If, as has been observed, demography is destiny, this will be the African century.
Most countries in sub-Saharan Africa are on the cusp of a demographic transition—the years when the share of young and old in the population declines and those in working age range (15-64 years) increases.
Elsewhere, this transition has generally been accompanied by higher savings, incomes, and economic growth. Our latest Regional Economic Outlook for sub-Saharan Africa looks at how the transition might play out and the implications for economic policies.
What we found striking is the truly global dimension and consequences of the demographic trends underway in the region. Consider the following:
- By 2030 or so, sub-Saharan Africa’s contribution to the increase in global labor force will exceed that from the rest of the world combined (Chart 1).
- This is forecast to occur in the context of a marked decline in the number of entrants into the working age range globally, from around 2 percent annually between 1980-2000 to 0.5 percent or so for 2030-2050 (Chart 2).
The global dimension
As global economic growth continues to disappoint, the extent to which many advanced and some emerging market countries have benefitted from demographic tailwinds over the past several decades is becoming clearer. Conversely, as populations age and labor force participation rates decline in these countries, both potential and actual growth look set to be adversely impacted in the years ahead. To be sure, the drag on growth is modest and can be offset by policies and, indeed, higher productivity growth. Still, the fact remains that for the economies accounting for over 60 percent of current global GDP (G7 countries, China and Russia), the working age population had peaked by 2010.
It stands to reason then that the global economy would benefit greatly from integrating Africa’s labor force into global supply chains. Indeed, given the aging population for much the rest of the world, there may be little alternative. This issue is something that needs to move up to the top of the agenda in the international economic discourse, in both the private and public sectors.
The regional angle
The ongoing demographic transition offers a huge opportunity for sub-Saharan Africa. The increasing share of working age population provides a direct channel for increasing per capita incomes, as more workforce employed implies greater economic output and labor income per household. However, much of the demographic dividend will also depend on the quality of economic and social policies.
Overall, harnessing the demographic dividend will depend on the suitability of the economic environment and policies to translate the potential benefits from the demographic transition into higher growth from both the increase in the number and quality of human capital––a growing labor force that is also better educated and healthier––and physical capital––including the upgrading of public infrastructure and continued private capital formation.
Concomitantly, saving rates tend to be higher for working age individuals, hence aggregate saving will also tend to rise, thereby allowing more funding of investment. Saving, investment, and economic activity may receive a boost during the demographic transition, provided that the economic environment does not hamper saving and it is efficiently allocated to productive investments.
Finally, increased female labor force participation can also provide additional dividends. The demographic transition comes when both mortality and fertility decrease. But we know that declining fertility rates tend to be associated with higher female labor force participation, And with higher female labor participation, comes higher and more inclusive growth. Hence, removing legal and institutional impediments to female participation is one of the factors that will allow the region to benefit the most from the demographic change.
What experience says
Historical experiences are useful to shed some light on key aspects that help exploit the demographic dividend. East Asian countries managed to capture a larger demographic dividend than Latin American thanks to the following factors.
- The demographic transition occurred faster in East Asia thanks in part to policies encouraging couples to reduce childbearing and investment in human capital that upgraded the skills and productivity of the growing labor force.
- Flexibility of labor markets permitted a better reallocation of workers toward labor intensive manufacturing with higher productivity in East Asia, while financial development allowed channeling increased saving to investment.
- Structural transformation was also more intense, with faster increases in average productivity in the economy as a whole, as well as integration in global trade, bringing foreign investment and technology transfers.
In a nutshell
Reaping the potential demographic dividend puts an urgent onus on addressing the key constraints to sustained higher growth in the region—particularly gaps in infrastructure (mainly electricity and transport) and skilled human capital (improving health and education systems).
In addition, fostering saving and investment––including from abroad––and enhancing competitiveness to boost exports can generate much needed employment for young job-market entrants.
Contingent on these policies, we are firmly of the view that the demographic transition will leave sub-Saharan Africa in a much stronger position by boosting savings, investment, and thus raising economic growth.
Filed under: Africa, Economic outlook, Economic research, Emerging Markets, Employment, Financial Crisis, Fiscal policy, growth, IMF, Inequality, International Monetary Fund, Investment, LICs, Low-income countries, Reform | Tagged: Africa, economic growth, emerging market, income, labor force, Regional Economic Outlook: Sub-Saharan Africa, Sub-Saharan Africa |