A Primer on the Demographic Dividend

Transcription

1 P 1: P 2: P 3: P 4: P 5: P 7: P 8: P 10: P 11: P 13: What is the Demographic Dividend (DD)? What evidence do we have of the DD? What policy tools help harness the DD? What are the population dynamics behind a DD? Why support for access to family planning, maternal and child health services is particularly important for the DD How long is the window of opportunity for the DD? Is population aging a concern when pursuing the DD? The difference between the first and second DDs What are the consequences of ignoring conditions for the DD? Have policy makers supported realizing the DD? Former Mexican President Vicente Fox: I also want to tell you that today we have a very potent arm with which to overcome inequalities and marginalization. That arm is what we have called the demographic dividend It is crucial, truly crucial, that we take full advantage of is. Otherwise we will have lost a great opportunity. The sustainability of our social and economic development depends, in large measure, on our response to this opportunity. Source: Development Outreach, April 2011 What is the Demographic Dividend? The Demographic Dividend is growth in a country s economy resulting from a change in the age structure of its population. When fertility rates decline, fewer births take place each year, and the size of the population of young dependents grows smaller. Lower fertility changes a country s age structure and can substantially affect the economy. Fewer youth dependents can mean savings to family income and government expenditures on such basic needs as health care, education and food. As a youthful population becomes older and has fewer children than previous generations, the population of working age swells, expanding the supply of labor. When there are more working-age adults (usually those between ages 15 to 64) relative to children under age 15 and the elderly, there is a lower dependency burden fewer people to support with the same income and assets. 1 Shifts in the balance of smaller populations of young dependents to larger populations of workers in a country can create a window of opportunity for governments to capitalize on the released resources for economic development and growth. This creates conditions for higher economic productivity and rising personal incomes; hence, the Demographic Dividend. The Demographic Dividend s window of opportunity is limited and will close over the next 10 to 20 years for most developing countries where fertility transitions are underway. For sub-saharan African countries, fertility declines are nascent and the enabling policy conditions are yet to be fully in place. The windows in this region may emerge in the coming five decades. However, the Demographic Dividend is not automatic for any country, 2,3 and for sub-saharan Africa, not realizing it can have profound economic consequences. By 2100 one third of the world s population is projected to live in sub-saharan African countries 4. Presently 72 percent of the region s population is impoverished living on less than $2 per day 5. Thus the opportunities for realizing demographic dividends in the region s countries also pose significant challenges to them. In order to compete in the global economy, economic prospects will depend on foresighted and prudent decisions about policies for health, education and employment taken today. This primer draws on published material cited in the references and was compiled by Dr. Amy Tsui, Director of the Gates Institute, with the assistance of Lucy Hebert. Comments from several reviewers, in particular Andrew Mason, Carmen Tull, Ishrat Hussein and Supriya Madhavan, are acknowledged with gratitude. September 8, 2011 Page 1

2 What evidence do we have of the Demographic Dividend? The Demographic Dividend is visible in the growth rates of a country s economy resulting from a change in the population s age structure. One measure is change in the annual percentage growth in a country s Gross Domestic Product (GDP) contributed by the Demographic Dividend. Typically the Demographic Dividend (sometimes called the Demographic Bonus) lasts 30 to 50 years, after which the population will age. Demographic Dividends have two parts, the first resulting from declining birth rates and an increased labor force supply, where, other things equal, per capita incomes will rise. The second demographic dividend results from a significant number of older workers motivated to invest in their financial security during retirement to lower reliance on or expectations that their families or governments will provide for their needs in old age. A number of regions, especially East and Southeast Asia, are poised to benefit from the second dividend which tends to be economically greater than the first dividend, as seen below 6. Table 1. How big are the dividends? The second has typically been even larger than the first. Demographic Dividends: Region contribution to growth in GDP/N 1 Actual growth in First Second Total GDP/N 1 Industrial economies East and Southeast Asia South Asia Latin America Sub Saharan Africa Middle East and North Africa Transition economies 2 Pacific Islands Source: Andrew Mason, 2005, "Demographic Transition and Demographic Dividends in Developed and Developing Countries," United Nations Expert Group Meeting on Social and Economic Implications of Changing Population Age Structures (Mexico City). 1 Actual growth in GDP per effective consumer (GDP/N), , in percent a year. The effective number of consumers is the number of consumers weighted for age variation in consumption needs. 2 Albania, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Georgia, Hungary, Kazakhstan, Kyrgyz Republic, Latvia, Lithuania, FYR Macedonia, Moldova, Mongolia, Poland, Romania, Russian Federation, Serbia and Montenegro, Slovakia, Slovenia, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan. September 8, 2011 Page 2

3 From Table 1 we see that for the East and Southeast Asia region, the Demographic Dividend contributed 1.9 percentage points of 4.32 percent actual growth in the GDP per effective consumer in the period 1970 to Of the 1.9 percentage points, 0.59 was contributed by the first and 1.31 by the second demographic dividend. Outside of sub-saharan Africa, second demographic dividends will be larger than the first in all regions. Another analysis 7 estimates India s economy will experience a similar size Demographic Dividend in the coming 20 years, one that will add 2 percentage points to its annual per capita income growth through 2030, after which the size of the dividend will begin to decrease. What policy tools help harness the Demographic Dividend? 8 Where a country stands in the transition will determine the kinds of policies and initiatives it can most usefully undertake to help bring about a demographic dividend, for example, by expanding access to family planning and other reproductive health services and girls education to accelerate the ongoing fertility transition. The importance of investing in human resources through more schooling, better health care and job creation is highlighted in key policy actions that can: Improve the quantity and quality of schooling Expand school enrolment especially for girls; ensure minimum standards of quality; ensure secondary school and university education is relevant for skills needed in the workforce Enact and enforce laws to prevent early marriage Girls marrying young typically have children early and more than their peers who stay in school and marry later; early marrying girls also are less able to contribute to productive sectors of the economy Bring the job market into the 21 st century by easing barriers to starting work, especially for females; encouraging flexibility in hiring and job mobility; encouraging private sector firms to invest in training; and ensuring equal gender access to employment Expand access to family planning services, especially in the most disadvantaged areas, to delay births, reduce unintended pregnancies, and improve maternal and child health. HIV prevention and treatment programs should also be linked to family planning services to serve infected persons and their partners who seek to reduce unintended pregnancies. Encourage young people s participation in public life, and expand opportunities for them to acquire the needed information and skills to enjoy productive and healthy lives Pursue multi-sectoral approaches to combine the efforts of various government departments to enhance youth skills and opportunities and to link health and education programs. September 8, 2011 Page 3

4 What are the population dynamics behind a Demographic Dividend? Declines in birth rates lead to a decrease in the number of young dependents (those under age 15) 9 in a population. As these cohorts get smaller, those aging into economically active ages (15 to 64) continue to grow for several decades. The ratio of those of working age to those who are under age 15 is called the youth dependency ratio. A lower youth dependency ratio means savings to governments and families through reduced expenditures for education and health, freeing up resources for investment in economic development and family welfare. Over time the fertility transition completes itself and population aging begins. The ratio of the population aged 65 and over, relative to those of working age, is called the old-age dependency ratio. The balance between the different age groups is best viewed in population age pyramids over time, seen for Thailand for 1965 to In the early phase of the transition, the age structure of the population is heavily concentrated in ages under 15. In the intermediate stage, there is an expansion of the population of working age 15 to 59 and in the late stage, the share of the population ages 60 and over increases. Figure 1: Thailand s demographic transition illustrates the change in its population age structure, positioning it in the intermediate stage and its chance to realize the demographic dividend. 10 September 8, 2011 Page 4

5 Fertility transitions are underway in all regions, except sub-saharan Africa, resulting in rising ratios of working age to non-working age populations. The prospective advantages of the demographic dividend start to decline for most regions between 2025 and Figure 2. Regions on the Demographic Upswing Source: D Bloom and D Canning, Demographics and Development Policy, Development Outreach, April 2011 Figure 3 shows the youth dependency ratios for seven developing countries in 2010 and projected for Earlier onsets of fertility declines in China, India, Ecuador and the Philippines result in higher ratios by mid-century, compared to Uganda, Kenya and Ghana. Source: United Nations World Population Prospects 2008 Why support for access to family planning, maternal and child health services is particularly important for the Demographic Dividend Optimal cognitive development of children is an imperative for any society, and formal schooling confers skills useful for employment, beginning about age 6. Ensuring the optimal health of females in adolescence, pre-pregnancy, during pregnancy and delivery, and post-pregnancy to protect both maternal and newborn wellbeing is a similar imperative. Health care investments, including nutrition, have lifelong impacts and have been associated with the prevention of noncommunicable diseases (NCDs), such as diabetes, hypertension and cardiovascular disease, in adulthood. September 8, 2011 Page 5

6 The timing and spacing of births enable energy and micronutrient stores to be replenished in mothers and cumulatively are important in lowering the risk of maternal mortality where women are likely to have many births in their life time. Among the behaviors that directly impact fertility, a later age at first birth and longer spacing between births are considered the most effective. Total Fertility Rate Figure 4. Total fertility rates and contraceptive prevalence rates for 202 developing country surveys Contraceptive Prevalence % Source: StatCompiler accessed January 11, 2011 TFR = *CPR R 2 = Controlling the timing and number of births is achieved efficaciously with modern contraception methods as shown in Figure 4. This graph of fertility rates and contraceptive prevalence indicates that without contraception the average fertility rate would be 6.7 births per woman of childbearing age and that each 16 percentage point gain in the rate of contraceptive use will reduce fertility by 1.0 birth. Source: United Nations, World Contraceptive Use 2011 Over the past 30 years for which data are available, contraceptive practice has risen to where a majority of couples with the female aged 15 to 49 are users (62.7% worldwide, 72.4% in more developed regions and 61.2% in less developed regions as of 2009) 11. The increase in use between 1980 and 2009, visible in Figure 5, is profound and associated with lower fertility. Fertility rates dropped in developing regions from 4.0 to 2.7 births per woman over this period. September 8, 2011 Page 6

7 Figure 6. Contraceptive prevalence rates for for the Republic of Korea, Thailand, Egypt and Pakistan; Source: United Nations, World Contraceptive Use 2010 The rapid uptake of contraceptive use between 1965 and 2010 in the Republic of Korea and Thailand is seen in Figure 6, with Egypt s rise being more gradual and Pakistan s still under establishment. The Demographic Dividend s realization in Egypt is probable but while it is uncertain for Pakistan. Nearly half (47%) of Pakistan s population of 185 million is under the age of 14, placing considerable burden on its government and families to support and provide healthy and productive futures for upcoming generations. By comparison, Egypt s youth constitute about one third of its 65 million population, a result of fertility declining from 6.6 to 2.7 children in this period. How long is the window of opportunity for the Demographic Dividend? The window of opportunity in contemporary times tends to be short and of durations one half to a third as long as those for European countries. The demographic dividend s window of opportunity can be estimated by the difference between the year when fertility begins to decline and the year when the aggregate number of births begins to decline. 12 Thirty years after the decline s onset is generally the time when fewer births lead to smaller cohorts of working and reproductive age populations. As seen in Table 2, Iran and Morocco have some of the shortest windows of 9 to 10 years, followed by India at 14 years. By comparison, Spain and Sweden had 74 and 89 years, respectively, which also allowed more time in which to develop and enact economic policies to benefit from both the first and second demographic dividends. The next-to-last column dates the second demographic turning point the onset of population aging. Compared to the 100-plus years European countries, such as Spain and Sweden, had to experience their demographic transition and dividends, the other countries in the table will see their demographic dividends run their course between 30 to 60 years. The short windows underscore the importance of enacting policies and programs today to secure the realization of the full dividend. September 8, 2011 Page 7

8 Table 2. Estimates of the Window of Opportunity for Countries Undergoing the Demographic Transition Country Year of onset of fertility decline Year number of births starts to decline Estimated duration 30 years after births start to decline (year) Difference from fertility decline onset China Costa Rica India Iran Morocco Sri Lanka Tunisia Turkey Venezuela Spain Sweden Source:: D Reher, Economic and Social Implications of the Demographic Transition, Population and Development Review 37 (Supplement): (2011). Is population aging a concern if the Demographic Dividend is actively pursued? The speed of population aging depends on the speed of the decline in birth rates. Korea s fertility levels declined from 5.1 births per woman in the early 1950s to 1.3 births in 2010, compared to Thailand s decline from 6.1 to 1.5 births in the same period. As seen in Figure 7, the median age of persons in the population rose from about years to years and faster for South Korea than Thailand. Figure 7. Trends in median ages from for Republic of Korea and Thailand. Source: United Nations, World Population Prospects September 8, 2011 Page 8

9 Popular concern about rapid population aging reflects a perception that there will be a heavy burden to support economically inactive older persons on government resources, in the form of pensions and medical care. The dependency burden from population aging depends on the magnitude of the fertility decline very low fertility imposes a severe burden while a fertility rate of 2 children leads to a reasonable support ratio. 13 Source: United Nations, World Population Prospects 2008 Figure 7 shows that the growing number of elderly will place proportionately greater demands on those of working age in industrialized, as well as industrializing countries such as China and India, by In just 40 years, China s ratio of workers to elders will fall from 8.8 to 2.6 and India s from 13.1 to 5. Economic support for a population is derived from four types of resources: 1) labor income, 2) government transfers, 3) private (usually family) transfers, and 4) assets (such as personal savings and investment income). Their relative importance varies by age. For those in primary working ages, labor income is sufficient to fund their consumption needs but children and the elderly must depend on public transfers, private transfers or assets. 14 If workers accumulate assets--such as a house, business, pension fund, or personal savings to support their needs in retirement, their investment increases national incomes. 15 This second demographic dividend materializes as long as supportive policies are put in place during the intermediate phase of the transition. The size of the second dividend depends on how great the needs for old-age assets will be, the extent to which workers expect to rely on their own financial resources when they are older, and the strength of the institutions that support efforts to realize economic security in old age through assets accumulation. Recent studies shows that economic support for the elderly can be enhanced by investing early in the economic life cycle--educating the young and establishing sound employment practices and September 8, 2011 Page 9

10 16, 17 policies, such as assisting working parents of young children or mandatory savings by workers. These can create favorable economic support ratios. Resource transfers between governments and the elderly then become economically manageable, and reliance on asset flows to retirees and wealth transfers between generations expands. Figure 8 18 shows how labor income and consumption vary over the life cycle and between two countries. Consumption exceeds labor income in India and Germany not because consumption is greater in the former but because the age groups for the young and the old in Germany are so large. Figure 8: Aggregate labor income and consumption by age in India (2004) and Germany (2003) Source: National Transfer Accounts Project, The First and Second Demographic Dividends Several Asian countries (China, India, Indonesia, Thailand, Japan and Korea) are progressing through and into the first and second demographic dividends. One metric for assessing the impact of demographic change on economic productivity is the Economic Support Ratio (ESR) 19. The ESR is the effective number of producers relative to the effective number of consumers in a population. The numerator of producers incorporates age differences in labor force participation, unemployment, hours worked and wages. The denominator of consumers incorporates age differences in consumption due to taste, physiological needs, and other factors In the two graphs below the ESRs for these countries peaked around 1.5 in the late 1980s and, except for Japan, stay at values of 1.5 or higher and well above 0 for the first half of this century. Growth in the ESR yields a one-for-one increase in growth of per capita income. This first demographic dividend eventually turns negative (left graph). September 8, 2011 Page 10

11 Figure 9: First and Second Demographic Dividends for Selected Asian Countries: Annual Growth Rate in Economic Support Ratios Source: UNFPA, The Impact of Demographic Change in Thailand, Figures 5.11 and 5.13, The projected economic support ratios in the second demographic dividend (right graph) after 2015 suggest that building up the quality of human capital with early schooling, health and employment investments can provide robust pay-offs for a sustained period of time. The steepness of the dividend curves also suggest that an abrupt decline in fertility may require significant adjustments to economic support ratios than a more gradual one, as seen when comparing China s and Indonesia s trend lines. What are the consequences of ignoring conditions for the Demographic Dividend? Economic growth does not automatically accelerate as fertility declines and the working age share of the population increases. Taking advantage of a demographic opportunity depends on a conducive policy environment. Good governance matters, as do solid macroeconomic management, a carefully designed trade policy, efficient infrastructure, well functioning financial and labor markets, and above all, effective investments in health, education and training. Bloom and Canning, Demographic change in the shape of smaller cohorts of children is embedded in the assumptions behind population projections for the rest of this century. However, demography is not destiny. By themselves the changes in the population age structure will not generate the benefits of either the first or second demographic dividend. Creating a conducive policy environment is necessary and sooner rather than later. September 8, 2011 Page 11

12 Figure 10. A Tale of Two Economic Trajectories: Income growth in Indonesia and Nigeria, (per capita GDP in constant 1990 US dollars) Source: G McNicholl, Achievers and Laggards in Demographic Transition: A Comparison of Indonesia and Nigeria, Population and Development Review 37 (Supplement): (2011). In the mid-1960s, Nigeria s population of nearly 39 million was half as large as Indonesia s 22, 23. By 2050 both countries population sizes are projected to be 290 million. After this, Indonesia s population is expected to stop growing, while Nigeria s is expected to reach 730 million by Per capita GDP in 2008 is nearly 4.5 times greater in Indonesia than in Nigeria. Fertility declines clearly enhance the ability to invest in human capital. As Figure shows, with high fertility rates of 5 or more births per woman, Nigeria and Kenya invest the two lowest percentages of average annual income to improve human capital among countries in the figure. Figure 11. Human capital spending and fertility rates for 23 countries--african (gray), Asian (green and turquoise), Latin American (blue), European and North American (green) Source: National Transfer Accounts Data Sheet 2011, September 8, 2011 Page 12

13 Because the Demographic Dividend has a finite window and is not automatic, the timing of policy action for both its first and second phases is everything. To benefit from the first demographic dividend, funding of health, education and employment programs needs to take place early in individuals life cycles. Inadequate investments in health and nutrition will compromise a generation s wellbeing, adversely and cumulatively impacting it from pregnancy, to childhood, through adolescence and into adulthood. Satisfying contraceptive demand with improved access to family planning accelerates fertility declines, reduces infant mortality and slows growth in the number of youth dependents. Advance planning to invest early in education will insure that the smaller cohorts of young persons have enhanced skills to enter the labor force prepared to compete in the global economy. To benefit from the second demographic dividend, funding of retirement through savings and capital accumulation needs to take place well in advance, during the working years of future retirees. 25 Delays otherwise will leave many retirees with insufficient economic support and enormous pressure to rely on transfers from government or families. The period of robust economic growth ensuing from the first dividend can also help raise savings rates and raise current standards of living. The Demographic Dividend is like the African proverb that says, The best time to plant a tree was twenty years ago. The second best time is now. Have policymakers supported realizing the Demographic Dividend? Nigeria s new Minister of Finance, Ngozi Okonjo-Iweala, and former managing director of the World Bank, has said that One of the greatest untapped growth drivers in Nigeria s economy is our youth population, adding that the public and private sectors should invest in human capital, labor supply and savings to secure the demographic dividend. These help to create a knowledge-based economy. Policies should be directed toward getting the demographic dividend. Source: Development Outreach, April 2011 Indian Prime Minister Manmohan Singh: Looking ahead, we enjoy a demographic dividend in terms of a growing working-age population in a world that is aging rapidly. September 8, 2011 Page 13

14 References and Footnotes 1 Ashford, L. Africa s youthful population: Risk or opportunity. Population Reference Bureau, Washington, DC Bloom, DE, Canning D, and Sevilla, J. The Demographic Dividend: A new perspective on the economic consequences of population change. Rand Corporation, Santa Monica, CA, Bloom DE and Canning D. Global demographic change: Dimensions and economic significance. Population and Development Review 34: 17-51, United Nations, World Population Prospects: The 2010 Revision. New York: United Nations Population Reference Bureau World Population Data Sheet. Washington DC: Population Reference Bureau. 6 Mason, A. Demographic transition and demographic dividends in developed and developing countries. United Nations Expert Group Meeting on Social and Economic Implications of Changing Population Age Structures (Mexico City), Aiyar, S. and Mody, A. The Demographic Dividend: Evidence from the Indian states. International Monetary Fund Working Paper WP/11/38, Ashford, op. cit., pp The upper age of youth dependency is variously defined as 15 or 20 years. Similarly the lower age for old-age dependency has been defined as beginning at 60 or 65 years. This brief uses a youth dependency range of 0 to 14, working age range of 15 to 64, and older dependency range of 65 and above. 10 Lee, R. and Mason, A. What is the demographic dividend? Finance and Development 43(3), United Nations, World Contraceptive Use Wall Chart. New York: United Nations Reher, D. Economic and social implications of the demographic transition. Population and Development Review 37 (Supplement): 11-33, Andrew Mason, personal communication, September 6, National Transfer Accounts: Data Sheet Mason, op. cit. 16 Lee and Mason, op. cit., p. 4. September 8, 2011 Page 14

15 17 Lee, R. and Mason, A. Population aging and the generational economy: A global perspective. Edward Elgar Publishing, United Kingdom, National Transfer Accounts, op. cit., p Ibid., p United Nations Population Fund. Thailand Country Office. Impact of Demographic Change in Thailand. Bangkok, Thailand Bloom, DE and Canning, D. Demographics and Development Policy. Development Outreach, April McNicholl, G. Achievers and laggards in demographic transition: A comparison of Indonesia and Nigeria. Population and Development Review 37 (Supplement): , United Nations, World Population Prospects: The 2010 Revision. New York: United Nations National Transfer Accounts, op. cit., p Mason, op. cit. Additional readings Ross, J. Understanding the Demographic Dividend. POLICY Project, Futures Group. September Phang, HS. Demographic dividend and labor force transformations in Asia: The case of the Republic of Korea. Myrskyla M, Kohler HP, and Billari FC. Advances in development reverse fertility declines. Nature 460(7256):741-3, September 8, 2011 Page 15