Saturday, June 03, 2006

Demographic Dividend

Recent use of the expression demographic dividend seems to originate in a studyof East Asian growth carried out by David Bloom and Jeffrey Williamson (Bloom and Williamson 1998). In the study they used quantitative results obtained from cross-country econometric regressions with the objective of calculating the contribution made by age structure changes to the 'spurt' in East Asian economic growth.

Simply stated what has become known as the demographic dividend occurs when a fall birth rates following an initial mortality decline leads to changes in the age distribution of a society, with these changes meaning less collective expenditure is required to meet the needs of the youngest age groups (a reduction in downward intergenerational transfers in Lee's terminology: Lee, 2003) . In this way resources are released which may be used for investment in economic development and for improved family welfare. Essentially a falling birth rate makes for a smaller share of the population in the younger, dependent, ages and for relatively larger share in the adult working age groups who comprise the productive labor force. Thus the ratio of productive workers to child dependents in the population is improved, and with this the potential per capita income. In principal this should make for faster economic growth and fewer burdens on individual families and collective welfare systems.

Now according to Bloom and Williamson the 'demographic dividend' leads to opportunities for growth in output per capita for two principal reasons.

Firstly, there is a simple age-structure impact on total GDP due to a simple 'factor availability' or 'growth accounting' effect in that a rising share of the total population in the working-age group increases the ratio of producers to consumers. Obviously this situation is extremely favourable to the growth of output per capita. This 'composition effect' may be also be added to via the fertility decline which releases more women from childrearing activities and enables them to enter the labour market.

A second changing age-distribution impact is identified by Bloom and Williamson which they call the 'behavioural effects'. This behavioural impact takes a variety of forms. On the one hand a growing proportion of prime-age workers in the work force enhances overall productivity due to the well-know prime age worker productivity effect. On the other hand there are changes in aggregate saving and consumption following the life cycle pattern. This increase in saving can, in principal, make capital more available, and hence relatively cheaper. There may also be impacts from gender related issues associated with the fertility decline as changing attitudes to female emancipation leads to an increase in female participation in the education system, and hence a more educated female labour force The sum total impact of all of these is a further increase in potential growth in output per capita.

Clearly this demographic dividend is far from permanent. There is a limited window of opportunity. In time, the age distribution changes again, as the large adult population moves into the older, less-productive age brackets and is followed in its turn by the smaller cohorts that were born during the fertility decline. When this occurs, the dependency ratio rises again, as does the level of intergenerational transfers, but this time it is a question of the care and support needs of the elderly, rather than the demands imposed by the need to support a large young population.

The course of this process can be followed through what Bo Malmberg calls the Four Phases of the Demographic Transition schema.

Additionally, the dividend is not automatic. While demographic pressures are eased when fertility initially falls, some countries will take better advantage of this easing than others. Institutional structures matter. Some countries will act to capitalize on resources released and will use them effectively, while others will not. From the list of median ages, it can be seen that countries like Russia, Cuba and South Korea have passed through the demographic dividend epoch without gaining anything like the growth boost they should have. Iran seems to be about to add its name to this list.

This is important since, in time, the window of opportunity closes, and those countries that who have not found the way to take ample advantage of the dividend will find it hard to make the necessary leap when the winds of demography are finally blowing against them.

The demographic dividend is conventionally thought to be delivered through the operation of a number of interconnected mechanisms.

Labor Supply

As the demographic transition follows its course the generations of children born during the high fertility years enter adult life and become workers. Women who are now having fewer children than before are released from childrearing responsibilities and are able to take jobs outside of the home; also, as the transition moves forward, and years of compulsory education increase, younger women tend to become better educated than those to be found in the older cohorts, and are thus more productive once inside the labor force.


Mature working-age adults tend to earn more and thus can potentially save more than new-entrants to the labour market, or those setting up an independent home for the first time. Thus the larger generations who work their way through the labour force as the age pyramid changes favour greater personal and national saving. This ability to save becomes even greater as the 'thick cohorts' move into their 40s, especially as in the first instance the generation-span is smaller, and their own children rapidly become wage-earners themselves and hence soon require less support. Thus personal savings continue to grow and are able to serve as a source of investment funds. Countries steadily move from being heavily dependent on external finance, to a position of relative financial self-sufficiency.

Human Capital

Having fewer children normally enhances the health of both mother and child. Female participation in the labor force, in turn, enhances the social status and personal and financial independence of women. Also fewer children normally means fewer and better educated ones. More investment is allocated to each individual child.

There may however be other mechanisms at work. The most important among these is undoubtedly health. It is long been known that the process of economic development is associated with an improvement in the general level of health of the population. Conventionally this has been associated with an improvement in the nutritional environment and with a reduction of the disease load on young children.

One clear insight into how this process comes from the field of Life History Theory. Ronald Lee puts his finger on what is an extraordinarily important idea as follows:

"Turning to juvenile mortality when there is parental investment, contrast the death of a baby bird just after hatching with a death just before a baby fledges. The classic theory predicts equal selection against mortality at the two ages. However, the later death would be a total loss, whereas the early death would free up parental resources for greater investment in the surviving chicks, boosting their survival, size, and reproductive fitness, thus offsetting the direct effect and perhaps even increasing the survivors to maturity."


Bloom, D. E. and J. G. Williamson, 1998. Demographic Transitions and Economic Miracles in Emerging Asia. World Bank Economic Review vol.12, No.3, pp. 419-56.

Lee, Ronald, D. 2005. Rethinking the evolutionary theory of aging: Transfers, not births, shape senescence in social species, PNAS, vol. 100, no. 16, 9637-9642

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