What Is the Demographic Dividend?

• Author: Ronald Lee and Andrew Mason
• Position: Professor of Demography and Economics at the University of California, Berkeley, and Chair of the Center on the Economics and Demography of Aging/Professor of Economics at the University of Hawaii and a Senior Fellow at the East-West Center

Industrial countries have largely completed what is called the "demographic transition"-the transition from a largely rural agrarian society with high fertility and mortality rates to a predominantly urban industrial society with low fertility and mortality rates. At an early stage of this transition, fertility rates fall, leading to fewer young mouths to feed. During this period, the labor force temporarily grows more rapidly than the population dependent on it, freeing up resources for investment in economic development and family welfare. Other things being equal, per capita income grows more rapidly too. That's the first dividend.

This dividend period is quite long, lasting five decades or more, but eventually lower fertility reduces the growth rate of the labor force, while continuing improvements in old-age mortality speed growth of the elderly population. Now, other things being equal, per capita income grows more slowly and the first dividend turns negative.

But a second dividend is also possible. A population concentrated at older working ages and facing an extended period of retirement has a powerful incentive to accumulate assets-unless it is confident that its needs will be provided for by families or governments. Whether these additional assets are invested domestically or abroad, national income rises.

In short, the first dividend yields a transitory bonus, and the second transforms that bonus into greater assets and sustainable development. These outcomes are not automatic but depend on the implementation of effective policies. Thus, the dividend period is a window of opportunity rather than a guarantee of improved standards of living. The dividends are sequential: the first dividend begins first and comes to an end, and the second dividend begins somewhat later and continues indefinitely. They certainly overlap. The first and second dividends both had positive effects between 1970 and 2000 (see table), except in sub-Saharan Africa.

[ GRAPHICS ARE NOT INCLUDED ]

Potential sizes of the dividends

Developing countries are still working their way through the demographic transition (as illustrated by Thailand's age pyramids in Chart 1). The horizontal lines mark the conventional working-age boundaries (ages 20 to 65). During the early stage, the number of children rises rapidly as mortality falls. Later, at an intermediate stage, fertility begins to...