What Is Demographic Dividend?
Demographic dividend refers to the growth in an economy that results from a change in the age structure of a country’s population, typically brought on by a decline in fertility and mortality rates.
The Essence of Demographic Dividend
While most countries have seen improvements in child survival rates, birth rates remain high in many developing nations, preventing them from enjoying a significant economic benefit known as the demographic dividend.
Demographic dividends occur when a country reaps accelerated economic growth stemming from lower fertility and mortality rates. A country with a concurrently low birth and death rate witnesses an economic dividend from the increased productivity of its working population. As birth rates decline, the number of young dependents decreases relative to the working population. With fewer dependents and a larger labor force, economic resources can be allocated to other areas, accelerating economic development and future prosperity.
To benefit from a demographic dividend, a country must undergo a demographic transition—from a largely rural, agrarian economy with high fertility and mortality rates to an urbanized, industrial society characterized by low fertility and mortality. In the initial transition stages, declining fertility rates lead to a labor force growing faster than its dependent population, thereby increasing per capita income. This economic boost is the first demographic dividend.
Types of Demographic Dividend
The First Demographic Dividend
The first period of demographic dividend typically lasts for several decades. However, as birth rates decline continuously, labor force growth eventually slows. Simultaneously, advances in medicine and healthcare expand the elderly population, which may erode further gains. At this stage, per capita income growth decelerates, potentially resulting in a negative first demographic dividend.
The Second Demographic Dividend
An older working population facing extended retirement incentivizes the accumulation of assets for future self-support. These assets are often invested in domestic and international markets, boosting national income—a phenomenon known as the second demographic dividend, which can continue indefinitely.
Maximizing the Benefits of Demographic Transition
The benefits of a demographic transition are neither automatic nor guaranteed. The extent of economic benefit depends on well-implemented policies across education, healthcare, governance, and the economy. The level of productivity among young adults influences dividend magnitude; higher levels of schooling, favorable employment practices, and effective economic policies are pivotal. Similarly, tax incentives, healthcare programs, and pension policies impact the productivity of older adults.
Key Areas for Capturing the Demographic Dividend
- Savings: Personal savings increase during the demographic period, stimulating economic growth.
- Labor Supply: The labor force expands, including higher participation from women.
- Human Capital: With fewer births, family resources are better spread, enhancing children’s educational and healthcare outcomes.
- Economic Growth: Due to a lower dependency ratio, GDP per capita rises.
Key Takeaways
- Demographic dividend is economic growth resulting from a changing population structure, driven by falling fertility and mortality rates.
- Economic productivity boost: The demographic dividend boosts per capita income through enhanced working population productivity.
- Duration: The first demographic dividend can span over 50 years, followed by an indefinite second period through prudent investments by an aging population.
- Areas of dividend: Savings, labor supply, human capital, and economic growth are key areas where demographic dividends can be harnessed.
Related Terms: Economy, Working Age Population, Labor Market, Income Per Capita, Gross National Income, GDP Per Capita, Dependency Ratio.
