong Kong, have been facing the phenomenon of population aging since
fertility reduced considerably and life expectancy rose steadily (Bloom et al., 2003).
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Moreover, the story has been more complex after the Asian crisis in 1997 and financial
crisis in 2007 which make the economic growth process more stalled (Bloom and Finlay,
2009). Accordingly, the analysis based on different time periods and regions in Asia may
provide the distinct results of the impact of demography on process of economic growth.
There are several reasons why the Southeast Asia seemed to be an interesting sample
to investigate the relationship between demographic factors and economic growth in this
study. First, as reported of United Nations (2015), if considering Southeast Asia as a single
country, its labor force is in the third place of the world in size, just behind China and India.
Second, at the crossroads of the aging population in East Asian and the baby boom
generation in South Asian, most of the countries in South East have just experienced the
demographic transition in the last two decade and have been receiving demographic bonus
(Bloom and Finlay, 2009). Third, according to the classification of World Bank, the
Southeast Asian countries is relatively diversified from high-income countries, middleincome countries to low-income countries. Consequently, the sample from Southeast Asia
could show a large variation in data across countries, but the homogenous group of
countries with many similar characteristic like climate, culture, history may be observed.
Furthermore, this study also concerns the bi-directional causality between
demographic factors (proxied by the population growth and the life expectancy) and
economic growth that has not been clarified in most previous researches (Bloom et al.,
2010; Cervellati and Sunde, 2011). Particularly, these papers has just dealt with this
simultaneous problem to confirm the effect of demography on growth based on the
estimation instrumental variables, yet ignored the possible impact of economic growth on
demographic factor. Therefore, this study will not only focus on the link between economic
growth in Southeast Asia and the demography of this area, but also shed light on the
influence from the two factors to each other.
In conclusion, although a number for publications have been found in the public
domain, this study is different with the conducted researches in the past in the four
fundamental areas. First, the influence of demographic factor on economic growth has
been clarified in the new context (Southeast Asia) where the phenomenon of demographic
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transition and demographic bonus is coming out (in the period of 1990-2013). Second, a
various aspects of demographic factors are utilized simultaneously, including: population
growth, life expectancy, and age structure. Third, the bi-directional causality is interpreted
among: (i) the population growth and the economic growth; and (ii) the life expectancy
and the economic growth. Fourth, the two new econometric techniques, Driscoll and Kraay
estimation, and structural equation model, in parallel with the panel regression technique
are applied.
1.2. Research objective
This study aims to analyze the influence of a number of the demographic factors on
the economic growth. Accordingly, there are two main objectives have been analyzed as
following:
(i) Determining the possible effects of a number of the demographic factors on the
economic growth.
(ii) Interpreting the bi-directional causality among: (i) the population growth and the
economic growth; and (ii) the life expectancy and the economic growth.
1.3. Research questions
On the view of the main objectives, the three of research questions has been
concerned:
(i) Do demographic factors have significant influence on the economic development?
(ii) Is there simultaneous nexus between the population growth and economic growth?
(iii) Is there simultaneous nexus between the life expectancy and economic growth?
1.4. Research scope
This thesis has evaluated the relationship between demographic factor and economic
growth by using the panel data in the period of 1990 - 2013. The selected area is the South
East Asia countries which has experienced the economic miracles, and obtained the
advantage of demographic bonus.
1.5. Thesis structure
The next content of this thesis includes four chapters, which clarified as following:
Chapter 2 exhibits the related theories and the empirical evidence.
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Chapter 3 explores the research methodology, specifies model and explains data
measurement. In addition, the applied econometric technique for each of research
objectives have been specified.
Chapter 4 exhibits the empirical results since the econometric technique is identified.
After that, the explanation and discussion will be revealed for the findings in comparing
with other empirical researches.
Chapter 5 formulates the concluding remark, the policy implication, and the limitation
and direction for further research.

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CHAPTER 2
LITERATURE REVIEW
This chapter will review the linkage between the demographic factors and economic
growth focusing on the following three fundamental sections: (i) theoretical literature on
the influence of demographic factors on growth process; (ii) the summarization of the
sizable evidence from the empirical research have been demonstrated for each proxies in
demographic factors. And (iii) the conceptual framework has been conducted so as to
clarify the potentially influential channel.
2.1. Theoretical literature
2.1.1.
2.1.1.1.

Key concepts
Demographic factors

There has been a long time since most of economists focused on population growth
and population size to evaluate the effects of demography. In recent times, the age structure
which is the contribution of each stage of life has been more focused. In particular, the
difference between behavior and contribution in each age group could lead to the different
difference in economic performance. As depicted in Figure 2.1 (Fig. henceforth), the high
proportion of young people will create a high economic burden because of their small
savings and a great budget has to be spent for them in many aspects such as health,
education and so on. However, this could be a potential labor source for country in the
future, when population growth falls based on the drop of fertility rate, the nation will get
benefit of high proportion of working-age and low dependence age (the young and the
elderly). Nevertheless, when the countries keep improving the living standard, life
expectancy will increase and the ratio of elder in population will be higher. The resources
for elderly will be greater than the product they create as could be seen from Fig. 2.1, thus
could restrict the income per capita of the nation. In such explanation, the age structure
could be a more reasonable proxy to distinguish the countries that have same population
size and growth.

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Figure 2.1. Life Cycle Income and Consumption

Sources: Bloom et al. (2003)

Another proxy that is examined as a demographic factor in this study is life
expectancy. As the definition of United Nations (2013), life expectancy at specific age is
the expected years that a person at that age could live base on the assumption that agespecific mortality levels is constant. In this thesis, life expectancy is the short word for life
expectancy at birth which was the number of years that one newborn could live if the agespecific mortality rates was not change. Due to the fact that longevity reflect the mortality
as well as the health of country, life expectancy could be an important demographic proxy
in the process of economic development.
2.1.1.2.

Demographic Transition

In general, the demographic transition or demographic window refers to a period
which exhibits the common declination in the mortality and the fertility. This period
accelerated the economic growth through the higher portion of working age population in
comparison to the one of non-working age population, thus improve the productive per
capita. The United Nations (2004) has defined this period when the proportion of
population under 15 years is below 30 percent and the proportion of population over 65
years is still below 15 percent. Moreover, the benefit that a nation could obtain during the
demographic transition was called the “demographic dividend” or demographic bonus as
the definition of UNFPA (2014).
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Figure 2.2. The process of demographic transition and population growth

Sources: Bloom et al. (2003)

The dawn of demographic transition was marked by the decline in the death rate for
a while, and then, be finished at the time when the birth rate declination ended.
Nevertheless, this mechanism is quite complex than that when there are two separated
dimensions to explain the trend of population growth. As depicted in Fig. 2.2, at first, the
population has started to increase since the death rate decreased. Then, this trend will be
interrupted, and tend to decline since the birth rate begin to fall. It means that baby-boom
episode and the increase in population has happened when the birth rate is still maintained
for the higher level than the death rate. Furthermore, this process can be understood that
the initial generation of baby-boom population would reach to the prime level of
reproductive that lead to an echo effect of the increase. As a result, in spite of the decline
in the population growth, the population could still expand when the replacement level is
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still satisfied. At this time, the population growth rate would observe a bulge in the number
of population in comparing with previous period before the starting point of the transition
(Bloom et al., 2003).
2.1.2.

Demographic factors and economic growth

The characterization of modeling the relationship between demographic factors and
economic development has been challenged for a long time ago (from the a hundred years
ago) which initially debated in the papers of the study of Malthus (1798). It has portrayed
the influential dimension of the demographic factor on the economic growth by defining
the Malthusian stagnation mechanism. Nevertheless, this has been changed in recent year
due to the changeable idiosyncratic of demographic factors, the economic situation, or even
the changeable modern conception. Based on this way of analyzing, a number of researches
has been constructed as a summarized framework for the related theories which includes:
(i) the traditional “Malthusian regime” that focused on the stagnation from the relationship
between the controlling process of demographic transition (population growth) and the
food issue; (ii) the “post-Malthusian” state which implied the slight impact of greater
population on the growth; (iii) the “modern approach” postulates the steady growth
mechanism with a group of number of factors that impact on growth.
2.1.2.1.

The perspective of Malthusian Regime

The most basic theory of the role of population in economic growth process is
Malthusian controversy. The main idea of this view is population without control increases
geometrically but food supply only rise arithmetically because of limit of some factor of
production such as land and technology. Consequently, the demand will overwhelm the
supply and people in the world will face up to the terrible famine.
As stated by Malthus (1798), the economic performance will be higher with small
population, on the one hand, high income per capita have the supportive function to the
expansion of population. On the other hand, the higher population with circumscribed
resource will lead to the increase in price, it will have a preventable effect to the standard
of living. Malthus recommended that terrible situation could only be stopped by lower
population size. There are two solutions were provided: the first is “positive check” which
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to rise the death rate (malnutrition, disease, famine, and war), the second is “negative check”
(or preventive check) which to decrease the birth rate (later marriages, birth control).
Figure 2.3. Population growth and food supply
Population growth if
unchecked

Quantity

Food supply

Time

Sources: Author’s analysis

The Malthusian theory implies that population size will be self-adjusted to adapt with
the supply of production. The raise in product will counterbalance by increasing in
population size, thus the technologically superior countries only had higher population
density and the economic performance did not reflect technological progress. As can be
seen from the Fig. 2.4, the Malthusian regime endured most of human history and
characterized by a constant GDP per capita as well as a little change in population size.
Some evidence from history presented the result consistent with Malthus’s hypothesis.
The study of Maddison (1982) in Europe reports that growth rate of population and output
per capita from 500 to 1500 is quite minuscule. In addition, Livi-Bacci (2012) demonstrates
the population growth in the world is smaller than 0.1 percent per year between the years
1 and 1750. As reported from the book of Galor (2011), life expectancy during the
Malthusian regime vacillated around 35 due to the fluctuations in fertility rate as well
mortality rate. The denser populations without improvement in infrastructure and social
service was the reason for such fairly low life expectancy in a long time. Nevertheless, the
stability of Malthusian only endured until 1750 with developed countries and 1900 with
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developing countries (Galor, 2011). The evolution of technology considerably increased in
conjunction with the advancement of industrialization, sparking a marked periods in
history which is described in next part.
Figure 2.4. Population growth and economic growth, in period of 1300-2000

Sources: Galor (2011)

2.1.2.2.

The perspective of Post-Malthusian

Ironically, the two centuries after Malthus’s influential theory witnessed a number of
countries took off from the Malthusian trap and took advantage of the significant increase
in the quick pace technology. However, the start point of the take-off and its significance
was dissimilar across regions. In developed countries, the evolution which was
concatenated with the Industrial Revolution occurred at the dawn of the 19th century
compared to the delay until the 20th century for developing countries.
During Post-Malthusian Regime, the higher population growth participated quite
considerable contribution in economic transform. The dilute effect on resources per capita
of larger population was counteracted by technological advancement and accumulation of
capital, and hence the output per capita was continuing to increase in spite of the raise of
population. Moreover, the propulsive role of high GDP per capita on the expansion of
P a g e | 10


population from Malthusian Regime continued to function. An dramatic increase in the
growth rate of the income per capita is related with a boom of population, portrayed by a
simultaneous acceleration of the population growth (from 0.27% to 0.8%) and the income
per capita (from 0.05% to 1.3%) from the period of 1500-1820 to the period of 1870-1930
(Maddison, 2007). In particular, in regional technological leaders such as United Kingdom,
Western Europe, US, Canada, Australia, the substantial increase in its share of world
population due to technology and land abundance was described by Galor (2011).
Moreover, the positively significant impact of growing population during the pre-industrial
development was investigated by Goodfriend and McDermott (1995), their finding
suggested the contribution of larger population was through labor market, hence generated
a better economic performance.
The Post-Malthusian Regime finished in developed countries with the downward
trend in population growth towards the end of the 19th century, on the other hand, the
delayed take-off of developing countries still continued and generated a sharp rise in
population over the world (from 0.93% over the period of 1913-1950 to 1.92% over the
period of 1950-1973). However, the take-off in developing countries finally ended with the
onset of the demographic transition (except for some African countries) in the last half of
the 20th century (Maddison, 2007). The theories in this period provided the framework to
investigate the relationship between demographic factors and marked growth of economy,
in addition, the technological promotion was considered as the most important factors on
this process. Notwithstanding, the stagnation during the Malthusian period and the next
sustained state would not be captured, hence this problem could be unraveled more clearly
in the next section with the modern growth theories.
2.1.2.3.

The perspective of Modern Growth Regime

As referred in Galor (2011), the Post-Malthusian and Modern Growth were separated
by the demographic transition with the reduction in population growth. There are two main
approaches of explaining the economic growth in Modern Growth Regime, the neoclassical
theory of exogenous growth and the new theory of endogenous, the predictable results
shows the negative effect to per capita output from a raise in population.
P a g e | 11


From one point of view, the exogenous growth model (Solow, 1956) implies that the
enlargement of population have contribution to the increase in output process. As can be
seen from the Fig. 2.5, the increase in population shifts the C line upwards to C’ and the
equilibrium in long-run upwards from A to B which have the lower output per capita and
capital per worker. Therefore, the growth of output in new equilibrium is more rapid due
to higher population growth. It is noticeable from this transform that the income per capita
growth rate is unaltered due to the unchanged technology.
Figure 2.5. The exogenous growth model

Sources: Author’s analysis based on Gylfason (1999)

From another point of view, the endogenous growth model reminisces the Malthus’s
view that the change made by larger population would lead to the lower growth of output
per capita. This process could be clearly shown in Fig. 2.6, the T line shifts to the left to T’
due to the larger population. Compared to the old equilibrium at point A, new equilibrium
B has lesser technological process with the same economic growth. The unchanged
economic growth, combined with a rise in population, would reduce the growth of income
per capita.

P a g e | 12


Figure 2.6. The endogenous growth model

Sources: Author’s analysis based on Gylfason (1999)

It is apparent from these theories that the positive influence of population and
demographic transition was neglected despite the fact that demographic change appears to
be essential for considerable growth of output per capita over the development process.
Meanwhile, there are many theories support for the promotional role of denser population
such as the argument of Kuznets (1960) about the contribution of population as the
producers, the saver and the consumers in the economy. Besides, he also points out that the
optimal income per capita may not the only signal for the benefits of country from more
population. In addition, Steinmann, G. (1984) states that technological advancement was
boosted by changing in demographic factors through concentration of elites, hence
accelerating the economic growth.
2.1.3.

Demographic transition and economic growth

The transmitted channel of demographic transition has constructed based on the three
major mechanism that includes: (i) the labor supply; (ii) the savings; and (iii) the human
capital.
2.1.3.1.

The labor supply mechanism

The demographic transition will create a crucial effect on the economic growth from
the baby-boom generation. It will make the working power being strong while the
P a g e | 13


dependent influence being low. A greater supply for the labor market will be captured, and
therefore creating and increasing spillover effect in the economy. Nevertheless, it is noticed
that this effect is essentially depend the cohort of the 15-64 baby-boom generation due to
their important contribution on the labor force. Besides, the educated generation would be
created since the family’s size is decrease. Then, the more productivity and the stronger
workforce would be created in the economy. (Bloom et al., 2001; Bloom et al., 2003).
2.1.3.2.

The savings mechanism

The demographic factors could foster the economy’s prospect based on the incentive
of investment from the savings idiosyncrasy. It exhibited the accounting and behavioral
effect of the working power. Particularly, there is the high consumption, but the low
production for the young and the old age people. Whereas, the higher level of saving and
the greater the output can be observed for the economy due to a concentration of
demographic transition on the working-age people who work for the annual salaries, their
child, their parent, their family, or their future outlook of the retirement. As a result, the
demographic transition could create the potential mechanism of encouragement in
reinforcing the economy. However, it has been noticed on the planning of pension and the
living standard for the economy when the transition come. Otherwise, the bad scenario of
the reduction output, or of the dependent burden of the population would constrain the
economy. Thereby, a healthy population should concern both case of the demographic
transition effect toward the economy. (Higgins and Williamson, 1997; Higgins, 1998; Lee
et al., 2000; and Bloom et al., 2003)
2.1.3.3.

The Human capital mechanism

The most tangible and significant factors that portray the demographic transition is
how people live or their attitude is change. It exhibits the crucial effects of demographic
factor on the human capital investment. As a result, when people experience a longer life
expectancy, they would change their way of investing on education as well as family or
retirement decision. From this prospect, the greater valuation for the population would
generate the possible quality workforce for the economic growth. (Inter-American
Development Bank, 1999; Bloom et al., 2001; and Bloom et al., 2003).
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2.2. Empirical studies
Although there are a lot of empirical studies on this topic with different duration,
countries and method, the relationship between demographic change and economic growth
has been still a debate until now. This section provides an overview of the contribution of
demographic factors to economic growth through some approaches:
2.2.1.

Population growth and age structure

From the Malthus’s theory about the bad influence of population growth on economic
performance, there is much paperwork which provides supportive evidence for this
pessimistic view. Coale and Hoover (1958) built up a hypothesis based on an Indian
database about the negative relationship between a raise in young dependence and savings
in a short run which lower the standard of living. Albeit, he believes that in the long run
with the decrease of fertility rate, low-income countries will benefit more in economics.
Another supportive idea for this view is from Ehrlich (1970) with the forecast in his book
“The Population Bomb” of the death of millions of people when the resource could not
adapt to extremely high population. For a time, the catastrophic theory was consolidated
by a number of studies in different level of data. Crenshaw et al. (1997) confirmed the
result of Coale and Hoover (1958) when he found the growth of workforce could not
balance out the growth of children, so the rapid increase in population due to the raise in
young ratio will damage the output per capita of developing countries during 1965-1990.
In addition, Bloom et al. (2000) uses data from 1965 to 1990 in 70 countries from different
regions to investigate the demographic variables and economic growth. Their results shows
that the fall of fertility could contribute to the success in some economy especially in East
Asia due to lower young dependence, although the power may not last long because of the
population grows old in future. Bloom et al. (2003) show that the rapid growth of
population requires a large part of technological improvement and the fixed resources such
as home, infrastructure and so on. Thus, the raise in productivity could not make significant
change in standard of living. Until 1800, the gap between the countries with high
technology like England, France, Germany and low-technology countries in Asia and
Africa is still small. The empirical review in recent decades such as Barlow (1994), Kelly
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