Africa’s prospects for enjoying a demographic dividend
David Bloom, Michael Kuhn, Klaus Prettner 20 October 2016
Africa’s total fertility rate and its own dependency ratio have already been falling because the 1980s, and so are projected to fall further. This column talks about the potential growth ramifications of the continent’s changing demography. The African economy gets the potential to grow between 0.5 and 2 percentage points faster over another five decades than it could without the projected fertility reduction. However, this ‘demographic dividend’ would depend on the policies that African governments enact.
While African economies grew slowly weighed against other countries through the entire 1970s, 1980s, and 1990s, the continent’s per capita incomes have become faster during the last 15 years (e.g. Economist 2016). Among the many reasons may be the submit the demographic situation: Africa’s dependency ratio (the ratio of the non-working-age population to the working-age population) peaked in the late 1980s and has decreased slowly since that time. Figure 1 plots Africa’s total fertility rate (TFR, roughly the quantity of children per woman) in blue and the dependency ratio in red, as obtained from US (2015) data.
Figure 1 TFR (blue line) and dependency ratio (red line) of Africa, as obtained from US (2015)
Notes: The solid lines make reference to actual data, and the dotted lines represent projections. The dependency ratio is calculated as the ratio of the populace at ages 0-14 and 65+ to the populace age 15-64 with the effect multiplied by 100.
Regardless of the drop in the TFR from high levels in 1960-1990, it had been still 4.6 children per woman in 2015, which is far greater than the TFR of Europe and Northern America in the peak baby-boom years of the 1950s and 1960s. However, the US (2015) projects that Africa’s TFR will fall further, reducing the dependency ratio before middle of the 21st century and staying less than in Northern America and Europe from 2050 on (Bloom et al. 2016). This expected development gives rise to hope that demography may become a tailwind to the economic development of photography equipment in the decades to come.
The reduction in the TFR implies a short- to medium-run economic benefit, labelled the ‘demographic dividend’ (Bloom et al., 2003), that can be decomposed into accounting effects and behavioural effects. The accounting effects relate with the results of a declining share of the dependent young, as the workforce remains unaffected before smaller cohorts begin to work approximately 15-20 years following the onset of fertility decline. Altogether, these dynamics combine to improve the ratio of the working-age population to the dependent population, resulting in larger savings and more working hours on a per capita basis. As a knock-on effect, when the relatively smaller cohorts enter the workforce, capital dilution is reduced and an increased land-to-labour ratio emerges than regarding higher fertility, both leading to faster growth in the medium run (Ashraf et al. 2013).
The behavioural effects are as a result of changes in individual choices linked to lower fertility: i) lower youth dependency enables higher female labour force participation, reinforcing the corresponding accounting effect by raising per capita working hours further; ii) lower youth dependency allows families and governments to improve educational and health investments per child, which raises the productivity of another generation when it enters the workforce; and iii) because children tend to be an alternative for social security in less developed countries, lower fertility implies rising savings for retirement, which again fosters capital deepening and thereby raises growth in the medium run.
Estimates of the African fertility decline’s effects on economic growth
To measure the potential growth ramifications of changing demography in Africa for another decades, we present four plausible estimates. The first depends on Ashraf et al. (2013), who simulate an over-all equilibrium model that incorporates the previously discussed accounting and behavioural effects and discover that reducing the TFR by 0.5 children per woman increases per capita gross domestic product (GDP) by 11.9% after 50 years. This corresponds to a rise of 0.225 percentage points in economic growth each year. According to the US (2015) projections, Africa’s TFR will fall from 4.71 in the five-year period 2010-2015 to 2.71 in the five-year period 2060-2065. For such a fall, and so long as there are no strong nonlinearities regarding the magnitude of the result or its timing, the results of Ashraf et al. (2013) imply economic growth will rise by around 0.8 to 0.9 percentage points each year until 2065 because of the demographic dividend alone.
The next estimate is founded on the quantity edited by Canning et al. (2015), which include (in Chapter 4) a macroeconomic framework predicated on Ashraf et al. (2013). According with their calculations, reducing Nigeria’s TFR by one young child per woman would increase its per capita income growth by around 0.7 percentage points. Thus, the TFR reduced amount of two children per woman projected by the US (2015) could translate roughly into yet another per capita income growth of just one 1.4 percentage points.
As a potential lower bound for the impact of the demographic dividend in Africa, we utilize the results of Bloom and Canning (2008), which claim that a 1% upsurge in the growth rate of the ratio of the working-age population to the full total population implies a rise in per capita GDP growth by 1.394%. Predicated on the implied change in the ratio of the working-age population to the full total population because of the projected TFR decrease in Africa, this would result in a rise in the annual rate of growth of per capita GDP by 0.5 percentage points over another 50 years (cf. Ashraf et al. 2013).
As a potential upper bound, we depend on a comparison with Parts of asia which were highly successful in reaping some great benefits of the demographic dividend. Growth regressions (as in Bloom and Williamson 1998) and growth accounting exercises (as in Mason 2001) claim that approximately 1 / 3 of East Asia’s so-called growth miracle is because of the demographic dividend. These email address details are equivalent to an increase in per capita GDP growth of 2 percentage points each year.
Therefore, the African economy gets the potential to grow between 0.5 and 2 percentage points faster over another five decades than it could without the fertility reduction projected by the US (2015). How big is the result and even if the effect actually materializes at all hangs, however, on the policies that African governments enact.
Potential policies to reap the demographic dividend
While Africa’s potential to reap a demographic dividend in the coming decades is theoretically large, social norms and illness and education could stifle an economic take-off predicated on fertility decline. A coherent political strategy along the next lines might therefore be most successful in maximising the expected positive impact of demographic change in Africa: i) providing maternal support, child healthcare, and knowledge of the usage of contraceptives and family likely to lessen (often precautionary) fertility (Kalemli-Ozcan 2003, Prettner and Strulik 2016a); ii) buying women’s education and health insurance and facilitating female labour market usage of improve women’s income prospects, social standing, and intrafamily bargaining position, which typically plays a part in lower fertility and higher educational and health investments in children (Bloom et al. 2015, Prettner and Strulik 2016b); iii) after the youth dependency ratio decreases and resources are unleashed, productive capacity could possibly be raised further by investments in education, health, and infrastructure; and iv) good employment prospects are had a need to avoid a brain drain to developed countries (Hatton and Williamson 2003, 2011). In this instance, establishing sound political, financial, and economic institutions and implementing open trade policies may play a significant role (Ndulu and O’Connell 1999).
Taking into consideration the projected decline in the continent’s dependency ratio, Africa’s potential to take pleasure from a demographic dividend is large. A considerable decrease in fertility could unleash resources for investment in education, infrastructure, health, and other productive areas. However, corruption and rent seeking by an extractive ruling elite could imply that increases in size from declining fertility are largely wasted and that the promise of a demographic dividend goes uncaptured.
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