Demographic Dividend - Four Mechanisms For Growth in The Demographic Dividend

Four Mechanisms For Growth in The Demographic Dividend

During the course of the demographic dividend there are four mechanisms through which the benefits are delivered. The first is the increased labor supply. However, the magnitude of this benefit appears to be dependent on the ability of the economy to absorb and productively employ the extra workers rather than be a pure demographic gift. The second mechanism is the increase in savings. As the number of dependents decreases individuals can save more. This increase in national savings rates increases the stock of capital in developing countries already facing shortages of capital and leads to higher productivity as the accumulated capital is invested. The third mechanism is human capital. Decreases in fertility rates result in healthier women and fewer economic pressures at home. This also allows parents to invest more resources per child, leading to better health and educational outcomes. The fourth mechanism for growth is the increasing domestic demand brought about by the increasing GDP per capita and the decreasing dependency ratio.

Low fertility initially leads to low youth dependency and a high ratio of working age to total population. However as the relatively large working age cohort grows older, population aging sets in. The graph shows the ratio of working age to dependent population (those 15 to 64 years old, divided by those above or below this age range - the inverse of the dependency ratio) based on data and projections from the United Nations.

There is a strategic urgency to put in place policies which take advantage of the demographic dividend for most countries. This urgency stems from the relatively small window of opportunity countries have to plan for the demographic dividend when many in their population are still young, prior to entering the work force. During this short opportunity, countries traditionally try to promote investments which will help these young people be more productive during their working years. Failure to provide opportunities to the growing young population will result in rising unemployment and an increased risk of social upheaval.