11 July is World Population Day. The number of people on the planet has passed the 7 billion mark, presenting both challenges and opportunities – with implications on economic development, sustainability, urbanization, access to health services and youth empowerment. Alongside this rise in the population we are also witnessing a demographic revolution that is affecting economies around the world – population aging. Andrew Mason, co-editor of Population Aging And The Generational Economy, explores the costs and potential benefits of this phenomenon.
A global age transition is underway that will have lasting implications for economic growth, generational equity, public finances, and many other features of both developing and developed economies. In many developing countries, changes in age structure have produced a demographic dividend that has enhanced economic growth. How this experience can be repeated in Africa is an issue of great importance.
In many rich and middle-income countries population aging is seen as a major challenge. These concerns are well-founded in countries that face severe population aging and are saddled with large public pension and health care systems. For many countries, however, population aging will bring economic benefits as well as costs.
Global age transition
Today’s changes in population age structure can be traced to events that began in the 1950s. Many countries in the West experienced a baby boom that lasted until the mid-1960s and produced large cohorts of young people. The number of children in the developing world increased more dramatically during this time but for a different reason. Declining infant and child mortality combined with high fertility led to large increases in the number of surviving children and to much younger populations. In the early 1970s nearly 60 percent of the people living in China and India, for example, were under the age of 25.
Starting in the 1970s, fertility rates began to decline around the world. The result has been fewer children combined with large cohorts of working age adults. The rapid growth in the share of the population in the working ages, and its economic benefits, are widely referred to as the demographic dividend.
Population aging is the dominant demographic trend for the rich countries and quite a few countries that are still relatively poor. Steady improvements in life expectancy are contributing to aging, but the level of fertility is also a very important determinant. In East Asia, Southern and Eastern Europe, and Germany, fertility rates are quite low and population aging could be quite severe. About 40 percent or more of the populations of Japan, Spain, Germany, and South Korea, for example, will be 60 or older if the projections just released by the United Nations Population Division prove to be accurate. Fertility is higher in Latin America, the US and many Northern and Western European countries and population aging will be more moderate.
Click here to see a chart showing the transition from young to old populations between 1950 and 2060. Chart is constructed using the most recent population projections from the UN Population Division.
Demographic dividends for the developing world
A population heavily concentrated in the working ages is obviously an advantage for achieving higher standards of living. If workers are supporting fewer children, resources can be freed up to raise current standards of living or to enhance growth prospects. Spending more on education and health, improving communication networks, transportation systems, and other vital infrastructure, and funding entrepreneurial activities of those who otherwise have no access to capital markets, are examples.
What steps will help developing countries take advantage of the demographic dividend? There are three priorities:
- Productive employment for young adults
- Effective human capital spending
- Strong commitment to reproductive health and rights
1. The dividend arises because the number in the working ages increases relative to the number of children and elderly. The payoff is greatest if new entrants to the labor force can find jobs that match their skills and their education. One of the key ingredients of the extraordinary economic success of countries in East and Southeast Asia was their ability to generate employment opportunities that not only matched growth in the working-age population but pulled young people into higher value-added jobs in the manufacturing and service sectors. Many African countries have been less successful at providing good paying jobs even for men and women in their late twenties and early thirties. The extent of this problem can be seen by comparing the labor income by age for younger adults in three African countries (Nigeria, Kenya, and South Africa) to labor income of young adults in lower income countries elsewhere. Young adults in these three African countries lagged far behind their developing country counterparts in other regions of the world. This greatly diminishes the prospects for a robust demographic dividend in Africa.
2. The second priority is to take advantage of the quality-quantity tradeoff. Lifetime public and private spending on health and education per child in low fertility countries ranges from 300 to 600 percent of the average annual labor income of a prime-age adult. High fertility, lower income countries spend only 100 to 200 percent of annual labor income of prime-age adults on health and education. By investing more in children, the benefits of the demographic dividend can be enhanced and sustained long after the bulge in the working-ages has passed.
3. Rapid fertility decline leads to sharp increases in the share in the working ages and a substantial, concentrated demographic dividend. Many of the poorest countries, however, are experiencing very slow declines in their birth rates. Without strong commitments to reproductive health, gender equality, and other programs that allow women to exercise control over their childbearing and other aspects of their lives, a large demographic dividend will be out of reach.
Challenges of aging
Many countries that face population aging are concerned about the adverse effects on economic growth and the sustainability of public programs that provide pensions, health care, and, in a few countries, long-term care for the elderly. In some European and Latin American countries, public programs fund a large portion of all consumption by the elderly. Some of these same countries are also likely to face severe aging. Public sector reform cannot be postponed in these countries and pro-natalist policies may prove to be attractive if fertility rates do not recover from their low levels.
For many countries, however, population aging may be less of a problem than widely perceived by the public. Two points deserve attention.
- First, although low fertility is leading to fewer taxpayers over time, it is also leading to more educated and more productive taxpayers. What matters isn’t the number of taxpayers, but how much they produce. The most important response to aging is to provide a high quality education for the children we have.
- Second, the elderly are often described as dependents when the reality is that they bring resources of their own to the table. Many elderly continue to work; in recent years the proportion working at older ages has increased, although modestly. The elderly also produce in ways that go unmeasured – working as community volunteers and caring for their grandchildren. Perhaps most importantly, the elderly provide the financial resources, through their personal saving, pension funds, and other forms of wealth, that are essential to a strong economy.
Andrew Mason is Professor of Economics, University of Hawaii at Manoa and Senior Fellow at the East-West Center, Honolulu, Hawaii. He is a member of the Center for the Economics and Demography of Aging (CEDA) at the University of California, Berkeley. Mason and Ron Lee co-direct the National Transfer Accounts (www.ntaccounts.org) network, an international project involving researchers from over forty countries developing a comprehensive approach to measuring and studying the changes in population age structure and the generational economy in both rich and poor countries. Their book, Population Aging and the Generational Economy: A Global Perspective, was a finalist for the Paul A. Samuelson Award and selected as an Outstanding Academic Publication by Choice Magazine. Mason’s current research is concerned with the economic lifecycle, intergenerational issues, and the effects of population change on development, economic growth, and public and private transfer systems. He earned a Ph.D. in economics from the University of Michigan.