Who can reap the demographic dividend?

Western societies are becoming older. The share of working age population in high income countries peaked last decade. And as baby boomers retire and fertility rates remain low, this share is likely to fall to historically low levels within the next 20 years, affecting growth, productivity, public finances, as well as inflation and interest rates. 

At the same time, the demographic structure of many developing and emerging market (EM) economies is improving. Longer – and healthier – lifespans and falling fertility rates are laying foundations for the so called ‘demographic dividend’, that is the boost to growth coming from a higher share of working age population and lower numbers of children to care for.

According to projections from the United Nations (UN), the total number of people of working age (here we use the ages from 15 to 60; using a different age group yields small differences in results) will continue to grow and will stabilise only around 2070-2080, thanks to the new entrants into the global labour market from middle and low-income countries. But despite that, the share of the working age people in the global population is likely to shrink, in part because of population aging in China which faces as poor demographic prospects as many developed countries.

Fortunately, the number of workers in low income countries (such as India, Pakistan, and outside Asia South Africa, Nigeria, Ethiopia, and many other African countries) will peak only in 2040-2070, according to the UN projections, offsetting some of the negative impact from population aging in China and the developed economies. A recent Fundamentals note on Asian demographics explored these young challengers in detail.

But their impact on global growth and trade will very much depend on how well these new entrants will be able to plug into the global production and export chains. That takes time and investment. In the meantime, populations of export-oriented middle income countries – so those currently supplying cheaper labour force to the world, including developed markets (DM) – are becoming older too. According to the UN, the population structure of countries like Poland, South Korea, or even Brazil may become as growth-negative as that of Japan or Germany, offering little offset to a shrinking DM workforce. What is more, these countries may also become old before they become rich, and in turn would offer little demand for the goods and services produced by the incoming workers from the low income countries.

So what are the changes that the developing countries with rising numbers of working age people can make to harvest the demographic dividend? Is demographics destiny, or could these countries not make the most of the opportunity?

To see which countries enjoy these conditions we built a scorecard of supportive indicators. While no single variable can guarantee success, having a range of supportive indicators would suggest a higher probability of benefiting from a growing workforce.

How did we select our indicators? According to economic theory and empirical research, productive employment of the new labour force is the key factor, alongside efficient labour markets, ability to create jobs, education levels and, importantly, employment of women. Type of employment also matters with manufacturing jobs offering higher productivity gains. Other factors include macro stability and business-friendly environment, and low to moderate levels of inflation.

What we find is that countries with the highest potential demographic dividend score low on many labour market efficiency metrics despite having generally high employment ratios, including of women, and lower youth unemployment that many developed markets. Here, countries like Ethiopia and Kenya stand out positively. Many of these countries also have moderate scores on business environment, such as Philippines. India – expecting one of the largest increases in working age population – scores low on these metrics too. These countries can still be the winners in the long term, but only if they improve their business environment and address labour market problems.

Middle income countries with a modestly positive or mildly worsening demographic dividend score relatively high on labour market efficiency metrics and have large manufacturing sectors, helping improve productivity and create jobs. Some middle income countries also score relatively well on ease of doing business indicators. Thus, the earlier structural reforms and investments should help offset some of the impact of negative demographic developments in the near term. Here, Mexico, Philippines, Peru, Indonesia, Malaysia stand out positively, as do Turkey, some CEE and LatAm countries. These factors will let these countries hang on for now and sustain growth.

But some of the middle income EMs, such as Russia, Korea, Ukraine, but also China and Vietnam, face rapidly deteriorating demographic conditions, alongside problems with business conditions, reliance on resources, or gaps in education. Without innovation and sizeable investments, these countries face stagnation and DM-like, low rates of growth.

What we also find is that developed countries with negative demographic prospects score well on many measures (this can help increase productivity or attract migrants). However, some of them have rather inefficient labour markets, such as those in Southern Europe; this will only exacerbate the demographic problems. Some suffer from high public debt which, in turn, may affect expenditure on some key public services, such as education. But some of the DMs, such as Israel or New Zealand, are in a sweet spot: they are bucking the demographic trends and have supportive labour and business conditions.