The demographic dividend

Three weeks ago the world’s population passed seven billion with predictions that it could reach 15 billion by the end of the century. Naturally the emphasis of media stories was on the planet’s ability to support such a figure and the stark environmental dangers of a population explosion.  Certainly the figures are staggering. It took 250,000 years for the global population to reach 1 billion, another century to reach 2 billion and 32 years more to reach 3 billion. However,  the increase from 5 billion in 1987 to 6 billion took only 12 years; and 12 years later, it stands at 7 billion. By 2050, the UN estimates there will be 9.3 billion people.

In fact, the growth in the world’s population is actually slowing, with the peak of population growth in the late 1960s, when the total was rising by almost 2% a year. Now the rate is half that figure. The last time it was so low was in 1950, when the death rate was much higher. The result is that the next billion people, according to the UN, will take 14 years to arrive, the first time that a billion milestone has taken longer to reach than the one before. The billion after that will take 18 years.

These changes are potentially more significant in the short to medium term for business and commerce, because they reflect a change in the demographic profile of many countries, which in turn will influence the nature of consumer demand and employee profiles. The effect of a decreasing birth rate combined with greater life expectancy is an ageing population, with profound implications for future economic growth. A smaller workforce and more retired workers means a higher dependency ratio and slower rate of increase in economic output. In 2011, almost half the world’s population, some 3.2 billion people, live in countries with a fertility rate of 2.1 or less. That number, the so-called replacement rate, is usually taken to be the level at which the population eventually stops growing.

Indeed, global fertility rates are now in general decline and this trend is most pronounced in industrialised countries, especially Western Europe, where populations are projected to decline dramatically over the next 50 years. In 1970 the total fertility rate was 4.45 and the typical family in the world had four or five children. It is now 2.45 worldwide and lower in some surprising places. Bangladesh’s rate is 2.16, having halved in 20 years. Iran’s fertility fell from 7 in 1984 to just 1.9 in 2006.   Several of the so called BRIC countries (Brazil, Russia, India and China ) have fertility rates below replacement levels and the demographic time bomb is also ticking in most of the rest of emerging Asia. A fall in fertility sends a generational bulge surging through a society with low-fertility countries facing the biggest demographic problems.

It is now said that China will ‘get old before it gets rich’ as the population of the world’s second biggest economy ages rapidly.  Part of China’s phenomenal growth has come from its unprecedentedly low dependency ratio. However, the proportion of elderly to working age people is expected to quadruple by 2050, which would take China’s ratio beyond that of the US with two elderly people for every five workers. The process is most pronounced in Japan and South Korea, where the proportion of the population over 65 had reached 22.6 per cent and 11 per cent in 2010 respectively, compared with 7.9 per cent and 3.5 per cent in 1975. Indeed, South Korea’s ratio will rise to three elderly for every five workers, resulting in the need to plan some significant economic reforms.

These changes will allow ‘younger countries’ such as India, Pakistan and the Philippines a window of opportunity to take economic advantage of their youthful populations before they also begin to age; a so-called ‘demographic dividend’. This dividend occurs when there are relatively few children (because of the fall in fertility), relatively few older people (because of past high mortality caused by poverty and poor health care), and more economically active adults, including more women joining the labour force in large numbers for the first time. India, for example is entering a  a period of smaller families, rising income, rising life expectancy and big social changes, including divorce, postponed marriage and single-person households.  This demographic dividend boosts economic growth, because an increasing labour force keeps wages relatively low, encourages savings and increases demand for goods and services. At the moment, Africa has larger families and more dependent children than India or Arab countries and is a few years younger (its median age is 20 compared with their 25). However, all three areas will see their dependency ratios fall in the next 40 years, the only parts of the world to do so.

The impact of demographic changes will influence the relative economic positions of a country in terms of relative GDP per capita. PwC, the professional services company has researched a range of impacts on economics growth:

The seven largest emerging market economies, China, India, Brazil, Russia, Indonesia, Mexico and Turkey are referred to collectively as the ‘E7’. With the noticeable exception of Russia, the change in economic growth rates of these emerging economies is correlated with changes in demographic profiles and fertility rates.

Sources:  The Economist,  The Financial Times. PwC

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IB-style questions

1. Define the following terms:

• Dependency ratio
• Demographics

2. Explain the impact of an ageing population on countries such as Japan

3. Examine the impact of demographic change on the HRM function of a multinational corporation

4. To what extent can a business adapt to changes in the demographic profile of its customer base and what are the major associated marketing implications?

Extension Activity

Ask your student, either individually or in groups, to select one of the E7 emerging economies and research the following:

• demographic change over the last 20 years and predicted changes in the next 20 years
• changes in economic growth and performance
• the impact of demographic changes on the structure of the economy: primary, secondary and tertiary sector

Then the students prepare a Case Study of one of the major MNCs based in that country, mapping its growth in terms of of the economy.