Africa's prospects for enjoying a demographic dividend

David Bloom, Michael Kuhn, Klaus Prettner

Africa’s total fertility rate and its dependency ratio have been falling since the 1980s, and are projected to fall further. This column looks at the potential growth effects of the continent's changing demography. The African economy has the potential to grow between 0.5 and 2 percentage points faster over the next five decades than it would without the projected fertility reduction. However, this 'demographic dividend' is dependent on the policies that African governments enact.

While African economies grew slowly compared with other countries throughout the 1970s, 1980s, and 1990s, the continent’s per capita incomes have grown faster over the last 15 years (e.g. Economist 2016). One of many reasons might be the turn in 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 then. Figure 1 plots Africa’s total fertility rate (TFR, roughly the number of children per woman) in blue and the dependency ratio in red, as obtained from United Nations (2015) data.

Figure 1 TFR (blue line) and dependency ratio (red line) of Africa, as obtained from United Nations (2015)

Notes: The solid lines refer to actual data, and the dotted lines represent projections. The dependency ratio is calculated as the ratio of the population at ages 0–14 and 65+ to the population age 15–64 with the result multiplied by 100.

Despite the drop in the TFR from very high levels in 1960–1990, it was still 4.6 children per woman in 2015, which is far higher than the TFR of Europe and Northern America in the peak baby-boom years of the 1950s and 1960s. However, the United Nations (2015) projects that Africa’s TFR will fall further, reducing the dependency ratio until the middle of the 21st century and staying lower than in Northern America and Europe from 2050 on (Bloom et al. 2016). This expected development gives rise to hope that demography may act as a tailwind to the economic development of the African continent in the decades to come.

The mechanisms

The decrease in the TFR implies a short- to medium-run economic benefit, labelled the ‘demographic dividend’ (Bloom et al., 2003), which can be decomposed into accounting effects and behavioural effects. The accounting effects relate to the consequences of a declining share of the dependent young, while the workforce remains unaffected until the smaller cohorts start to work approximately 15–20 years after the onset of fertility decline. Altogether, these dynamics combine to increase the ratio of the working-age population to the dependent population, leading to 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 a higher land-to-labour ratio emerges than in the case of higher fertility, both resulting in faster growth in the medium run (Ashraf et al. 2013).

The behavioural effects are due to the changes in individual choices related 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 increase educational and health investments per child, which raises the productivity of the next generation when it enters the workforce; and iii) because children are often a substitute 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 assess the potential growth effects of changing demography in Africa for the next decades, we present four plausible estimates. The first relies on Ashraf et al. (2013), who simulate a general equilibrium model that incorporates the previously discussed accounting and behavioural effects and find 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 an increase of 0.225 percentage points in economic growth per year. According to the United Nations (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 provided that there are no strong nonlinearities regarding the magnitude of the effect or its timing, the results of Ashraf et al. (2013) imply that economic growth will rise by around 0.8 to 0.9 percentage points per year until 2065 due to the demographic dividend alone.

The second estimate is based on the volume edited by Canning et al. (2015), which includes (in Chapter 4) a macroeconomic framework based on Ashraf et al. (2013). According to their calculations, reducing Nigeria’s TFR by one child per woman would increase its per capita income growth by around 0.7 percentage points. Thus, the TFR reduction of two children per woman projected by the United Nations (2015) could translate roughly into an additional per capita income growth of 1.4 percentage points.

As a potential lower bound for the impact of the demographic dividend in Africa, we use the results of Bloom and Canning (2008), which suggest that a 1% increase in the growth rate of the ratio of the working-age population to the total population implies an increase in per capita GDP growth by 1.394%. Based on the implied change in the ratio of the working-age population to the total population due to the projected TFR reduction in Africa, this would lead to an increase in the annual rate of growth of per capita GDP by 0.5 percentage points over the next 50 years (cf. Ashraf et al. 2013).

As a potential upper bound, we rely on a comparison with Asian countries that have been highly successful in reaping the benefits of the demographic dividend. Growth regressions (as in Bloom and Williamson 1998) and growth accounting exercises (as in Mason 2001) suggest that approximately one third of East Asia’s so-called growth miracle is due to the demographic dividend. These results are equivalent to a gain in per capita GDP growth of 2 percentage points per year.

Therefore, the African economy has the potential to grow between 0.5 and 2 percentage points faster over the next five decades than it would without the fertility reduction projected by the United Nations (2015). The size of the effect and even whether the effect actually materializes at all depends, 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 poor health and education could stifle an economic take-off based on fertility decline. A coherent political strategy along the following lines might therefore be most successful in maximising the expected positive impact of demographic change in Africa: i) providing maternal support, child health care, and knowledge of the use of contraceptives and family planning to help reduce (often precautionary) fertility (Kalemli-Ozcan 2003, Prettner and Strulik 2016a); ii) investing in women’s education and health and facilitating female labour market access to improve women’s income prospects, social standing, and intrafamily bargaining position, which typically contributes to lower fertility and higher educational and health investments in children (Bloom et al. 2015, Prettner and Strulik 2016b); iii) once the youth dependency ratio decreases and resources are unleashed, productive capacity could be raised further by investments in education, health, and infrastructure; and iv) good employment prospects are needed to avoid a brain drain to developed countries (Hatton and Williamson 2003, 2011). In this case, establishing sound political, financial, and economic institutions and implementing open trade policies may play an important role (Ndulu and O’Connell 1999).

Conclusions

Considering the projected decline in the continent’s dependency ratio, Africa’s potential to enjoy a demographic dividend is large. A substantial reduction 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 mean that the gains from declining fertility are largely wasted and that the promise of a demographic dividend goes uncaptured.

References

Ashraf, Q H, D N Weil and J Wilde (2013), “The effect of fertility reduction on economic growth”, Population and Development Review 39, 97–130.

Bloom, D E and D Canning (2008), “Global demographic change: Dimensions and economic significance” Population and Development Review (supplement) 34, 17–51.

Bloom, D E, D Canning and J P Sevilla (2003), The demographic dividend, Population matters: A RAND Program of Policy-Relevant Research Communication, Santa Monica, California.

Bloom, D E, M Kuhn and K Prettner (2015), “The contribution of female health to economic development” NBER Working Paper No. 21411.

Bloom, D E, M Kuhn and K Prettner (2016), “Africa’s prospects for enjoying a demographic dividend”, Journal of Demographic Economics, forthcoming. Also available as NBER Working Paper No. 22560.

Bloom, D E and J G Williamson (1998), “Demographic transitions and economic miracles in emerging Asia”, World Bank Economic Review 12(3), 419–456.

Canning, D, S Raja and A S Yazbeck (eds) (2015), Africa’s demographic transition: Dividend or disaster? Washington, DC: World Bank Group.

The Economist (2016), “Special report: Business in Africa”, 16 April.

Hatton, T J and J G Williamson (2003), “Demographic and economic pressure on emigration out of Africa”, The Scandinavian Journal of Economics 105(3), 465–486.

Hatton, T J and J G Williamson (2011), “Are third world emigration forces abating?”, World Development 39(1), 20–32.

Kalemli-Ozcan, S (2003), “A stochastic model of mortality, fertility, and human capital investment” Journal of Development Economics 70(1), 103–118.

Mason, A (ed.) (2001), Population change and economic development in East Asia: Challenges met, opportunities seized, Stanford University Press.

Ndulu, B J and S A O’Connell (1999), “Governance and growth in sub-Saharan Africa”, Journal of Economic Perspectives 13(3), 41–66.

Prettner, K and H Strulik (2016a), “It's a sin—Contraceptive use, religious beliefs, and long-run economic development”, Review of Development Economics (forthcoming).

Prettner, K and H Strulik (2016b), “Gender equity and the escape from poverty”, Oxford Economic Papers (forthcoming).

United Nations (2015), World population prospects: The 2015 revision, New York.