Banking on the demographic dividend

Young population does not automatically guarantee economic prosperity.

By Ehtesham Shahid

Published: Fri 4 Feb 2022, 10:49 PM

A younger population usually means a larger upcoming workforce and more innovation and economic growth opportunities. That’s the theory anyway. In the real world, despite the potential to become agents of change, acting for a more prosperous and stable future, and playing their part in reaping the demographic dividend, a young population doesn’t automatically guarantee economic prosperity. Policymakers and governments would do well to tick other boxes too.

Bangladesh, a burgeoning economy buoyed by the youth, is a good example. With 165 million people, about 3,000 living per square mile, Bangladesh is one of the world’s most densely-populated countries. Yet, its economy has registered a rapid rise in recent years and is expected to grow by 6.8 per cent in 2022. One of the reasons attributed to its phenomenal rise is its young population, around 45 per cent aged below 24 years and 70 per cent below 40.

An Asian Development Bank (ADB) Institute working paper says Bangladesh is experiencing rapid demographic changes accompanied by age-structural transitions. It also creates a window of opportunity for potential demographic dividends in the coming decades. Quoting the Global Connectivity Index 2019, the paper reveals Bangladesh, Ukraine, South Africa, and Algeria as the top four economies with remarkable improvement and the fastest growth in the adoption of the digital economy between 2015 and 2019.

Studies indicate that countries like Bangladesh are in line to attain demographic dividends. They have the prodigious opportunity to optimise its gain at least for the next four to five decades, “a crucial factor in the country attaining high-income status by 2041 as it has targeted”. Despite some challenges from other regions, “Bangladesh would still enjoy the highest potential benefits until 2070,” the paper claims.

No country for young men

But are all young countries performing well on the economies of scale?

“It’s a complicated issue,” asserts Dr Paul Sullivan, a Non-Resident Senior Fellow with the Atlantic Council’s Global Energy Center and Senior Research Associate at the King Faisal Center for Research and Islamic Studies. For Dr Sullivan, a youthful population does not guarantee higher productivity. “Consider Japan, an ageing society and a very productive one, compared to Myanmar, Nigeria, Venezuela, Afghanistan, or Yemen,” says Dr Sullivan, who teaches environmental and energy security at Johns Hopkins.

He highlights the factors that affect a country’s productivity, including the percentage of educated people, how well they are educated, and how 
education directs competitiveness. “It is also about how healthy they are. Youth who are not healthy are not productive,” he says. Another important aspect, he asserts, is the work ethic and the 
incentives to work hard and smart. It includes “how well they are treated, paid, and whether they are given the sense that what they do is worthwhile,” he emphasises.

So, if this explanation sways us, does that mean age is just a number for economic productivity? Dr Sullivan chooses to cite more examples: Afghanistan, Yemen, Iraq, Myanmar, and Venezuela. These are countries with youthful populations, but many other critical factors go against them. “If other factors to help them be productive are in place, then a good solid, healthy, educated, and supported workforce in the 15-40 years bracket can make an enormous difference,” he says.

Sami Zoughaib also links demographic dividend to “a healthy policy mix”. An economist and research manager at The Policy Initiative, an independent think-tank based in Beirut, Zoughaib says it goes side-by-side with investments in human capital, closing the gender gap and ensuring women’s larger participation in the labour force. “They should aim for the right economic choices, be more productive, investment-friendly, and [have a] diversified market that can absorb new entrants to the labour force,” says Zoghaib, whose research focuses on Lebanon’s political economy, governance structures, macroeconomics, and local economic development.

Others see population growth as a natural phenomenon where a perfect demographic balance is hard to pinpoint. For Hassan Siddiq, a PhD candidate at Yale University, an ideal scenario for any nation is a pyramid structure where youth at the base far exceeds the elderly. “That way, a country has a much bigger working population that contributes to the economy and pensions for the retired,” he says, adding that with rising life expectancy, the idea of a demographic dividend is proving elusive for most nations.

Siddiq suggests a direct correlation between the young population and economic growth. “Intuitively, the relationship makes sense since younger people in most occupations are more productive. We see Asian countries with young populations growing strongly, whereas most western countries with ageing populations are stagnant,” he says.

Siddiq co-founded, led, and exited a VC-backed education technology non-profit in China between his degrees at Yale and has also served as an investment banker. Perhaps this broad exposure prompts him to cite interesting and evolving demographic dividend stories. “China’s population is ageing, and that is a cause for concern for its policymakers. On the other hand, Japan has an older population — something that has contributed to its economic woes,” he says.

Dr Zsolt Gál of Comenius University in Slovakia attributes numerous factors to influencing economic growth, hinting at the cause-and-effect sequence. Dr Gál, who specialises in economic development in central Europe, argues that if the older population burden public finances (pensions, health care, long-term care etc.), the young bring liabilities such as schooling, health care, and social assistance. “Usually younger countries are less developed, so the economic growth potential is higher than in older countries that are more developed,” he points out.

Going by his analysis, a country can grow faster from a lower level and a younger age structure. “The two often go hand-in-hand and are hard to separate, plus there are many more intervening factors,” he says. According to Dr Gál, ageing societies, especially some with the highest share of elderly like Japan or Italy, could illustrate high costs, high public debt, low growth etc. “Again, demography is just one of the many factors having an influence,” he clarifies.

Several countries in Africa face similar dichotomies. As a continent, Africa has the world’s youngest population, with 70 per cent of sub-Saharan Africa under 30. According to S&P Global Ratings, by 2050, the region’s working-age population will increase over two-fold to become the world’s largest, offering an unprecedented opportunity for growth.

However, studies suggest that the demographic structure, represented by the dependency ratio, signifies that the higher the working-age population (i.e., lower dependency ratio), the higher the economic growth will be. The young-age dependency ratio is defined as the number of young people (under age 15) per hundred working-age people (15-64 years).

However, no demographic transition yields automatic dividends. According to UNCTAD, for most of the world’s most vulnerable countries, “the promise of younger generations driving development and contributing to higher living standards will depend upon the right socio-economic policy mix.” So, factors beyond favourable demography are always in the mix.

The old-and-young balance

No matter how much a nation brags about its young, it needs older, experienced people to train and educate them. Dr Sullivan of the Atlantic Council maintains that without learning from the experience of older people, the youth could be lost in their drive towards good and productive careers. “However, if a society is locked in the inertia of ‘old ways’, then the older people may not allow the youth to make the changes needed to make the country grow and develop,” he cautions.

According to Dr Sullivan, it needs to be a partnership between the younger and older people to make a country work and work well. “Creativity, invention, and innovative ideas need to be allowed to develop and flourish,” he says, highlighting the need to nurture traditions and cultures in the drive towards a more developed and productive society. In his own words, “there are some complex trade-offs as a country develops and changes”.

Citing existing literature, Sami Zoughaib suggests that economic productivity follows an inverted U-shape when plotted with age. “The acceleration in productivity gains is very high within the first 10-15 years of employment and later decelerates to peak around the age of 50,” he says. On the other hand, according to the Harvard Business Review, the average age of successful entrepreneurs (when their company takes off) in the United States between 2007-2014 was 42.

“This indicates that experience indeed matters, particularly those gained during the rapid acceleration of productivity within the first 10-15 years of employment,” says Zoughaib. He also concludes that this experience, coupled with nurtured fresh ideas, would culminate in successful entrepreneurs and business projects midway through a person’s career. “On paper, a country with a young population should indeed have a higher potential for success if everything else is held equal,” he says.

Herein lies the moot point: is there anything called the perfect demographic balance? Dr Sullivan underlines the German Mittelstand as the example of a good balance. Mittelstand refers to a group of unique businesses in German-speaking countries capable of surviving economic turbulence. Dr Sullivan believes that, alongside Germany’s apprentice system, Mittelstand helped lead it become an amazingly productive country.

“When experienced scientists, financiers, and businesspeople help the younger people start with ideas and some wisdom on how to survive and prosper, that can make a dramatic difference,” he says, citing Egypt, Saudi Arabia, and indeed the UAE as countries following this route. “An important aspect of this is for a company and country to be open to hopeful and innovative ideas and take a reasonable and calculated risk on young people and young ideas,” he adds.

Dr Sullivan also has a classic young-and-old balance theory in which older people, especially those who can translate the world to younger people and help them as mentors, can add value. “When there are too many younger people working instead of being in school, that can also harm a country,” Dr Sullivan theorises.

Children and young people (0-24 years old) in the Middle East and North Africa account for nearly half of the region’s population. They have the potential to become agents of change, acting for a more prosperous and stable future for themselves and their communities and playing their part in reaping the demographic dividend. However, going by the need to build an ecosystem, stakeholders should realise that mere potential is not enough.

Siddiq of Yale University sums up the argument in the most apt manner. “With rising life expectancy for humans, the idea of a demographic dividend is proving elusive for most of the nations,” he says.

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