Capitalizing on the demographic dividend

On August 27th, the Economist published an article on Africa’s population and demographics titled “The Baby Bonanza”. In this piece, the authors describe the “demographic dividend” which is predicted to occur in Africa as a result of the demographic transition to a larger working-age population. The term, “demographic dividend”, was first coined by David Bloom, who emphasized the importance of demography to economic growth. Bloom attributed a large portion of the economic growth of East Asia in 1965-1990 to the region’s large working-age population, which led to the increase in productivity. On the other hand the slow growth of Africa during the same period was at least partially attributed to its large dependent population. Thus East Asia was able to cash in on its demographic dividend, while Africa was not.

However, this may change. If the United Nations predictions are, in fact, true, then the fertility rate in sub-Saharan Africa could drop to three by 2030 (it is currently estimated at five children per woman). The drop in fertility rate with the already present growth in the middle class has the potential to increase the working-age population which in turn could increase economic growth in the continent. To capitalize on the demographic dividend, a proper environment is needed. Currently, Africa is facing food and farming land shortages, deforestation, an HIV/AIDS epidemic, conflict, and institutional corruption. Needless to say, none of these factors are conducive to economic growth. On the other hand, the rapid spread of technology and innovation throughout the continent whether in agricultural developments or in education, may help Africa to capitalize on its demographic dividend. In addition to the potential for technology to help Africa capitalize on its working-age population, proper policies in foreign aid can also contribute to the dividend if donor governments start to take demography into account.

Bloom emphasized three policies that can increase the demographic dividend (i.e. the economic growth resulting from a large working-age population): public health improvements to catalyze the demographic transition; family-planning programs to accelerate the demographic transition; and reformed labor markets and increased rule of law to allow business to exploit the demographic opportunities.

There are ways to integrate some of his suggestions into foreign aid policy. For example, in regards to the public health perspective, a larger increase in the working age population may also call for broader health programs that include chronic diseases and preventive measure to extend life. The third policy, which strives to maximize the use of the working-age population, calls not only for labor-market flexibility, but also for good governance. US foreign aid policy can play a huge role in improving rule of law by asking for accountability from recipient governments. With an accountable government in place, private investment, both foreign direct investment and investment in small and medium enterprises, is more likely to flow and successfully generate business growth which can capitalize on the working age population.

The short window of opportunity for a nation to capitalize on its demographic transition requires timely action and a favorable business environment. Donor governments, including the US, can help ensure that such an environment exists by taking demography into account when making policy.

-Yulya Spantchak
Research Associate
Center for Global Prosperity