Events

Banking the "Demographic Dividend": How Population Dynamics Can Affect Economic Growth

October 24, 2002 // 12:00am

By Robert Lalasz

Policymakers and mainstream economists often disregard demographics as a factor in economic growth. But David Bloom, co-author of the new RAND Corporation Rand Corporation "Population Matters" report "The Demographic Dividend: A New Perspective on the Economic Consequences of Population Change," told a Wilson Center meeting that population dynamics are key to understanding disparities in regional income growth.

Moreover, Bloom argued, national policies can capitalize on a country's demographic makeup to spur higher economic growth. "There are two things to remember," said Bloom. "First, that population matters to the pace and growth of economic development. Second, that it matters a lot."

Ignoring the Correlations

Bloom first reviewed the debate and recent research on the connections between population and economics. Since 1820, he said, economic growth has differed substantially by region, with the per capita income disparity between richest and poorest nations rising from 3:1 to 20:1 today. Meanwhile, global population is expected to reach nine billion by 2043, with the dominant share of that growth among the economically weakest and most vulnerable countries.

But can economic differences be explained by demographics? Bloom detailed the differences between what he called the "East Asian Miracle" and the "African Debacle" of 1965-1990. While East Asian economies during this period grew at close to 6 percent a year—-an unprecedented length of such high and sustained growth—-sub-Saharan Africa grew at 0.3 percent annually. But sub-Saharan Africa has had a substantially higher rater of population growth and a much smaller ratio of working-age to dependent population. "Is this a coincidence, or is there some connection?" asked Bloom.

Most economists don't think so, according to Bloom. He said that population neutralism (the idea that demography and income growth have no correlation) became widespread in the wake of a mid-1980s National Academy of Sciences report that coined the term and concept. The NAS report, Bloom said, caused population issues to fall off the radar screens of the World Bank and other international organizations and foundations as well as American foreign policy—-this, despite that "one rarely encounters scholars and policymakers in developing countries who agreed with population neutralism," said Bloom.

The "Demographic Dividend"

But most economists have misunderstood "demography" and "demographic change" as merely code words for "population growth," Bloom said. For example, he argued, they need to consider such phenomena as the demographic transition—-when societies move from having large numbers of dependents (children and elderly) to a larger ratio of workers to dependents.

In the early stages of demographic transitions, a falling mortality rate (often spurred by improvements in public health) eventually leads to a decline in fertility, as women whose children are surviving have fewer of them. But there is a lag time between the two events, resulting in a large youth cohort that becomes workers in a generation. Bloom said that this cohort yields more savers, increased productivity, and accelerated economic growth—-the demographic dividend.

"[The demographic transition] is extremely strong as a catalyst and predictor of economic growth," said Bloom. "In fact, no other factor comes close to its impact." East Asia is the prime example, he said, with the demographic dividend accounting for up to 40 percent of the East Asian Miracle. The 1979 legalization of birth control in Ireland produced a similar rise in that country's ratio of working-age to dependent population and a concomitant economic boom. But the HIV/AIDS pandemic in sub-Saharan Africa will exacerbate its economic drag, said Bloom, since 80 percent of its fatalities will be of people in their productive working years.

Desperately Seeking Policy

David E. BloomBloom cautioned that reaping the demographic dividend is not automatic—it depends on a policy environment that emphasizes population and family planning, good public health, good education, open labor markets, free and fair trade, and good governance and economic management.

Latin America, said Bloom, provides an example of an "unreaped economic dividend." While Latin America's demography has resembled East Asia's, he said, its economic growth is closer to sub-Saharan Africa's because of poor governance and an inward economic orientation. "We are now midway through the Latin American demographic transition, so all is not lost," said Bloom.

Bloom said that there are three major areas in which policy can boost the demographic dividend:

  • Catalyzing the demographic transition (with public health improvements, especially geared towards infants and children);
  • Accelerating the demographic transition (with family planning programs, since smaller family sizes allow women to enter the workforce);
  • Allowing countries and businesses to exploit demographic opportunities (by reforming labor markets and blocking high minimum wages or formation of powerful unions).



RAND's research, said Bloom, strongly suggests that demography is a way into the development process, and that its lessons must be understood and applied across sectors and ministries. "Failure to act could have dire consequences," Bloom said—-including high unemployment in the potentially volatile boom cohort and rising numbers of elderly dependents straining available resources.

"There is no magic bullet to solving the problem of underdevelopment," concluded Bloom. "But health and demography swamp every other factor in development—-including education. We are right at the moment of deciding whether demography should be reevaluated as a development policy issue, and whether health should be evaluated in the first place."

 

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