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Wednesday, October 19, 2005

Demographic Dividends in developing and Developed Countries

Andrew Mason had another paper at the UN experts meeting on ageing: DEMOGRAPHIC TRANSITION AND DEMOGRAPHIC DIVIDENDSIN DEVELOPED AND DEVELOPING COUNTRIES. Well worth a read. Mason is very aware of the issues.

This paper has several objectives. The first is to explain the demographic dividends in a conceptual and formal way. This draws on earlier work that identifies two demographic dividends (Mason and others, forthcoming). The first dividend arises because changes in age structure influence the share of the population concentrated in the working ages. The second dividend arises to the extent that anticipated changes in the share of the population concentrated in the retirement ages induce individuals, firms, and/or governments to accumulate capital.

The first dividend is inherently transitory. Demographic transition around the world has led to an increase in the share of the working age population that has lasted for many decades. But when large cohorts of prime age adults pass into their retirement years, the first dividend ends. The share of the population in the working ages begins to decline and the first dividend turns negative. The first dividend can have a lasting effect on economic growth if the gains in per capita income are used to create human capital by investing in health and education, to accumulate physical capital, to support technological innovation, to create growth-inducing institutions, etc.

The second dividend is permanent in nature because it is driven by the rising share of the elderly in our populations. It is not self-evident that lifecycle wealth would necessarily continue to rise as the share of the retired population increases. The estimates presented here do not extend beyond the year 2000, but detailed simulations to 2150 show that for the US and Taiwan life cycle wealth stabilizes at a high plateau or continues to increase depending on the mortality assumptions employed (Lee and others, 2003). Thus, the second dividend does not turn negative as the demographic transition proceeds.