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The global demographic dividend and how to make the most of it

Wolfgang Fengler's picture

From a global demographic standpoint, our generation and those of our parents and grand-parents, experienced the most profound shifts in human history ever. Assuming your grandparents were born around 100 years ago, the world they came into consisted of less than 2 billion people. When I was in primary school, that figure had doubled to 4; I remember apocalyptic projections and calls to stop such uncontrolled population growth. Today, the world is home to almost 7.2 billion people and demographic doomsday scenarios have not materialized.

Three generations at a family owned village store in KabulAlthough human suffering remains tragically widespread, the world is undoubtedly a much better place today than it was 100 years ago.  An average person is healthier, better educated and wealthier than his or her grandparents. Strong growth in poor and emerging nations has fostered the emergence of a global middle class, even in Africa. In most parts of the world, the Millennium Development Goals will also be reached. There are few places left on earth where universal primary enrollment and vaccination have not been achieved, with the associated spectacular drops in child mortality.
 

These remarkable achievements are neatly captured in one single indicator of human welfare, which matters to us all: life expectancy. When they were born, our grandparents could expect to live about 50 years. Today the global average is about 70 years (and 80 years in the advanced economies). The most spectacular improvements happened in East Asia, which was the poorest region of the world until the 1980s. Today, life expectancy in East Asia is 74 years, excluding Japan the place in the world where people live longest.

What will happen over the next decades? Will rapid population growth continue forever? Will we eventually reach a tipping point when the world will no longer be able to accommodate all of us and will development gains of the past be reversed?

Rapid population growth will continue certainly for another 50 years and most likely until 2100. However the pattern and drivers of this growth will change significantly. The average number of children per family is actually shrinking worldwide and even in almost all of Africa. As a result, the number of young people (below 15 years) is basically stagnating. There are almost 2 billion youth on the globe, a number which will remain broadly constant until 2050. Adults below 65 years are therefore driving current and future population growth. This age group has been rising rapidly from 3 billion (mid 1980s) to more than 4.5 billion today and 5 billion by 2020 (see figure). With a rising work-force and shrinking number of (un-productive) dependents, the world can reap a major global demographic dividend.

Figure – The global demographic dividend
Source: Projections by Emi Suzuki, based on UN World Population Prospects 2012 revision

Some regions of the world have already ‘cashed in’ on their demographic dividend and are now facing the opposite challenge. Many European countries are actually shrinking continuously, a first ever in human history. My home country Germany is the largest “shrinker” and can expect to lose 15 percent of its population and almost 30 percent of its workforce until 2050 if no compensating measures are taken.

These opposing demographic trajectories across regions of the world are resulting in massive shifts in the global distribution of populations. Until 2050, Africa and Asia will contribute 90 percent of total global population growth. By that time Europe will have ‘shrunk’ to a meager 8 percent of global headcount (vs. 13 percent today). The contrast is the most extreme with Sub-Saharan Africa: in 1965, there were two Europeans for every African; since the late 1990s Africans have outnumbered Europeans and by 2030, the initial ratio will have been reversed.

Over the summer I moved from Africa to Europe, from a booming continent to a declining one. The challenges here and there (and possible solutions) could not be more different. The North is facing a challenge with the elderly, the South with the youth. In the former, people must be kept at work, even beyond the traditional retirement age. In the latter, it’s all about bringing youths into the workforce.

While world population kept growing the world has become a much smaller place in so many respects. Urbanization and communication have connected us in unprecedented and unimaginable ways opening up opportunities to engage in global dialogues. Theoretically, it is now possible to reach the most remote person on the planet with knowledge that can change his or her life. Future development cannot be imposed by a few elites at the top. Instead it will come from more knowledge exchanges with people connecting, engaging, challenging and innovating. Because of the global demographic dividend and almost ubiquitous connectivity there are now many more global citizens that can participate in such development debates. This blog’s ambition is to be such a platform.
 

Comments

Submitted by William on

Well articulated article. Countries with a high proportion of youth must endeavor to get the youth into the labor. Paradoxically, my home country has a high youth population but the government is in the processes of increasing the retirement age. I think the world bank and the other multilateral organizations must advise these countries to reform their pension systems and put in place interventions that draw the unemployed youth in the labor force. Otherwise country like mine will not be able to cash in on the demographic dividend.

Submitted by Wolfgang on

Thanks for an interesting thought. Pension system reform is indeed at the core of demographic challenges of many of the richer economies. However, it is important to understand that an economy can grow and add new jobs. Employing younger and older people at same time is no contradiction; often the combination actually makes the workplace richer. More people do not mean more unemployment. Germany is the largest country in the EU and has one of the lowest rates of unemployment
In most countries in the world there is a lot of work to do. Kids need to be taught and vaccinated, elderly to be taken care of, and roads to be built, and much more. This need for work is not always translated into jobs. This is where government policies come in. The better public services are delivered and the easier it is for business to operate, the more jobs will be created.

Submitted by Anton Dobronogov on

Interesting piece indeed, Wolfgang. You are certainly right that when the first window of demographic opportunity becomes available, it must be accompanied by adequate policies if it is to be captured to its fullest extent. East and Southeast Asian countries stand apart from the rest of the world because of their extremely fast fertility transitions. In 1960, South Korea, Hong Kong, Singapore, and Thailand had total fertility rates (TFR) greater than or equal to five children per woman (and higher than six in Thailand). In 2010, all these countries had TFRs lower than replacement level (2.1 children per woman), and most of them had already reached such low levels in the 1990s. During the same time, these countries benefited from spectacular economic growth rates and were dubbed the Asian Tigers. Public authorities in Asia seized the opportunity. They complemented demographic changes with sound policies facilitating public and private investment in human capital. The economic policies of the Asian Tigers varied widely from one country to another. Some elements, such as sound macroeconomic management, were common, but others factors, such as degree of the government's intervention in the economy, were different (Hong Kong's laissez-faire vs. Singapore's more proactive stance is a classic example). What was, in my view, common is that all these countries converged during the demographic transition towards the institutional frontier of the developed world (roughly speaking, the norms of the OECD countries), and this was most conducive to economic growth. For example, China's institutions are nowadays more similar to institutions of any OECD country than they were 40 years ago under Mao's rule, even though they are still quite different from institutions of these countries. The Asian Tigers were probably converging to different points on that frontier, having chosen different convergence paths. The fact that they were doing so during the period of demographic dividend resulted in outcomes larger than the simple sum of the demographic dividend and the "institutional convergence dividend.”

What are specific policy areas important for maximizing the demographic dividend? The dividend can work in three ways: when share of working-age people in the population increases, any growth in the gross domestic product (GDP) per worker may result in higher growth in GDP per capita; savings rate may go up as more people of working age also means more savers; and investments in human capital per child may increase because the number of child dependents per worker goes down. Hence, first, macroeconomic policies and business environment need to be improved to create incentives for investing larger domestic savings as well as foreign savings into economy, and creating more jobs by doing so. Second, the financial sector needs to be developed to provide intermediation of savings into investments. Third, sensible labor laws need to be put in place to encourage formal employment, including the laws on gender equality. And, fourth, social services such as health and education need to be expanded and strengthened to maximize benefits of higher investments in human capital per child.

As Robert Solow once pointed out, "a list of ingredients is not a recipe" and for different countries recipes will be different – in a sense that the policy ingredients listed above and standard population policy components will need to be mixed in various proportions, depending on specific circumstances. The good news is that the causality between fertility decline and acceleration of economic growth goes in both directions during the window of the demographic dividend. Once the demographic transition has started, the virtuous circle might well be achieved.

Finally, another important point is that very rapid population growth does involve risks, particularly for the landlocked countries. More on this here:
http://blogs.worldbank.org/africacan/one-billion-tanzanians-one-billion-ugandans

Submitted by Wolfgang on

Dear Anton,

Thank you very much for your insights, almost worthy of a blog post in its own right!
You make an important point: Favorable demographics are no guarantee for economic take-off and there remain huge variations and trajectories of fertility declines (or the lack thereof) across the regions of the world.

This leads me to another point. The global demographic dividend is naturally just an average that hides a lot of variation between and within countries. However, it also shows at that the same time that these opposing challenges (e.g. youth bulge versus aging) could also have global solutions, e.g. through smarter immigration policies.

Wolfgang

Submitted by Anders Ronquist on

Thanks for a great piece of work - thought provoking and constructive! If not a game changer, at least a very sound mind opener which brings new perspectives of how development partners and partner governments can approach some of the critical development challenges in a slightly different way. Human resources should be considered the greatest resources in any development context and - as the article clearly argues - the "growers" cannot be taken for granted, forever!

Submitted by Anders Ronquist on

Great and thought-provoking article. If not a "game changer" at least a mind opener for us practicioners in development. I particularly like that we need to change our perspective regarding "shrinkers" and "growers". Human reources are the greatest asset in any development context and we need to capitalise on that. The "growers" cannot be taken for granted for ever and developing countries need to make most out of the human resources' comparative advantage.

Submitted by Wolfgang on

Many thanks Anders. Even though the World is still growing rapidly adding the equivalent of another Germany every year, we are about to reach a tipping point where actual population growth (which is still substantial) is slowing down.

Submitted by CAA on

Interesting article, but also a little worrying and thought provoking. As an African, at 60 yrs old, my grandfather had about 20 grandchildren. My father is about this age now with only 3 grandchildren and what is even more interesting is there are only about 10 great grandchildren for my grandfather. The question is, have we cashed in on the demographic dividend? I think not. Is there still time to do so? Perhaps, but African governments need to act fast.

While demographics are important, policies are equally important. For example, a large population of semi skilled and non skilled workers with very high wages, may make it hard to cash in on the demographics so to speak. Therefore a look at demographics should go hand in hand with several other important issues.

Submitted by Wolfgang on

Thank you for your wonderful illustration of your own family’s “demographic transition”, even though yours is even more radical than in the more typical African family.
While some countries may have already benefitted from the demographic dividend, the biggest opportunities are yet to come, especially in Africa, because life expectancy is still catching up. However, as you highlight, the demographic transition creates an opportunity – no guarantee of success (see also the contribution by Anton D above) – and policy makers can use this opportunity or squander it. One critical example is the management of urban centers, a challenge that also results from changing demographics.
It is also important to note that despite the decline in fertility (typically not as extreme as in your case but very real everywhere) the total number of children in your country will still rise. Why? Due to the “base effect”. There are many more potential mothers and fathers in their 20s and 30s today due to their parents’ higher number of children. Even if these young families are smaller the total number of children should still rise.

It is so refreshing to see an article that at least touches upon some of the potential benefits of a more even distribution of demographic age groups. To really take advantage, though, we need to make some decisions as societies about what being part of the 65+ demographic should mean.

That sort of recalculation is not simple; fertility, variations within countries, and urbanization are all important to the broader demographic picture. I would caution that 80% of the world's older people do not receive a pension, so pension reform alone is not adequate either. Thanks for tackling this subject as one of your first blogs - it is so important!

To read more about our potential as we age, check out the HelpAge International and UNFPA-published report "Ageing in the 21st Century: A Celebration and A Challenge": http://www.helpage.org/resources/ageing-in-the-21st-century-a-celebration-and-a-challenge/

Submitted by Wolfgang on

Thanks for your encouraging response, especially as you are raising a critical point of the type of work people are engaged today (compared to their parents and grandparents). There are more and more people, including in my organization, who enjoy their work and want to stay on (voluntarily) beyond the retirement age.

Passion certainly does not diminish with age! Your colleagues' commitment is inspiring, but not surprising. The deeper question is really one on the labor market. As populations age, it’s likely that people will have to wait longer to receive a pension and that the transition from work to retirement will be less binary – more of a transition into retirement. If we work towards that, it will be key to make sure labor markets overall can adapt to an older workforce.

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