Demographic dividend

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Demographic dividend is said to take place when as a result of a falling birth rate, fewer investments are needed to meet the needs of the youngest age groups and resources can be released for investment in economic development and family welfare.

Demographic dividends are benefits which society gains during that period of a demographic transition. A 'demographic transition' is the change in population make-up as a society passes from a pre-industrial economy to an industrialized economy. During demographic transition there is a high ratio of working-aged individuals to dependent individuals (i.e., children, elderly).

Why should I be aware of this?

A falling birth rate makes a smaller population in the dependent age group and relatively more people in the adult age groups who comprise the productive labor force. It improves the ratio of productive workers to child dependents in the population and contributes to faster economic growth and fewer burdens on families.

If a country has a younger population it would mean both higher savings and a very great expansion of demand emerging from a dynamically growing system. Income growth would also be higher if the workforce grows faster than the population. This would not only result in increase in per capita income, but a higher savings rate.

Increase in the marriage age of women and decrease in the age of having the last baby would put more women in the workforce.

All about demographic dividend

Demographic dividend is a model where economic growth is driven by the demand of an expanding and younger workforce. The dividend most often occurs in countries where birth rates are falling. Resources shift from dependent children and elders to youth who form the bulk of the productive labor force. The declining dependency ratios of the demographic dividend also allow for increased investment in education and family welfare.

The following are the mechanisms through which demographic dividend

Labor supply

  • Provided good policies are in place before the generations of children born during periods of high leave the dependent years, they can start earning
  • As women now have fewer children and tend to be better educated than before they become free to take up jobs outside of the home, and thereby become more productive in the labor force.

Savings

  • The ability to save money is even greater when individuals born during periods of high fertility move into their 40s, and their children are mainly on their own and require less support.
  • Growth of personal savings becomes a partial resource for industrial investments that fuel economic growth.

Human Capital

  • Fewer children give better health to women, thereby increasing their participation in the labor force. This enhances their social status and personal independence. They tend to have more energy to contribute both to their families and to the society.
  • Family income can be used for better food forinfants, including girls, who are often given less to eat. The extra income can be used for better education of children and improving their life prospects.

Population growth

According to United Nations forecasts, the earth’s population is set to rise by a further 2.5 billion to 9.2 billion by 2050. The least developed countries will be most affected by this growth as their populations will double. The countries of Europe and the former Soviet Union will see an increase of 15 and 30% respectively. Africa’s share of the world population will rise from 13 to 22%, while Europe’s share will fall from 12 to 7%.

Overall because of improved hygiene, easier access to medicines and better health care, death rates have fallen, while birth rates are still at a relatively high level, causing the population to grow.

More serious than the growth of the population is the aging of the world population. According to United Nations calculations, the proportion of people aged over 60 will rise from 10 to 22% by 2050, whereas the proportion of under-15s will fall from 28 to 20%. The global median age will thus climb from 27 to 37 years. [1]

Age structure of the population

Growth in population is, therefore, not a problem in itself. What is important is the age structure of the population. Assuming that people attain significant incomes only between their 15th and 65th years, and save primarily between the ages of 40 and 65, the savings ratio is likely to decline if people over the age of 65 increases.

This is precisely what is expected to happen in Japan and many European countries from 2020, because the baby-boom generation born between 1955 and 1970 will then be retiring. In 2050 there will probably be 29 people under the age of 15 and 42 over 65 for every 100 between 15 and 65. The equivalent figures today are a mere 27 and 21 respectively. Each employable person will thus be helping to support 0.71 people of non-employable age – rather than today’s 0.48. [1]

In developing countries

In the developing countries, on the other hand, this “dependency rate” is expected to fall from currently 61% to 53% in 2050. While one person of employable age today supports 0.08 people over 65 and 0.53 people under 15, the equivalent figures by the middle of the century will be 0.21 people over 65, but only 0.32 people under 15. The increase in the proportion of over-65s in the population as a whole will thus be clearly offset by the decline in the proportion of under- 15s.

Consequently, the propensity to save of the population of many developing countries will grow by 2050, and this is also likely to have a positive impact on per capita income. Empirical studies indicate that a decrease in the dependency rate by one percentage point increases economic growth by 0.5 to 0.7 percentage points. [1]

CopperBytes

  • Of the world’s more than 6 billion people, 1.5 billion are between the ages of 12 and 24. Of that subset, 1.3 billion live in developing countries. [1]
  • While the youth population is steadily declining in China and Thailand, high fertility rates in other countries, primarily those in sub-Saharan Africa, continue to keep the number of youth high. [1]

References:

  • Understanding the Demographic Dividend
  • The Demographic Dividend
  • Harnessing the Demographic Dividend

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