Sub-Saharan Africa is nearing a historic opportunity, but most of its nations are not ready.
Published on Africa Day 2023.
The population of India will have surpassed that of China by the end of this year, with each country counting 1.43 to 1.45 billion people. This milestone has led several observers to wonder whether the Indian economy can achieve a demographic dividend in the same way that China did after 1990. There is however widespread misunderstanding around the question of what constitutes a demographic dividend. This recent statement from a leading Indian daily is typical but inaccurate:
“A high population, especially in a younger age cohort, is generally seen as an asset rather than a liability for the economic fortunes of a country. The simple reason for this is that more people also means more working hands.”
The Financial Times similarly published “Can India Unlock the Potential of its Youth?” in which it discussed India’s prospects of deriving a demographic dividend from its youth bulge.
“More people” or a “youth bulge” could in theory mean “more working hands” but only if there is a sufficient number of jobs being created. The fact that tens of millions of new young cohorts will come of age every year and will need to take jobs to make a living does not automatically mean that those jobs will be there for the taking. A benign economic outcome cannot be taken for granted merely because of a shift in demographics. If for example investment is weak or if literacy is low, having more people may result instead in greater poverty and other deteriorating conditions. In addition if there is a too-large “younger age cohort”, there may be new headwinds slowing the economy in cases where the number of dependents (the young and elderly) overwhelms the number of workers. All of this is to say that while the sheer total number of citizens is important, it is less important than the age distribution of the population and other non-demographic factors.
ELEMENTS OF A DEMOGRAPHIC DIVIDEND
A few years ago, we produced the following chart in an effort to sum up all the elements needed for an economy to achieve a demographic dividend. A demographic dividend is an economic chain reaction or virtuous cycle that is 1) triggered by improvements in literacy, fertility and health, and that is 2) assisted by positive capital flows, job creation and a strengthening of governance and institutions. The necessary ingredients include a PEOPLE component and a CAPITAL component, as shown in the chart. Another way to categorize them is along the populyst Three Pillars of Innovation/Productivity (red), Demographics/Health (black) and Society/Governance (green).
When we published this chart in 2015, we argued that China represented one of the more successful examples of a country realizing a demographic dividend. On the PEOPLE side of the equation, China made big strides in literacy in the 1950s, 60s, 70s and 80s, to such an extent that its literacy rate in 1990 was not far from those of much wealthier countries.
At the same time as literacy was improving, China’s birth rate was declining, a usual correlation also seen in many other countries. Contrary to common misconception, most of China’s decline in births occurred before China enacted its one-child policy. In turn, the decline in the total fertility rate (TFR) eventually led to a decline in the dependency ratio (DR). The DR is the ratio of dependents (the young and elderly) to workers.
A WINDOW OF OPPORTUNITY
The sequence of events that can lead to a demographic dividend is as follows, as observed in multiple countries. The fall in the dependency ratio opens a window of opportunity for a demographic dividend. This occurs because there are fewer dependents per worker, and there are therefore more dollars (or local currency) left over for discretionary spending or for saving and investment. In the United States and Europe, we also benefited from a demographic dividend that became possible not only because the birth rate declined but also because women joined the workforce in increasing numbers. We made these points more expansively in The Economics of Dependency.
The question then becomes whether that window of opportunity can be used in a way that helps the economy. For the answer to be yes, both the PEOPLE elements and the CAPITAL elements have to improve sufficiently to help capture the demographic dividend. These elements are categorized as follows:
PEOPLE: improvements in literacy and health, decline in fertility, etc.
CAPITAL: foreign investment inflows, better governance, rising trust, lower corruption, respect for contract law and property rights, job creation, political plurality, independent judiciary, inclusive business culture, etc.
In order to identify the countries that stand a chance to capture a demographic dividend in the next two decades, the first step is to find the countries where the fertility rate and the dependency ratio are on a steep downward trajectory.
Before we get to the list of individual countries, consider these regional figures from the United Nations’ Population Division. They show in the first table the dependency ratios for different regions or groups of countries, and in the second table the corresponding changes in the dependency ratios as measured from 2022.
We can see in the first row of the first table that the DR for the entire World was 54 in 2022 (54 dependents per 100 workers) and that it will rise to 59.3 in 2050. In the first row of the second table, we see that this change from 2022 to 2050 is an increase of 5.3 dependents per 100 workers. Similarly, we see that by 2050, the DR of high-income countries will rise by 17.9 and that the DR of low-income countries will fall by 21.6. The rise in high-income countries’ DRs is explained by the aging of the population which results in more dependents. The fall in low-income countries’ DRs is explained by an expected decline in the birth rate which results in fewer dependents.
Now looking at individual countries, the same UN data source expects nearly all sub-Saharan African countries to experience declines in their dependency ratios. There are in addition some countries outside of Africa where the DR is also expected to fall. This data is all shown below in Tables 3 and 4 for Africa and Tables 5 and 6 for other regions.
Note that Northern and Southern Africa already have relatively lower DRs and will see smaller declines by 2050. whereas Middle, Western and Eastern Africa have very high DRs and are expected to see bigger declines.
Please scroll down past the tables for the conclusion.
As noted above, the fall in the dependency ratio in theory opens a window of opportunity to capture a demographic dividend. Many countries will not be ready or will be unable to realize that dividend because of ongoing problems of governance, literacy, health or other. If the projections above are realistic, nearly all of the countries listed will have an opportunity. However, each has to be analyzed separately in order to determine its chances of capturing a demographic dividend.
We end, as we started, with China and India. China, arguably the greatest example in history of a successful demographic dividend, will see its dependency ratio rise from 44.9 in 2022 to 71.1 in 2050 (see chart). This is almost a full reversal of the decline that it experienced between 1966 and 2010 when the DR fell from 82.4 to 37.1. China’s ability to maintain a strong economy while its DR is rising is contingent on the other non-demographic factors working extra hard to generate growth. As to India, its DR has already fallen to 47.5 (from 81.8 in 1965) and it will remain near current levels for several decades. India could yet capture a demographic dividend by improving governance and by investing in productivity, education and health. But population growth on its own is not enough to move its economy decisively forward.