The 'Demographic Dividend'

1) The Demographic Transition and the Demographic Dividend.

The global human population has grown massively during the last three centuries. This growth has been caused by various factors such as changes in modes of production, improvements in hygiene and advances in medicine.

In the 'industrialised' or 'developed' world, during this period of growth, national populations have largely completed going through what is called the 'demographic transition' : the transition from a largely rural agrarian society with high fertility and mortality rates, to a predominantly urban industrial society with low fertility and mortality rates. While there are differences between industrial nations in the details of this transition, generally speaking, the change began with a large drop in mortality rate and only much later did fertility rate decline, allowing a massive population explosion (see the profile of the demographic transition given on our Population Trends page). Then with the later decline in fertility rate, the population growth slowed down and has or will soon cease (I ignore here the effect of possible high future immigration). However, in France , where fertility declined relatively early, there was no big time gap between the onset of mortality decline and the onset of fertility decline. Consequently, the demographic transition profile was low and flat.

It is generally hoped that developing countries will all go through the same process of transition and emerge as populations with low mortality and fertility; but there is no guarantee that this will always happen. The extent that such countries have already moved through the demographic transition varies considerably from country to country and region to region. Furthermore, in some developing countries, during the phase when dearth rate declined dramatically, birth rates actually increased for some time.

The demographic transition sees a very interesting change in the age composition of the population. These changes can be visualised using what are called 'age pyramids'. In such pyramids, a population is divided into 5–year age groups, separating males from females:

Age Pyramids
Early	Intermediate	Late
YOUNG. Each successive age group (from 0–4 to 85+ is smaller than the preceding age group. The working age group (shown in orange) has to provide for a comparatively large population of children. However children can help their parents in growing food, collecting firewood, etc.	INTERMEDIATE. The age pyramid is dominated by the working age groups. Given appropriate conditions (low unemployment etc.) the working age population is potentially well able to support the old and the young.	OLD. Now the pyramid is almost rectangular in shape. The working age population needs to support a large population of older people.Notice here and in the middle diagram the left-right asymmetry. This is because women tend to live longer than men.

Initially in the demographic transition there is a rapid rise in the younger age groups (babies and children). Later, as these persons grow older, the working age population comes to be a much larger proportion of the total population. Finally, as we see in Britain in recent times, the elderly population comes to be a larger component of the total population than in earlier times. The diagram shows age pyramids for early, intermediate and end stages of the demographic transition. Of course, the transition between these stages is gradual.

Now an economy depends on its workforce, so it depends largely on those people who are in the age groups 15–60; and while all members of the population are consumers, children and old people need to be supported by the working age population. However it should be remembered that in agricultural societies children give a lot of help to their parents, and in modern industrialised societies older people may help the economy by looking after children or continuing to work.

If you look at the age pyramids given above, you will see that nations which are in the middle part of the demographic transition are potentially in a particularly favourable position as regards the economy, because they have a relatively large working age population. This situation however is transitory – such populations will change to the type in the right pyramid – a reduced proportion of working age people and an enlarged proportion of elderly people. Countries in the middle part of the transition therefore have what has been termed a 'demographic gift' or 'demographic dividend', which they should exploit while it lasts. So goes the theory. The concept of the demographic dividend is explained more fully in D'Adamo (2004) and Williamson (2001).

2) The East Asian success story

Well, how have things been going, economically speaking, in the developing nations? There is much variation. In terms of regions, there is a big contrast between sub–Saharan Africa (generally not going well) and East Asia (usually regarded as a success story). We now explore developments in East Asian countries between 1960 and 1990. This account is based primarily on the reports of Mason (2003) and Williamson (ibid) and primarily concerns Japan, South Korea, Taiwan, Singapore, Thailand and Indonesia.

We may summarise the demographic situation as follows:

• The national populations grew rapidly and generally still continue to grow substantially although at a reduced rate (and Japan’s population is expected to begin to decline during the present decade).
• However, during the period in question, childbearing and population growth rates have dropped rapidly – more rapidly than in any other region of the developing world.
• The labour force growth rate has exceeded the total population growth rate.
• There has been a massive increase in longevity.

Concomitant with these demographic trends, there has been massive economic growth.

Most East Asian countries experienced annual growth rates in per capita GDP markedly in excess of that in the USA. This should be viewed in the context of studies of economic growth in 78 countries across the world dealt with by Williamson (ibid) and the differences between countries in how far they have progressed through the demographic transition. Williamson concludes, as one might perhaps expect, that where the growth rate of the economically active sector of the population exceeds the total population growth rate, GDP per capita growth rates are greater than when the population growth rate exceeds the growth rate of the economically active sector of the population. Further while generally growth of the working age population has had a powerful positive effect on GDP per capita growth, growth of the total population has had a powerful negative impact.

Mason makes use of the 'economic support ratio’ to illustrate the changing size of the working–age population relative to the dependent population (those who are either too young or too old to work). This particular ratio measures the working population relative to the consuming population. Mason refines the ratio to incorporate age variation in productivity and consumption. In the numerator, the population in each age group is weighted by the average productivity of workers in that age group. In the denominator, allowance is made for variation in consumption needs, again by using weights. Mason uses a consumer weight of 0.5 for children aged 0 – 14 and a weight of one for all other ages.

Mason shows that the economic support ratio for Southeast Asia fell during the 1950’s and 1960’s. This was the period of the first stage of the demographic transition, illustrated in the first (left) diagram above. Then beginning in 1970 the economic support ratio rose rapidly, and is projected to continue to rise for some time to come. This corresponds to the second phase of the demographic transition illustrated by the second (middle) diagram above.

There were several, interacting reasons for the East Asian economic success story:

1. The challenge to provide food for the growing population was generally met. In some countries this was primarily achieved by making maximum use of existing high–yielding crop varieties, and investing massively in the further development of new varieties; low fertiliser prices helped. In other countries, a major contribution to increased food supply came from increasing the total area of agricultural land. In fact food output per capita increased by 36% in Asia and 47% in East Asia between 1963 and 1992 (contrast Latin America, with only a 13% increase and Africa with a decline of 7%!).
2. Most countries were able to successfully meet the employment challenge posed by the growth of the working age population (i.e. more and more people seeking jobs), mainly through a rapid industrialization. The greater involvement of women in the labour force concomitant with improved female status, was a subsidiary factor.
3. Savings and investment rates grew rapidly. There is controversy over the contribution of different causes to this growth, especially the contribution of demographic factors like the increasing proportion of the working age population.
4. East Asian countries in the late 1950s and early 1960s changed from having positive views on large and expanding populations, to having concerns about the possible adverse effects of rapid population growth. They adopted and promoted corresponding population policies – adopting development plans with specific population growth reduction targets, legalising the manufacture and distribution of contraceptive devices and drugs. Some governments adopted comprehensive sets of incentives and disincentives to encourage small rather than large families. And population growth slowed down substantially during the 1960–1990 period.
5. Asian countries generally, experienced more political stability than in most of Latin America and sub–Saharan Africa. Consequently, their governments could realistically pursue long–term goals.
6. Few Asian countries experienced active opposition to the development of population policies by powerful religious groups – contrast Latin America.
7. In some countries income inequality at the beginning of the period in question was relatively low; this was partly due to war–time destruction and partly due to the implementation of major land reform programmes.
8. Taiwan and South Korea had relatively high levels of literacy and received substantial foreign assistance for reconstruction.

This account of change in East Asia is a general one. The picture is of an economic success story, partly brought about by a successful exploitation of the demographic dividend. There was however, much variation between countries in the various trends:

• Japan led the way on fertility reduction. Already in 1960, Japan only had on average two children per woman. In contrast, fertility decline in Indonesia did not begin until the late 1960s.
• In general in East Asia, the intermediate phase of the demographic transition (the 'demographic dividend’ period) dominated the scene between 1960 and 1990. However, Japan was moving through the demographic transition ahead of other nations and has now entered the later phase. These demographic changes are reflected in the economic support ratio. Japan’s growth phase in the support ratio is now over; in contrast, this phase is expected to last for five more decades in South Korea and Indonesia.
• Mention has already been made of the variation in response to growing food need. In Japan, Taiwan and South Korea, the supply of potential agricultural land was particularly limited, precluding increasing employment in the agricultural sector. In fact, the agricultural work force declined, and employment for the increasing national working age population was largely successfully provided in these countries by massive changes in industry and occupational structure. In Thailand and Indonesia however, more land was available for agricultural expansion. While Thailand managed to absorb many more workers into agriculture with no decline in arable land per worker, Indonesia experienced a significant drop in arable land area per agricultural worker. Further, while non-agricultural employment grew rapidly in both countries, the manufacturing and service sectors of the economy were so small in 1960 that even their rapid growth was insufficient to absorb the large number of potential workers.
• Agricultural productivity grew much more slowly than in non–agricultural sectors in Thailand and Taiwan. This slowed economic growth, and led to growing inequalities between agricultural and other sectors.

What general conclusions does Mason draw from his analysis? He judges that fears about the adverse development impact of population growth per se were probably exaggerated.
Substantial population growth was accommodated in Northeast Asia with no apparent adverse economic effects and in Southeast Asia with only modest difficulties.
He ends concluding:

“That population policies and programmes were a success in East Asia is an inescapable conclusion. Commitments to reducing fertility rates of childbearing and slowing population growth rates were followed by unprecedented declines in fertility. Rapid social and economic development drove the region’s demographic transformation, but government action accelerated population change and economic development”.

End Note. The context of the economic miracle

The question springs to mind. Are present economic trends sustainable? More generally, the failure to take on board the environmental effects of economic activity is a major weakness in much economic analysis. And then we need to consider the changing social conditions in the East Asian countries. The book by Amy Chua discussed on our Other Literature page should cause us to pause for thought.

References

D'Adamo, P. (2004). Understanding the demographic dividend.
http://www.developmentgateway.org/
Mason, A. (2003). Population change and economic development: What have we learnt from the East Asia experience. Applied Population and Policy 1,1: 3–14.
Williamson, J, G. ( 2001). Demographic change, economic growth, and inequality. In Birdsall, N. et al. (2001).Population matters. Oxford University Press.

© copyright J.F.Barker, June 2004.