The demographic dividend: a brief introduction

This article is mainly based on the book by Bloom, D. E., D. Canning and J. Sevilla (2003). The Demographic Dividend: A New Perspective on the Economic Consequences of Population Change. CA: Santa Monica: RAND.

The demographic dividend, as the name suggests, refers to the benefits to economic growth brought by population changes. In particular, a large proportion of working population (aged between 15 and 64 as international benchmark) can support more youth and elderly and create opportunities for economic growth .

The positive effect operates through three major channels:

Firstly, the growing population can increase labor supply, in quantity and quality terms. On the one hand, as the babyboom population turn into adults, they supply more labor. The per capita production is likely to increase as more people are in their peak years. On the other hand, women’s participation will increase due to smaller family size and less efforts needed by the family. Female workforce is also likely to be more educated, as families tend to invest more when they have fewer kids.

The increase in working age population brings about the second benefit: increased savings. As nuclear family becomes more prevalent, people have to save more for their retirement. But the government plays an important part in directing the savings. Only when a country is equipped with well functioning saving and investment systems can it fully utilize the savings brought about by the demographic changes.

The final aspect of the benefit concerns human capital. Higher human capital is the most far reaching impact of the demographic dividend. People nowadays enjoy better medical treatments and improved living environments than a couple of years ago. They are more healthy. If a person’s investment in education and training depends on his discount values of the future returns (suggested by human capital theory), increased longevity and health make people invest more in these aspects as they will have enough time to recover the cost. The rising human capital capital increases productivity and creates a long-lasting benefits for the economy.

However, how well the demographic dividend is utilized depends highly on the policy environment. Education and training should be combined with a flexible labor market to absorb the better prepared labor force. Otherwise, there can be a counter productive effect as unemployment and crime increase. For south and southeast Asia, family planning policies should be implemented. Since fertility still stands at relatively high levels, the countries haven’t got the chance to reap the benefits yet. Sub-Saharan Africa is similar. Last but not least, openness of the economy matters. Latin America’s austerity from the 1960s to the 1980s and this prevented the countries from harvesting the demographic dividend.

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