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This document summarizes a RAND report on how population dynamics can affect economic growth. It discusses the concept of a "demographic dividend" that can occur when countries experience a decline in fertility rates and a shift in population structure with more working-age people. Countries like those in East Asia that enacted policies to improve health, education, and jobs were able to benefit economically from this dividend. In contrast, places like sub-Saharan Africa that still have high fertility rates have not seen the same benefits due to a lack of a change in population structure. For all countries, effective policies across health, education, economic, and governance are needed to fully capitalize on the potential for increased growth from demographic shifts.

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53 views3 pages

DDDD

This document summarizes a RAND report on how population dynamics can affect economic growth. It discusses the concept of a "demographic dividend" that can occur when countries experience a decline in fertility rates and a shift in population structure with more working-age people. Countries like those in East Asia that enacted policies to improve health, education, and jobs were able to benefit economically from this dividend. In contrast, places like sub-Saharan Africa that still have high fertility rates have not seen the same benefits due to a lack of a change in population structure. For all countries, effective policies across health, education, economic, and governance are needed to fully capitalize on the potential for increased growth from demographic shifts.

Uploaded by

mihir_mhk
Copyright
© Attribution Non-Commercial (BY-NC)
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RAND: Banking the "Demographic Dividend" - How

Population Dynamics Can Affect Economic Growth


Banking the "Demographic Dividend

How Population Dynamics Can Affect Economic Growth


Countries can spur economic growth by reducing high fertility rates and enacting policies that
improve health, education, and job opportunities. These conclusions emerge from a recent
report published by RAND's Population Matters project: The Demographic Dividend: A New
Perspective on the Economic Consequences of Population Change, by David Bloom, David
Canning, and Jaypee Sevilla. The report synthesizes recent research that sheds light on the
debate over the impact of population dynamics on economic development--in particular, the
importance of age structure. The report also examines the relationship between population
change and economic growth in specific regions of the world and discusses the policy
environment needed for nations to benefit economically from the transition to lower fertility
rates.

THE CONSEQUENCES OF AGE STRUCTURE FOR ECONOMIC DEVELOPMENT

For decades, experts have debated the impact of population growth on economic
development. "Population pessimists" have insisted that high fertility and rapid population
growth inhibit development. This view contributed to the rationale for widespread funding of
family planning policies and programs in the 1960s.[1] Conversely, "population optimists" have
argued the opposite position: Rapid population growth and large population size can promote
economic prosperity by furnishing abundant human and intellectual capital and increasing
market size. Proponents of both views can find support in the research record, but overall, the
evidence has been inconclusive.

Proponents of yet a third view, "population neutralism," contend that population growth, in
isolation from other factors, has little impact on economic performance, a position supported
by a sizable body of economic research. This view has become the dominant position in the
current policy environment.

Focusing on population size and growth, the debate has largely ignored a critical demographic
variable: the age structure of the population (that is, the way the population is distributed
across different age groups). Because individual economic behavior varies at different stages
of life, changes in age structure can significantly affect national economic performance.
Nations with a high proportion of young or old dependents tend to devote a relatively high
proportion of resources to these groups, often limiting economic growth. By contrast, nations
in which a relatively large share of the population has reached the prime ages for working and
saving may enjoy a boost to income growth stemming from the higher share of the population
that is working, from the accelerated accumulation of capital, and from reduced spending on
dependents. This phenomenon is known as the "demographic dividend." The combined effect
of this "dividend" and effective policies in other areas can stimulate economic growth.

The relationship between population change and economic growth has taken on added
salience in the last few decades because of demographic trends in the developing world. At
varying rates, developing countries are undergoing a demographic transition to lower rates of
mortality and fertility, producing a boom generation that is gradually working its way through
nations' age structures. Thus, many developing countries face opportunities to translate their
ongoing demographic transitions into economic gains.

STUDIES IN CONTRAST: EAST ASIA AND SUB-SAHARAN AFRICA


The demographic transition and its impact on economic development are playing out
differently in different regions of the world. The East Asian nations have experienced the most
success in "reaping" the demographic dividend produced by reduced fertility rates. This
achievement has been less pronounced in other areas. Latin America has undergone a fairly
sharp demographic transition but, because of a weak policy environment, has not capitalized
on it. The demographic transitions in South Central and Southeast Asia started later and have
been less pronounced than that in East Asia; these regions are only beginning to enjoy the
economic benefits of demographic change. The Middle East and North Africa are still in earlier
phases of the demographic transition, and indeed many parts of sub-Saharan Africa have seen
almost no decrease in traditionally high fertility rates.

The cases of East Asia and sub-Saharan Africa best illustrate the two ends of the spectrum
with respect to the demographic dividend.

East Asia. The East Asian "economic miracle" shows how reduced fertility can help to create
conditions for robust economic growth. Declining mortality, followed by declines in fertility,
resulted in a rapid demographic transition in the region between 1965 and 1990. As a result,
the working-age population grew four times faster than the dependent (youth and elderly)
population. A strong educational system and trade liberalization policies enabled national
economies to absorb this "boom" generation into the workforce. The demographic dividend
fueled the region's spectacular economic boom: Real per capita income growth averaged 6
percent per year between 1965 and 1990. The demographic dividend accounted for
approximately one-fourth to two-fifths of this growth.

Sub-Saharan Africa. By contrast, sub-Saharan Africa has experienced an extremely sluggish


demographic transition. Traditionally high fertility rates and large family sizes have persisted
in the face of improvements in infant and child mortality, and now the ravages of HIV/AIDS
are depleting the working-age population. As a result, the average age of the population has
remained low, and there has been no demographic dividend to help catalyze a sustained
period of economic growth. Compared with East Asia, the proportion of working-age people in
sub-Saharan Africa remains low (see figure). As long as fertility rates remain high, sub-
Saharan African countries are unlikely to see rising incomes, improved health conditions, or
better-educated workers. There is cause for optimism, however. Despite difficult conditions,
sub-Saharan Africa is projected over the next 25 years to see a decline in fertility from 5.5
children per woman to 3.5. Some nations --notably those in southern Africa, including
Namibia, Botswana, South Africa, and Zimbabwe--have achieved reductions in high fertility
rates. In most countries of sub-Saharan Africa, however, children are still viewed as a valuable
source of labor and insurance for old age, so policies to reduce fertility have been slow to take
effect. Still, for the region as a whole, there may be opportunities to reverse the cycles that
have hindered economic growth. One possible starting place: improving the status of women.
If policymakers can emphasize educating and empowering African women, who represent a
critical supply of social and economic resources, countries are more likely to see declines in
fertility and a gradual increase in the share of working-age people.

THE NEED FOR EFFECTIVE POLICIES IN OTHER AREAS

As the case studies show, falling fertility rates can create conditions for economic growth.
However, reduced fertility by itself provides no guarantee of prosperity. In order to capitalize
on their demographic dividend, nations need effective policies in key areas.

Catalyzing the Demographic Transition. Improvements in public health are the key to initiating
the demographic transition. Improved sanitation, immunization programs, and antibiotics lead
to declines in mortality that lead in turn to declines in fertility. Furthermore, there are
economic reasons to invest in health: Mounting research indicates that a healthy population
can abet economic growth and lessen poverty,
contrary to the long-standing belief that causation
runs only from wealth to health.

Accelerating the Transition. Effective family


planning can accelerate the demographic
transition, potentially enhancing the economic
benefits and lifting nations out of a cycle of
poverty.

Exploiting the Transition. Policies in three areas--


education, the economy, and governance--are
critical to collecting the demographic dividend.

• Education. Transforming a youthful Share of Population of Working Age--East


population into a productive workforce Asia and Sub-Saharan Africa, 1950-2050
requires investment in education at all levels.

• Economic policy. A larger, better-educated workforce will yield benefits only if the
extra additional workers can find jobs. Government policies that lead to stable
macroeconomic conditions are associated with the growth of productive and rewarding
jobs. Labor- market flexibility and openness to trade are also important, but the
relevant policy reforms must be undertaken gradually and in a manner that protects
those who can lose out in such transitions.

• Good governance. In many countries, necessary steps to reaping the benefits of the
demographic dividend include strengthening the rule of law, improving the efficiency
of government operations, reducing corruption, and guaranteeing contract
enforcement.

The effects of successful policies in all of these areas can be mutually reinforcing, helping to
create a "virtuous cycle" of sustained growth. Conversely, without effective policies, countries
may miss opportunities for economic growth, or worse. They may risk high unemployment,
increased crime rates, and political instability.

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