Harnessing the demographic dividend

The economic phenomenon called the demographic dividend is a potentially game-changing, one-off opportunity for accelerated growth for many countries in sub-Saharan Africa. It occurs when falling mortality followed by falling fertility results in a “youth bulge” which creates a window of opportunity, for a few precious decades in a country’s development, when the ratio of workers to dependents is high.

The demographic dividend enables an economic surplus to be generated that can massively increase incomes, living standards and investment for the future - potentially multiplying a country’s national income many times over. However, the dividend is not automatic, being dependent on investments being made in children and young people in areas such as health, education and employment so that they develop into healthy, productive adults. Big Win Philanthropy is focused on supporting leaders to make such investments while there is still time.

There is a one-off window of opportunity in a developing country’s journey – a phase of about three decades when improved child survival and lower birth rates radically change a nation’s age structure, opening up the potential for accelerated economic growth. This is known as the demographic dividend and it can transform a country’s wealth by harnessing the energy of a large, young, working-age population.

First, falling child mortality due to factors such as better sanitation, nutrition and healthcare results in a generation larger than previous ones because more children survive. Then, as parents become more confident that children will reach adulthood, they choose to have fewer children and so subsequent generations reduce back down in size. The unique “bulge” generation then matures into a population of workers which is historically large compared to the numbers of children and old people who need to be provided for. This high ratio of workers to dependents allows surplus wealth to be created which can be used to improve living standards and increase investment for the future. Finally, the bulge generation enters old age and itself becomes dependent, the ratio of workers to dependents falls and the economic opportunity to gain a demographic dividend fades forever. These stages are shown in the chart below.

The stages of the demographic dividend

However, the enormous potential benefits of the demographic dividend are not an automatic consequence of changes in a population’s age structure. Many years in advance of the youth bulge appearing, governments must make large-scale human capital investments in areas such as health, family support and education to improve the life chances of the bulge generation from conception into early adulthood. These investments will help to ensure that, by the time the members of the bulge generation enter the workforce, they are healthy, skilled and joining an economy that is able to offer them employment.

Without sufficient human capital investment, the demographic dividend will not materialize and the opportunity will have been lost, an effect shown in the chart below:

Investment in human capital is needed to achieve a demographic dividend

One of the most impressive examples of a country gaining huge benefit from the demographic dividend is South Korea. The graphic below shows South Korea’s dramatic 22-times real-terms increase in income per person between 1960 and 2014 (from $1,107 to $24,566 measured in 2005 US dollars). About a third of this increase was due to the demographic dividend. Many countries in sub-Saharan Africa and South Asia could follow a similar path – but only if they increase their human capital investment in areas such as health and education.

South Korea's demographic dividend

An additional limitation is that the window of opportunity does not stay open for long. The potential of the demographic dividend reduces as the bulge generation ages (the stage that South Korea is now approaching) and the ratio of workers to dependents falls back towards its original level or even lower. Indeed, the potential of the opportunity begins to reduce as soon as the people of the bulge generation start to be born, because without investments in maternal health and early child development, key stages in the physical and psychological development of these children pass by.

Many countries in Africa and South Asia are beginning the population changes that could generate a demographic dividend. Now is the time for leaders in these countries to act – to make human capital investments that can leverage their countries’ shifting demographics, lift millions out of poverty and realize long term prosperity.

This century Africa will experience massive increases in its population. By 2100 there are projected to be 3.7 billion more people in the world, and 84% of this increase is expected to be in Africa. Africa’s population is now just over a billion. By 2050 this is projected to increase to nearly two and a half billion, and by the end of the century to over four billion.

As the new generations reach working age, Africa’s productive potential will grow at a time when most of the wealthier economies face an ageing population. Africa’s share of the global working age population is projected to increase from 13% in 2010 to 41% percent by 2100. The magnitude of these demographic developments could be transformational for Africa – but only if the right human capital investments are made as a matter of urgency.

Human capital investments should focus on three key areas:

Health and nutrition to improve maternal and newborn health and to support the cognitive and physical development of children and young people.

Family circumstances to ensure stable, safe, nurturing and stimulating environments where children and young people can thrive.

Education and training to develop a productive workforce that is knowledgeable, skilled and with the economic readiness to adapt to an evolving labor market.

Timely human capital investment is essential to realize the demographic dividend and so generate strong economic growth for generations to come. It also needs to be underpinned by enabling factors such as the rule of law and access to employment opportunities, and by factors that are important at certain stages – such as access to contraception for parents who want to limit the number of children they have, and reliable financial services that encourage people to save money during times of economic surplus – because asset accumulation is an important potential benefit of a demographic dividend.

Big Win Philanthropy works with leaders in developing countries in Africa and South Asia who recognize the importance of human capital to fulfilling the promise of the demographic dividend.

The charts below show the past and projected future changes in the ratio of workers to dependents in three example countries whose governments we are working with: Ethiopia, Kenya and Liberia (the direction and magnitude of the projections depend on assumptions about mortality, fertility, economic growth and other aspects of development). They also show the income per person to date in those countries. The charts illustrate the approaching opportunity for a demographic dividend, and the urgent need for those countries to optimize their human capital investments to benefit from this opportunity.

Ethiopia: potential for demographic dividend

Kenya: potential for demographic dividend

Liberia: potential for demographic dividend

The data on annual income per person is from World Bank country datasets and is GDP per capita in constant 2005 US dollars, which takes account of inflation. The data on workers per dependent is from the UN’s World Population Prospects 2015 revision and is the reciprocal of the dependency ratio of people aged under 15 and over 64 compared to people between these ages. Figures on Africa’s share of the working age population are from Africa Rising: Harnessing the Demographic Dividend (IMF 2014). Figures on projected population increases in Africa are from the UN World Population Prospects 2012 Revision.