What Is the Demographic Dividend

Ronald Lee and Andrew Mason
Finance and Development, A quarterly magazine of the IMF
September 2006, Volume 43, Number 3

This demography paper shows how long-term demographic changes and improved financial institutions can be harnessed in a country's development. Thailand is used extensively as an example:

"Industrial countries have largely completed what is called the "demographic transition"—the transition from a largely rural agrarian society with high fertility and mortality rates to a predominantly urban industrial society with low fertility and mortality rates. At an early stage of this transition, fertility rates fall, leading to fewer young mouths to feed. During this period, the labor force temporarily grows more rapidly than the population dependent on it, freeing up resources for investment in economic development and family welfare. Other things being equal, per capita income grows more rapidly too. That's the first dividend."

"This dividend period is quite long, lasting five decades or more, but eventually lower fertility reduces the growth rate of the labor force, while continuing improvements in old-age mortality speed growth of the elderly population. Now, other things being equal, per capita income grows more slowly and the first dividend turns negative."

"But a second dividend is also possible. A population concentrated at older working ages and facing an extended period of retirement has a powerful incentive to accumulate assets—unless it is confident that its needs will be provided for by families or governments. Whether these additional assets are invested domestically or abroad, national income rises."

"In short, the first dividend yields a transitory bonus, and the second transforms that bonus into greater assets and sustainable development. These outcomes are not automatic but depend on the implementation of effective policies. Thus, the dividend period is a window of opportunity rather than a guarantee of improved standards of living. The dividends are sequential: the first dividend begins first and comes to an end, and the second dividend begins somewhat later and continues indefinitely. They certainly overlap. The first and second dividends both had positive effects between 1970 and 2000 (see table), except in sub-Saharan Africa."

"...Developing countries [such as Thailand] are still working their way through the demographic transition..."

"...How much of the second dividend is realized depends on how a society supports its elderly. In the developing world, the elderly are supported by their families and the public sector, but, in addition, they depend on assets they have accumulated during their working years—housing, funded pensions, and personal savings, among other things. As populations age, the support burden placed on families and governments will increase relative to GDP, a matter of great concern in many countries. But through the second dividend, increased numbers of middle-aged workers may substantially raise capital relative to GDP if policies encourage workers to save for their retirement."

"To the extent that countries meet the challenge of aging by expanding unfunded familial or public transfer programs, asset growth will be reduced, and the second dividend will be diminished. By contrast, if workers are encouraged to save and accumulate pension funds, population aging can boost capital per worker, productivity growth, and per capita income. Thus, policymakers, especially in developing countries, will need to focus on establishing financial systems that are sound, trusted, and accessible to the millions who wish to secure their financial futures. The time to do so is now so that, as a population ages, its growth-inducing potential will be realized."