In 2006, Dr. Durre Nayab’s pioneering work on Pakistan’s demographic dividend made that once-obscure expression unusually famous in the country’s business and policy circles. But what is the size of that potential dividend, and how exactly does it pan out in Pakistan’s case is the stuff that national transfer accounts are made up of.
Fourteen years later, she is back with another pioneering research of constructing those national transfer accounts, the first such exercise in Pakistan, done in collaboration with her co-author Omer Siddique – also from Pakistan Institute of Development Economics.
The study, titled ‘National Transfer Accounts for Pakistan: estimating the generational economy’, essentially takes a look at the size of wealth flows from one generation to another; at how much people earn and consume at every age; and at how population growth and changing age structure can influence economic growth, public finances, and other ancillary macroeconomic affairs.
Here are some of the paper’s key findings that demand deliberation once the Corona fever is over; or perhaps economists and policy wonks would instead muse on the paper during their self-quarantine and produce great work based on its findings.
In contrast to many European economies, in Pakistan aggregate income earned by those in the most productive age flows mostly to the younger cohorts than to the elderly. The graph shows that life cycle surplus, which can be loosely translated as aggregate income in excess of aggerate consumption at each age segment of the population, is much smaller than its deficit.
A close look at that figure tells us that Pakistanis between the ages of 32 and 58 bear the public and private expenditure on those younger than 32 and older than 58 years. In contrast, in Columbia for instance, the burden of this expenditure rests on much wider age cohort of 23 to 63 years.
This implies that the working age has very little savings, a trend quite visible in macroeconomic numbers as well. As Pakistan’s current working age population enters the age of dependency, they may get to benefit from asset transfers from older generations. But because their own savings have been rather poor, they may have very little assets to transfer to the generations after them.
One approach could be to work more to earn extra. Or to consume less. The former will impair work life balance and affect human capital whereas the latter would be difficult given genuine dependency needs of the younger cohorts. Better solution, therefore, is to gain productivity and to save more, failing which there will be far bigger burden on the earning generation in the years to come.
Keep in mind that even in intergenerational terms there are no free lunches; those currently in the earning generation can only raise desirable level of assets for their future if they reduce their current consumption (which they can’t because of youth bulge) or divert their savings for capital accumulation, for which Pakistan’s macroeconomic system isn’t fully geared for at the moment.
In addition to increasing factor productivity and savings ratio, Pakistan needs to improve access to labour markets for the elderly, develop asset-based pension systems, raise financial literacy and of course strengthen the domestic financial sector and investment environment.
This isn’t to demonise those who are dependants. It is quite understandable that the young and the old consume more than they produce, whereas prime age adults produce more than they consume and accordingly leads to economic transfer and asset-reallocations to the young and the old. Pakistan’s problem is that this transfer is happening from a smaller number of people to a large number of people.
In classic emerging economies, the youth bulge comes in tandem with lower fertility rates and higher factor productivity and savings that lead to growth and development. However, in Pakistan productivity and savings are falling while fertility rate isn’t falling at desired pace, leading to higher burden on both tails – young and elderly – in the years to come.
This begs the question should Pakistan’s tax policy be influenced by national transfer accounts? If so, what are the implications. One way to look at it is formality. Lack of formality affects in intergenerational terms; when public outflow (i.e. taxes) is low, public spending on health and education remains dismal leading to negative impact on productivity and erosion of private savings that comes to haunt when old age hits those currently in the productive age.
Economic literature suggests that Pakistan will not be the first country to waste demographic dividend because of informality. Brazil was one such example in recent memory; unlike its peers in Asia, Brazilian economy grew much slower rates than what demographic dividend predicted.
Aside from taxation, an understanding of National Transfer Accounts is important to understand and design policies for inter alia poverty, economic growth, intergenerational equity, pension, health care, education and fertility. To that end, this paper is an important contribution.
However, given the rather technical nature of the subject one hopes the paper’s authors would also release policy briefs for wider audience that come along with comparison with peer economies to help offer some context, and also a comparative evaluation of the four provinces to try and encourage competition. Lastly, exercises like this study should not be a one-off paper; it should be done every ten years to read the pulse of intergenerational trends.