The Missing Links in the Demographic DividendMarch 9, 2012 By Elizabeth Leahy Madsen
The “demographic dividend,” a concept that marries population dynamics and development economics, is on the rise in policy circles – Rajiv Shah, Melinda Gates, and African government ministers have all discussed it recently in high-level forums. Most notably for demographers, World Bank Chief Economist Justin Yifu Lin wrote a blog post that focuses on the demographic dividend’s potential to give developing countries a powerful economic boost through declining dependency ratios and a proportionately large working-age population.
However, as Lin’s post demonstrates, discussions about the dividend often give rise to two common misconceptions: one, that all youthful age structures open an opportunity for the dividend; and two, that once age structure changes are in place, economic benefits will accrue automatically.
When a Youth Bulge Is Not
Population age structure is the key link between demography and economic development. If countries wish to incur the potential economic benefits of the demographic dividend, their age structure must change. While Lin’s post describes these age structure changes in detail, it completely omits a critical step required for them to happen: fertility reduction.
Lin describes sub-Saharan Africa’s youthful population age structure as having a “youth bulge.” But this is a tricky term.
Most researchers use “youth bulge” to describe large cohorts of young adults (typically ages 15 to 29), regardless of the number of children under 15. But as Sarah Staveteig pointed out in ECSP Report 11, a “bulge” shape is only apparent in a population profile when the number of children is smaller than older age groups. For example, the U.S. age structure in 1980 (see figure below) shows a clear “bulge” of young adults due to the drop in average family size during the 1970s after the baby boom of the 1950s and early 60s. This type of youth bulge can trigger a demographic dividend, provided other sound policies are in place, because dependency ratios (the share of dependent children relative to working-age adults) decline, allowing increased savings, productivity, and investment.
Even though it’s often described as having a youth bulge, a country that simply has many young people (like Iraq in the example below) will not incur the potential economic benefits of the demographic dividend. Whether the under-15 cohort is growing or shrinking is key – and for it to shrink, fertility rates must decline first. Dependency ratios do not decline when a large cohort of youth enters the labor market and those youth are followed by even larger, younger cohorts. In that case, a country’s youthful population is on track to continue unabated into the future.
Unfortunately, Lin conflates these two very different demographic scenarios. “In a country with a youth bulge, as the young adults enter the working age, the country’s dependency ratio – that is, the ratio of the non-working-age population to the working-age population – will decline,” Lin writes. He continues:
If the increase in the number of working-age individuals can be fully employed in productive activities, other things being equal, the level of average income per capita should increase as a result. The youth bulge will become a demographic dividend. However, if a large cohort of young people cannot find employment and earn satisfactory income, the youth bulge will become a demographic bomb, because a large mass of frustrated youth is likely to become a potential source of social and political instability.
At first, Lin is writing about populations with a true youth bulge – those where the dependency ratio has declined as fertility has declined. As the post correctly explains, the increase in the proportional size of the labor force, if productively employed, leads to increases in income and savings as families tend to have more workers and fewer dependents.
However, in the second part of the paragraph, Lin describes the potential “bomb” effect of a population with a large share of unemployed and frustrated youth. This is linked to a different kind of age structure, one where fertility rates remain high and the size of the cohorts entering the labor market grows year after year. As Henrik Urdal writes in his seminal study of age structure and conflict, “youth bulges in the context of continued high fertility and high dependency make countries increasingly likely to experience armed conflict.” Once dependency ratios decline – as a consequence of fertility decline – the risk of conflict goes down, even while there is still a large share of young adults.
Dependency Differences: South Korea and the DRC
To illustrate, it’s helpful to compare two different age structures that could be characterized by a “youth bulge” but face quite different development trajectories.
The World Bank post cites the example of South Korea, a frequent case study in the demographic dividend literature. South Korea and the other East Asian “Tigers” experienced annual increases in per capita income on the order of six percent between 1965 and 1990. Fertility in Korea declined over the same period from six children per woman to less than two. Studies indicate that such demographic changes were responsible for between one-fourth and two-fifths of the economic growth in the region.
In 1980, halfway through the dividend period, nearly half of South Korea’s total labor force was composed of young adults between the ages of 15 and 29, which certainly created a “youth bulge” in the job market. But, importantly, the dependency ratio was on the way down as well: There were 61 dependents (including children and older adults, but mostly children) per 100 working-age adults – down from 81 dependents for every 100 working-age adults in 1960. Children ages 14 and younger comprised about one-third of the country’s total population, a decline from 41 percent in 1960. You can see this “bulge” in the working-age population in South Korea’s population profile for 1980 (see figure to right).
In contrast, in the Democratic Republic of the Congo (DRC), young adults ages 15 to 29 comprised 54 percent of the total labor force in 2010, about five percentage points higher than South Korea’s share 30 years ago. The key difference is the size of the dependent younger cohort. Currently, children younger than 15 make up 46 percent of the DRC’s total population. Every 100 working-age adults has to economically support 96 dependents, nearly all of whom are children.
Of course, a dependency ratio provides an imperfect snapshot of a country’s labor market. Unemployment, income and wage levels, and the rate of female and child participation in the workforce also play important roles. But in a developing economy with a dependency ratio as high as that of the DRC, most families will be hard-pressed to build savings or to invest in their children’s education, and women’s opportunities to generate income will be limited by their child-care responsibilities.
Including the dependency ratio in any discussion of age structure reveals there is little comparison between South Korea 30 years ago and the DRC and many other youthful countries in sub-Saharan Africa today. Women in the DRC have had an average of six children each since 1950, and as long as that fertility rate remains constant, the ratio of dependents to working-age adults will remain essentially equal.
As only six percent of married women in the DRC are using an effective contraceptive method, it is very unlikely that fertility will decline. More than one-quarter of women have an unmet need for family planning, meaning that they have expressed a desire to avoid pregnancy but are not using any contraception. Unless this need is met, fertility will not decline, the dependency ratio will stay high, and the DRC will not have a chance to enjoy the benefits of the demographic dividend. But this caveat is absent from Lin’s post.
More Than Age Structure
The second key misconception about the demographic dividend is that once age structure changes are in place, economic benefits will accrue automatically. Lin thoroughly summarizes the major socioeconomic investments that governments wishing to capitalize on the dividend must make, such as educating young people beyond primary school, improving the health of the population, generating jobs for youth entering the labor market, and shifting employment from agriculture towards manufacturing and service industries.
Other scholars have reviewed the importance of trade openness, flexible labor markets, and stable financial systems that encourage savings and investment – factors that were lacking in Latin America, for example, as its countries achieved a lower dependency ratio in the 1980s and 90s.
As promising as the potential benefits of the demographic dividend may be, they will not be realized without several prerequisites. Before making investments in human capital and other areas of economic development, policymakers must establish policies and programs that promote age structure changes, such as education for girls and the provision of family planning.
In sub-Saharan Africa in particular, the preeminent scholars of the demographic dividend, David Bloom et al, said it best: “If policymakers can urgently place much more emphasis on educating and empowering African girls, who ultimately represent one of the continent’s most important sources of economic and social progress, they can expect their countries to reap corollary rewards.”
Elizabeth Leahy Madsen is a consultant on political demography for the Wilson Center’s Environmental Change and Security Program and senior technical advisor at Futures Group.
Sources: Bloom, Canning, and Sevilla (2003), Cincotta (2008-09), Gender Action (2011), Goldstone (2008-09), Lin (2012), MEASURE DHS, Staveteig (2005), Tsui and Hebert (2011), UN Population Division, Urdal (2006), World Bank.
Chart Credit: South Korean age structure, 1950, 2010, 2050 (medium variant estimate), data from UN Population Division; Panel A and B, Staveteig (2005); Figures 2 and 3 arranged by Sean Peoples, data from UN Population Division.
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