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What Is Demographic Dividend?
Demographic dividend is economic growth caused by changes in a country’s age structure, often due to lower fertility and mortality rates.
Key Takeaways
- A demographic dividend results from shifts in a country’s age structure, boosting economic growth by reducing fertility and mortality rates.
- Economic benefits occur when a larger working-age population supports fewer dependents, increasing resource allocation for development.
- A second demographic dividend can arise as an aging population invests in assets, boosting national income.
- Successful demographic dividends depend on government policies in education, health, and the economy to enhance productivity.
- Key areas of demographic dividends include increased savings, labor supply, human capital investment, and economic growth.
How Demographic Dividends Impact Economic Growth
Demographic dividends occur in countries that see declines in both fertility and mortality rates. A country that experiences low birth rates in conjunction with low death rates receives an economic dividend or benefit from the increase in productivity of the working population that ensues. As fewer births are registered, the number of young dependents grows smaller relative to the working population. With fewer people to support and more people in the labor force, an economy’s resources are freed up and invested in other areas to accelerate a country’s economic development and the future prosperity of its populace.
To receive a demographic dividend, a country must go through a demographic transition where it switches from a largely rural agrarian economy with high fertility and mortality rates to an urban industrial society characterized by low fertility and mortality rates. In the initial stages of this transition, fertility rates fall, leading to a labor force that is temporarily growing faster than the population dependent on it. All else being equal, per capita income grows more rapidly during this time too. This economic benefit is the first dividend received by a country that has gone through the demographic transition.
Many countries have better child survival rates, but birth rates stay high, especially in less developed nations. These countries, therefore, rarely enjoy an economic benefit known as the demographic dividend.
Important
A decline in fertility and mortality rates boosts working population productivity, which leads to a demographic dividend.
Exploring the Phases of Demographic Dividends
The first dividend often lasts five decades or more, but lower birth rates eventually slow labor force growth. Meanwhile, improvements in medicine and better health practices lead to an ever-expanding elderly population, sapping additional income and putting an end to the demographic dividend. At this stage, all else being equal, per capita income grows at a decelerated rate and the first demographic dividend becomes negative.
An older working population facing an extended retirement period has a powerful incentive to accumulate assets to support themselves. These assets are usually invested in both domestic and international investment vehicles, adding to a country’s national income. The increase in national income is referred to as the second dividend which continues to be earned indefinitely.
The benefits gotten from a demographic transition is neither automatic nor guaranteed. Any demographic dividend depends on whether the government implements the right policies in areas such as education, health, governance, and the economy. In addition, the amount of demographic dividend that a country receives depends on the level of productivity of young adults which, in turn, depends on the level of schooling, employment practices in a country, timing, and frequency of childbearing, as well as economic policies that make it easier for young parents to work. The dividend amount is also tied to the productivity of older adults which depends on tax incentives, health programs, and pension and retirement policies.
There are four main areas where a country can find demographic dividends:
- Savings: During the demographic period, personal savings grow and can be used to stimulate the economy.
- Labor supply: More workers are added to the labor force, including more women.
- Human capital: With fewer births, parents are able to allocate more resources per child, leading to better educational and health outcomes.
- Economic growth: GDP per capita is increased due to a decrease in the dependency ratio.
Is Demographic Dividend Guaranteed?
While many countries may experience changes in age structure, such shifts alone do not guarantee a demographic dividend.
In fact, it’s not uncommon for countries to see a decline in birth and mortality rates without experiencing any economic growth. Critically, adequate work opportunities must be available to match the expanded capacity of a growing work force.
Which Region of the World Is Experiencing the Fastest Population Growth?
The continent of Africa has some of the highest population growth rates. In South Sudan, the population growth rate is 4.65%, followed by Niger at 3.66%, and Angola at 3.33%.
What Is One Reason Why a Country Would Experience a Demographic Dividend?
Demographic dividends are driven by a confluence of factors, rather than a single explanation. However, integral to a demographic dividend is an increase in the productivity of the working population. Typically, this is caused by a lower birth rate—reducing the proportion of a total population that consists of dependents—as well as a lower mortality rate—increasing the working age population.
The Bottom Line
Demographic dividend is economic growth that results from a shift in a country’s age structure. This typically occurs when fertility and mortality rates fall, thereby expanding the working population. Demographic dividends can increase savings, expand the workforce, increase human capital, and drive growth.
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