Page 54 - Nuvama | IC Report 2023

• DE-GLOBALISATION • DEREGULATION • DEBT • DEMOGRAPHY • DEMOCRACY

Macroeconomics of age structure: Savings, investment boom
Needless to say, investments are vital for sustained economic growth. Any economy needs capital
along with labour to produce output. So, if a large and growing working age population can generate
high savings, they can provide the necessary capital for investments and can kick off a virtuous cycle:

Exhibit 8: More Higher incomes More capital
Virtuous cycle investments (GDP per capita) for investments
of favourable
demography 1 3 5

2 4 1
More jobs More savings Even more jobs
(with young and
growing workforce)
Source: UN, Nuvama Research

Additionally, higher employment and greater utilisation of workforce is associated with more innovation
and improvements in productivity. That is how, economy gets locked in a virtuous cycle that transforms
an economy from low per capita income levels to high per capita income levels.

Public spending: Can be more productive

Moreover, with a young population, governments can steer their tax revenues toward creating public
With a young infrastructure (roads, railways, ports, accessible education, etc) without worrying too much about
population, providing social security benefits (say pension support). Furthermore, with increasing life expectancy
government can
steer tax revenues of population as growth and medical access improve, governments would be incentivised to spend
to create public more on human capital.
infrastructure
Demographic dividend: Necessary, but not sufficient
So far, we have seen the benefits of a young and growing working age population. This aspect is one
of the most influential factors in determining the long-term growth prospects of a nation. However,
economic success is a far more complex phenomenon than just having a favourable demography. It is
a necessary but not sufficient condition for prosperity.

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