Demographic Dividend

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September 2004

Understanding the Demographic Dividend
By John Ross
A fresh reason for attending to fertility dynamics has emerged—the “demographic dividend.” As fertility rates fall during the demographic transition, if countries act wisely before and during the transition, a special window opens up for faster economic growth and human development.

WHAT IS THE DEMOGRAPHIC DIVIDEND?
Simply stated, the demographic dividend occurs when a falling birth rate changes the age distribution,1 so that fewer investments are needed to meet the needs of the youngest age groups and resources are released for investment in economic development and family welfare. That is, a falling birth rate makes for a smaller population at young, dependent ages and for relatively more people in the adult age groups—who comprise the productive labor force. It improves the ratio of productive workers to child dependents in the population. That makes for faster economic growth and fewer burdens on families. The Republic of Korea serves as an example: as its birth rate fell in the mid-1960s, elementary school enrolments declined and funds previously allocated for elementary education were used to improve the quality of education at higher levels. Population pyramids for Korea and Nigeria in 2000 (presented in Figures 1 and 2) demonstrate the different population dynamics that are at work. In Korea the bulge is at the working ages whereas in Nigeria the young dependent ages stand out, with all the burdens that they represent in that poor country.

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The demographic module in the POLICY Project’s SPECTRUM Suite of Models can be used to project the changing age structure of the population and indicate the timing and magnitude of the potential demographic dividend.

Figure 1. Population Pyramid for the Republic of Korea, 2000

Figure 2. Population Pyramid for Nigeria, 2000

The demographic dividend, however, does not last forever. 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 by the smaller cohorts born during the fertility decline. When this occurs, the dependency ratio rises again, this time involving the need to care for the elderly, rather than the need to take care of the young. In addition, the dividend is not automatic. While demographic pressures are eased wherever fertility falls, some countries will take better advantage of that than others. Some countries will act to capitalize upon the released resources and use them effectively, but others will not. Then, in time, when the window of opportunity closes, those that do not take advantage of the demographic dividend will face renewed pressures in a position that is weaker than ever.

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HOW DOES THE DEMOGRAPHIC DIVIDEND HELP?
The demographic dividend is delivered through several mechanisms.2 Labor Supply The generations of children born during periods of high fertility finally leave the dependent years and can become workers (but good policies, preferably in place before the demographic transition, are required to educate and train them so they are not just unemployed). Women now have fewer children than before and are released to take jobs outside of the home; also they tend to be better educated than older cohorts and are therefore more productive in the labor force. This assumes wise policies by government to create more jobs and seize upon the “dividends” of the changed age distribution—if they fail to do this, countries may struggle with the social unrest of millions of unemployed citizens. Savings Working-age adults tend to earn more and can save more money than the very young. The shift away from a very young age distribution favors greater personal and national savings. The ability to save money is even greater when individuals born during periods of high fertility move into their 40s, when their own children are mainly on their...
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