Short Read

When a Demographic Dividend Becomes a Demographic Nightmare

A demographic dividend refers to the positive impact anticipated for an economy’s productivity and growth due to the age structure of its population. A younger population is useful for the growth of economies as a larger working force population can translate to increased output as well as decreased dependency from senior citizens per worker. The age demographic influences consumption trends, productivity patterns, natural increases in population , and social welfare needs. Countries with beneficial age demographics have focused on harnessing that advantage during their windows of opportunity.

A higher dependency ratio implies greater strain on the economically active population to support the needs of children and retirees. A higher ratio also places added burden on the government to finance expenditure with a lower proportion of taxpayers.

Figure 1 shows the current and projected dependency ratios in different countries. For most developed countries, the dependency ratio will see a sharp increase as the population ages. The ratios of newly-emerging-economies and lower income countries on the other hand, such as India and parts of Africa, are due to decrease due to their demographic structures. Currently, Sub-Saharan Africa has a very high dependency ratio due to its sizeable child population.

The dependency ratio can be split into the old-age dependency ratio and the child dependency ratio. Lower birth rates have reduced the size of the population under the age of 15 in many developed countries, while improved access to healthcare and medicine has increased overall life expectancy. This means that there has been a decrease in the child dependency ratio, but an increase in the old-age dependency ratio. An increasing old-age dependency ratio puts substantial strain on pension systems. There is no longer a steady ‘replacement population’ to ensure sustainable growth or funding of pension schemes.

With a rapidly ageing population, Japan, for instance, faces the uphill challenge of supporting its large retiree population. 

The Demographic Transition Model (figure 2) highlights the natural population increase/decrease rates of countries depending on their development phase. Emerging economies can be found in phase 2 and 3 with a natural increase due to high birth rates, increased hygiene and access to healthcare causing declining death rates. Most developed and high-income countries fall under stage 4 with low birth and death rates, and therefore a slow natural increase. However, it is important to note stage 5 as it is the only stage with a natural decrease. Developed countries are slowly moving into this phase and some, like Germany and Japan, are already within it. This is crucial as it emphasises the demographic shifts of these populations and the future struggle of the working-age-population to support the rest.

Many nations have reaped the dividends of a positive demographic age structure in the past. America’s “Baby Boomer” generation – a group of 73 million born post WW2 until 1960 – helped the country see some of its highest growth rates. The GDP growth rates in the 1970s were around 4% annually; a level that has not been seen this century. Baby Boomers make up approximately 20% of America’s population and this group is now moving into the old age dependency category. By 2031, the US population over the age of 65 will be 75 million, about double what the value was in 2008. This represents a great challenge for the American economy: lost output, decreased consumption and potential problems for inadequate savings.

Figure 3 shows the periods of demographic dividends in several other countries. It is important to note that the demographic dividend is contingent on the population finding gainful employment.

Nearly 65% of India’s population is younger than 35 years. The Indian labour market is expected to add over 10 million people to the workforce annually over the next two decades. In 2017, the IMF suggested that Indian demographic trends coupled with adequate policy measures could result in a further 1% annual GDP growth rate. The Indian government has attempted to maximise productivity for this growing demographic through employment opportunities such as ‘Skill India’ and ‘Make in India.’

A country’s age demographic plays a crucial role in economic growth and sustainability and it seems as though Western countries will face the challenges of an ageing population in the years to come.

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