Some concern has been apparent regarding Nepal’s declining population growth rate. Is it the beginning of the end to Nepal’s dreams of prosperity and high economic growth? A large number of Nepalese economists and other prominent scholars seem to be in some degree of agreement. However, depending on the economic growth model we pursue, the answer could be quite different.
Modeling economic growth
Various models have been propounded to depict the growth of economies at the national level. Population growth rate plays a significant role in all such major models that have been developed since the 1950s.
The bottom line of these models is that technological advancement is the “engine of economic growth,” and it enables countries to sustain that growth rate. However, in recent decades, the role of population growth in technological advancement, and in turn, economic growth, has become more pronounced after the Nobel Prize winning economist Paul Romer “endogenized” technological growth in the 1990s.
Exogenous and endogenous growth theories
Three major factors play a key role in economic growth. The first one is labor or the working population. They generally work for their livelihood and contribute to the economy. The second one is capital, which includes land, machinery, as well as other capital. These two factors, in combination, produce goods and services for the economy. Provided some assumptions, lower production can eat up resources and lead to capital depletion while higher production can help in “capital accumulation,” which is crucial for economic growth. These two factors are among the core components of many growth theories.
The third factor is a crucial one. It is often referred to as the “total factor productivity” or TFP. This determines how efficiently labor and capital interact with each other to produce goods and services. Two economies with the same level of labor and capital can have differing degrees of output. All the factors that determine the productivity of the available labor and capital are lumped together into the single TFP factor in order to simplify growth accounting and other economic calculations. To further simplify things, we will refer to TFP as simply “technology.” The more advanced the technology, the higher the productivity, and vice versa. As a supporting example, one can think of the difference technology has made in traditional and modern agriculture methods and output.
The difference between exogenous and endogenous theories is mainly on how they treat technology in their models. One of the early predecessors to modern growth theories is the Solow model, as developed by another Nobel prize winner, Robert Solow, in the 1950s. The Solow model takes the level of technology in an economy as a given or “exogenous,” and models economic growth based on changes in capital, labor population, and saving habits. Such models acknowledge that technological growth pushes economic growth, but do not answer how growth in technology occurs or can be achieved.
Paul Romer, on the other hand, managed to “endogenize” technology within the growth model. After all, it is indeed people—already included in traditional growth models—who invent technology. In his model, the economy (as well as technology) can grow at the same rate as the population in certain plausible instances, which implies that population growth is crucial for both technological and economic growth.
Population: to grow or not to grow?
China provides an interesting study on the policy of population growth, especially in conjunction with Solow’s and Romer’s theories. Even though there had been some family planning policies, China launched the One Child Policy in 1979 to curb its rapid population growth.
China’s fear of its impact on economic growth is understandable. A smaller population is easier to manage than a larger one. Resource allocation becomes easier, with each getting a larger share. In Solow’s model, the per capita income of a country increases when population growth declines. However, that is a one-time increase rather than a sustained growth, which requires sustained technological improvement.
In the 1970s, China was considered as a “poor country” by Western standards. It relied on handwork and manual labor for most basic tasks that are better performed with equipment and machinery. In other words, the technology variable or TFP had a low value in the growth equations, such as the one used for the Solow model.
However, in the decades after the 80s, we can observe that China put extensive effort on knowledge and technology transfer. They also had other reform programs, both internal and external, but to keep our study focused on the two growth models discussed above, China’s boost on its TFP through foreign direct investment and technology transfer led to a rapid economic growth. They are now on par, if not better, than most industrialized countries in terms of technology and innovation.
As a result, China can no longer rely on foreign technology to sustain its economic growth. This is where Romer’s model comes into play: China might need a growing population to come up with more ideas for innovation and newer technology to prevent saturation or a decline in its growth. The government’s concern on their declining population has therefore been somewhat evident in recent years. Their economic growth rate, once often higher than 10%, is projected to fall down to around 4% in the current year.
What’s in it for Nepal?
Nepal is nowhere near advanced economies to desire a high population growth rate in hopes of achieving high economic growth, as suggested by the Romer model. On the contrary, some decline in population could provide a much-needed temporary boost in per capita income, as predicted by the Solow model.
From an economic perspective, we could start thinking about the need for population growth at the policy level once we are in line to achieve high technological growth. Our current priority, from a policy perspective, should be to import technology and boost productivity while making the best use of the available labor population. The Solow model, which takes technology as an “exogenous” variable, could be the guiding model for planning Nepal’s economic growth.
Final note
Before jumping into conclusions, it must be stated that population is not just an economic concept and has various social, cultural, political, and demographic implications. The question of the impacts of population growth (or decline) needs to be analyzed from a multidimensional approach covering all these aspects, a task out of the scope of this article.
In conclusion, from the perspective of economic growth theories, population growth need not be the priority of the Nepalese economy yet. The government should, however, focus more on making best use of the available labor for productive purposes while importing technology and knowledge through international cooperation.