- The demographic dividend definition economics refers to economic growth that occurs due to changes in the age structure of the population.
- Demographic dividends can be received during two periods. The first lasts several decades, up to 50 years. The second period has no upper limit.
- A demographic dividend is an optional outcome of the demographic transition. Its realization requires many other factors to be in place.
This article will explain what a demographic dividend is and examine the factors necessary to achieve one.
Table of Contents
Demographic Dividend Definition Economics: Understanding the Concept
According to the definition of the demo dividend, it is the economic growth that occurs as a result of fewer births and a decline of mortality rates. These dividends in a sentence refer to the potential economic benefits that a country can gain, rather than any specific payments.
In the first stage, the age structure of the population changes as a result of falling birth rates. The dependency supported by the working-age population decreases. This leads to an increase in income per capita.
When population growth is driven by declining mortality rates, the number of elderly dependents increases. This reduces per capita income again. This marks the end of the first period of the demographic dividend.
The second phase of economic growth is driven by a strong incentive to accumulate assets. Thanks to the population’s investments in domestic and international funds, national income grows.
During periods of demographic transition, the following mechanisms can serve as sources of dividends (benefits):
- an increase in the working-age population;
- savings;
- improvement in human capital quality;
- GDP growth driven by increased consumption.
Demographic Dividend Definition Economics: Economic Mechanics Explained
As the dependency ratio decreases, the household savings rate increases. This enables greater investment and consumption, which positively impacts the country’s GDP.
At the same time, an additional labor force emerges. If this is accompanied by an increase in productivity, accelerated economic growth will be observed.
The Demographic Transition: Foundation for the Dividend
Demographic transition leads to a decline in both mortality and fertility rates. As a result, the two indicators almost cancel each other out. This consequently changes the age structure and minimizes natural population growth.
A demographic dividend does not occur automatically. It requires the implementation of appropriate policies, primarily to ensure access to education for women and young people, and to improve healthcare to support the nation’s sexual and reproductive health.
Components of the Demographic Transition
The demographic transition can be divided into four stages:
- High fertility and high mortality.
- Decline in mortality while fertility remains high, along with improvements in child survival rates. This leads to population growth.
- Despite high child survival rates, the decline in fertility changes the age structure of the population.
- Despite high levels of health and labour productivity, there is low fertility and low mortality, resulting in extremely slow population growth.
Key influencing factors include urbanization, which results in fewer children per family, and improved sanitation standards, which have a positive impact on health.
What Is a Demographic Dividend Window?
Reducing the number of young dependent population increases the labor force supply from the working-age population. This opens a window of opportunity for a demographic dividend.
However, the opportunity for rapid economic growth is time-sensitive. This refers to the time it takes for the government to respond. In order to improve productivity, it must invest in education and implement economic reforms. The country must seize the benefits before an ageing population leads to more elderly people relying on social benefits and fewer working-age people to support them.
Prerequisites for Achieving a Demographic Dividend
A comprehensive strategy is necessary in order to achieve a demographic dividend. Economic growth will not automatically follow a fertility decline.
Governance should include:
- health investments, including those aimed at maintaining child survival, reproductive health, and ensuring access to family planning;
- improving the quality of education;
- economic policies focused on creating jobs and encouraging the population to participate in productive work.
Policymakers’ actions should be directed towards stimulating the economy and enhancing human capital quality.
The Role of Fertility Decline in Triggering the Dividend (100 words)
The necessary condition for obtaining a demographic dividend is a fertility decline, which leads to changes in the population age structure. Through family planning and fewer births, the working-age population gains the opportunity to improve skills and dedicate more time to work.
The quality of healthcare is an important factor. It should ensure population growth through a reduction in mortality and contribute to improved reproductive health. Additionally, the population must have confidence that investments in education and employment will be beneficial.
A rapid decline in fertility ensures a quick increase in GDP. A slow decline does not lead to an increase in labour productivity.
| Country / Indicator | Fertility rate 1994 | GDP 1994, billion $ | Fertility rate 2024 | GDP 2024, billion $ |
| Thailand | 1,93 | 146,7 | 1,2 | 526,4 |
| Niger | 6,32 | 80,4 | 4,38 | 19,54 |
According to un.org and datatopics.worldbank.org
Critical Policy Investments for Demographic Dividend
Sound governance is the foundation for realizing the window of opportunity during fertility decline. Decisionmakers must prioritize health investments, education and gender equity.
A combination of economic policies is necessary to create jobs, expand youth employment programmes and increase the skills of the older population.
Health and Development Resilience in Challenging Times
COVID-19 has had significant health and socioeconomic impacts. The pandemic hindered the creation of a DD-favorable policy environment. When assessing DD potential, the resilience and sustainability of economic development are just two of the factors considered.
Key factors in ensuring national preparedness for public health emergencies include the development of primary health care networks and the diversification of supply chains for medical goods. This primarily pertains to goods necessary for maintaining the sexual and reproductive health of the nation, including contraceptives. Without these, long-term demographic benefits would be impossible to achieve.
The Two Phases of Demographic Dividend Investments
The first dividend period is characterized by the labor force growth and a decline in the young dependent population. Improving the quality of human capital is the key factor to success at this stage.
The second dividend is an increase in national income resulting from the elderly population’s asset accumulation, a process known as capital-intensive growth. Japan is an example of this, with a high level of savings contributing to technological progress.
If the government fails to implement policies that promote innovation and savings incentives during the first stage, population ageing will lead to stagnation. Brazil is a negative example. In order to benefit from the second demographic dividend, investments in education systems and social security are necessary.
Regional Case Studies: Success Stories and Challenges
Export-oriented industrialization became the foundation of the economic miracle of the East Asian tigers. However, the experience of some countries in South Asia and Africa shows that demographic shifts alone do not guarantee accelerated economic growth.
Similar successes are impossible in countries in Sub-Saharan Africa due to the slow decline in fertility and insufficient human capital investment.
East Asian Success Stories
A demographic dividend example is South Korea, which utilized the window of opportunity and allocated 30% of its GDP to education and infrastructure development. These investments in human capital fuelled economic growth, resulting in a tenfold increase in GDP.
Another positive example of realizing the opportunity for rapid economic growth is China. A key factor, besides fertility decline, was the country’s shift towards export-oriented industrialization.
Sub-Saharan Africa’s Opportunity
The growth of the youth bulge in the labor market could potentially bring Africa an annual dividend of $500 billion by 2030. However, this will only be possible if economic challenges are addressed. Governance primarily focuses on employment issues for the labor force.
In the long term, population growth will slow down and the size of the working-age population will decrease because fewer children are being born. For instance, a 15–20% slowdown in countries with the highest fertility rates today is estimated if the average age at marriage increases by five years. To benefit from this situation, economic policies aimed at encouraging savings must be implemented.
Rwanda’s Demographic Pathway
Rwanda’s demographic dividend is an increase in its annual GDP growth rate. This indicator has reached 7%. This was made possible by the use of modern contraceptive methods and support for reproductive health. Over the past 20 years, demand for family planning methods in the country has increased fivefold.
Strategic Recommendations
An increase in the labor supply is not enough to increase GDP per capita. Understanding the demographic dividend definition economics helps policymakers create effective strategies. It is important that government policies include the following:
- Investments in human capital should focus on improving the quality of education. A positive example is Vietnam, which performs well in the PISA rankings.
- Programmes to stimulate economic development and create jobs. It is also important to recognize that growth in the labour supply mainly results from women entering the workforce.
- Preparing for an ageing population. A positive example of this is Thailand’s timely pension reform.
FAQ
What is the demographic dividend definition economics?
The demographic dividend definition in economics refers to the economic growth potential that results from changes in a country’s age structure, particularly when the working-age population grows larger relative to dependents. This occurs during demographic transition as fertility and mortality rates decline, creating an unfavourable ratio that shifts to a more productive balance where fewer dependents are supported by more working-age citizens.
Which countries have successfully leveraged their demographic dividend?
The best examples of realizing the benefits of lower fertility are South Korea, Singapore, and China.
Why is decline in fertility essential for demographic dividend?
Thanks to the decline in fertility, there is an additional labor supply, primarily from women. Moreover, income per capita is increasing. The result is higher demand and GDP.
What is the second demographic dividend?
It is an increase in national well-being, achieved through the population investing in domestic and international assets. At the same time, however, the number of people in the labor force has not increased.
What is the difference between the first and second demographic dividends?
The first stage of reaping the benefits is an increase in the proportion of the working-age population within the total population. The second stage follows from the population’s capital accumulation.
Is demographic dividend guaranteed?
No, sound policies across many sectors are necessary to benefit from demographic transition.
What is the challenge of attaining the demographic dividend?
The main challenge is that labor productivity must also grow as the labor force increases. To achieve this, investment is required not only in job creation, but also in education, healthcare and other areas.
