The demographic dividend: Two phases of the demographic transition

Introduction

SEEMEEN SAADAT, SAMEH EL-SAHARTY, AND MARIAM M. HAMZA

There is a strong, well-documented link between demographics and economic growth. Countries that can successfully bring down their total fertility rates when these are high have the potential to boost their economic growth through lessening the burden of care per capita on the working-age population. In other words, lower fertility and fewer children per household mean that more can be invested in the health, education, and skills development of these children—that is, greater human capital formation. In parallel, households can accumulate savings, which can boost economic growth through investments back into the economy (Bloom, Canning, and Malaney 2000; Lee and Mason 2006; World Bank and IMF 2016).

THE DEMOGRAPHIC DIVIDEND: TWO PHASES OF THE DEMOGRAPHIC TRANSITION

Introduced in the late 1990s, the concept of a “demographic dividend” has been used to describe the interplay between changes in population structure and fast economic growth, most notably in the context of East Asian economies (Bloom, Canning, and Malaney 2000; Bloom and Williamson 1998; Canning, Raja, and Yazbeck 2015).

Put simply, a demographic dividend is the share of economic growth attributable to changes in an economy’s age structure. It is the “economic benefit to a country that can happen within a window of 15 to 20 years when it undergoes a demographic transition due to a rapid decline in mortality followed by a rapid decline in fertility. This leads to smaller, healthier families, and a youth cohort that can be educated and empowered to enter the labor market and match a dynamic labor demand” (Hasan et al. 2019, 1).

As fertility rates decline and countries undergo the demographic transition, they have the opportunity to pass through two phases of the demographic dividend (Lee and Mason 2006; World Bank and IMF 2016). The first phase of the dividend is a direct and immediate consequence of the growth of the size of the labor force relative to the cohort of children—that is, when the dependency ratio falls and the share of the working-age population rises as more people are able to work at the most productive stages of their lives. For the first phase to materialize, three things need to happen. First is a decline in fertility, usually due to health

improvements that lead to greater child survival and families’ desire to have fewer children. This decline in birth rates contributes to one large cohort of children followed by subsequently smaller cohorts, resulting in the “youth bulge.”1 When the first cohort reaches working age (that is, 15–64 years of age), the dependency ratio begins to fall.

The second requirement is twofold: (a) greater investment in the health and education of the subsequent smaller cohorts of children as more resources are available per child, contributing to their human capital accumulation (Kalemliozcan, Ryder, and Weil 2000; schultz 2005), and (b) women’s increased capacity to participate in the labor force due to lower fertility (Bloom et al. 2009).

The third requirement is investment in the economic environment, such that the bulge cohort can find well-paying jobs, rather than be unemployed or forced into low-productivity work. However, essential to this first phase is “the youth bulge,” which is only possible with the decline in fertility.

The second phase of the demographic dividend may arise if changes in age structure create space for higher savings and lead to increasing investments in human and physical capital, which can further enhance labor productivity (Birdsall, Kelley, and sinding 2004). The declining dependency ratio resulting from falling fertility is a necessary condition for countries to achieve the additional benefits of increased savings, investments, and per capita gross domestic product (gDP).

The bonus from the first phase is transitory; the second phase produces lasting benefits in the form of greater productivity growth and sustainable development (figure I.1). The two phases thus represent an opportunity—not a guarantee—of greater prosperity and improved living standards. These outcomes are not automatic—they depend on well thought out and implemented policies (World Bank and IMF 2016). A key point underlying the demographic dividend is that the population structure (and the dependency ratio) is far more important than the population size.

The global Monitoring Report (gMR) 2015/16 (World Bank and IMF 2016) uses two criteria drawn from the demographic dividend framework—the total fertility rate (TFR) and growth in the share of the working-age population—to identify countries’ stage of demographic transition and their potential for achieving the demographic dividend: pre-, early-, late-, or post-dividend. At a TFR of 3.1 births per woman, the Arab Republic of Egypt is an early-dividend country.2 As figure I.1 shows, it is at a very early stage of the first phase.

FIGURE I.1

First and second phases of the demographic dividend

Total dependency ratio Two distinct phases of the demographic dividend can be harnessed

Egypt First phase

• Demographic transition • More people of working age • More workers • More production Second phase

• More disposable income to save • Accumulation of human and physical capital • Permanent increase in capital–worker ratio and output per capita