How Significant Is Sub‐Saharan Africa's Demographic Dividend for Its Future Growth and Poverty Reduction?

• DOI: http://doi.org/10.1111/rode.12227
• Date: 01 November 2016
• Published date: 01 November 2016

How Significant Is Sub-Saharan Africa’s

Demographic Dividend for Its Future Growth and

Poverty Reduction?

S. Amer Ahmed, Marcio Cruz, Delfin S. Go, Maryla Maliszewska,

and Israel Osorio-Rodarte*

Abstract

Sub-Saharan Africa will be undergoing substantial demographic changes over the next 15 years with the

rising working-age share of its population. The opportunity of African countries to convert these changes

into demographic dividends for growth and poverty reduction will depend on several factors. The

outlook will likely be good if African countries can continue the gains already made under better

institutions and policies, particularly those affecting the productivity of labor, such as educational

outcomes. If African countries can continue to build on the hard-won development gains, the

demographic dividend could account for 11–15% of gross domestic product (GDP) volume growth by

2030, while accounting for 40–60 million fewer poor in 2030. The gains can become more substantial with

better educational outcomes that allow African countries to catch up to other developing countries. If the

skill share of Africa’s labor supply doubles because of improvements in educational attainment, from 25

to about 50% between 2011 and 2030, then the demographic dividends can expand the regional economy

additionally by 22% by 2030 relative to the base case and reduce poverty by an additional 51 million

people.

1. Introduction

The working-age share of Sub-Saharan Africa’s (SSA’s) population has been rising

since the mid-1980s and the demographic change has the potential to be an

important factor for the region’s future growth and poverty reduction (Sachs, 2015;

Eastwood and Lipton, 2011; Drummond et al., 2014). There is empirical evidence

of similar demographic transition boosting growth in East Asia (Bloom and

Williamson, 1998; Bloom et al. 2000). Therefore, a strong demographic dividend on

SSA’s savings, investment and growth is possible.

The demographic dividend concept is based on the idea that countries leaving the

first phase of demographic transition and moving to the second phase have a 20–30-

year window of high working-age shares of the population. The first phase of

demographic transition is characterized by low mortality rates and high fertility

rates that lead to rising dependency ratios—the ratio of the youth and elderly

population to the working-age population. The second phase of demographic

*Ahmed (Corresponding author): Development Prospects Group, World Bank, 1818 H St NW,

Washington, DC-20433, USA. Tel: +1-202-473-6454; E-mail: sahmed20@worldbank. Cruz, Go,

Maliszewska and Osorio-Rodarte: Development Prospects Group, World Bank, Washington, DC, USA;

Federal University of Paran

a, Curitiba, Paran

a, Brazil. The views expressed are those of the authors and

do not necessarily reflect those of the World Bank Group. The authors are grateful to Antoine Bouet,

Vandana Chandra, Stephen Karingi, Ayhan Kose, Christian Eigen-Zucchi, two anonymous reviewers and

participants at the Big Ideas for Africa 2014 conference held at the World Bank and at the 17th Annual

Conference on Global Economic Analysis held in Dakar for many helpful comments and suggestions.

Review of Development Economics, 20(4), 762–793, 2016

DOI:10.1111/rode.12227

©2016 John Wiley & Sons Ltd

transition, in contrast, is characterized by low mortality, low fertility and rapidly

falling dependency ratios. The larger share of the working-age population implies a

larger labor force as well as changes in savings and investment behavior. However,

the relatively few analyses of SSA’s demographics suggest that the shifts have thus

far been slow and the demographic dividend has yet to be reaped in full (Bloom

and Sachs, 1998). This is partly because of two reasons: the population of SSA is

relatively young and the demographic shifts into the relevant second phase are just

beginning; and, economic growth in SSA countries has only picked up in the last

15 years. Thus, the issue is more about SSA’s future potential, raising questions

about the feasibility and potential size of SSA’s demographic dividend by 2030. The

2030 timeframe is a useful horizon to focus the analysis since that is the

multilaterally accepted target year to achieve the Sustainable Development Goals,

as well as the target year that the World Bank Group—a major international

development institution—has set to reduce the global poverty headcount to below

3%.

Sustained growth in many SSA countries was absent for most of the 1980s and

early 1990s owing to myriad challenges including poor governance, conflicts and

growth collapses. Arbache et al. (2010) found that between 1975 and 2005, the

probability that an SSA country would experience acceleration in its economic

growth was almost equal to the probability that it would experience deceleration.

Countries that managed to experience growth acceleration had average annual per

capita growth rates of 3.6% vs the 0.7% for the region over the period, while

countries that experienced growth decelerations experienced average annual

contractions of 2.7%. Fewer conflicts, greater macroeconomic stabilization, and

better policies in general were associated with periods of accelerated growth.

1

In

this context, Chuhan-Pole and Devarajan (2011) provide some cause for optimism

by noting that not only has SSA’s growth accelerated in the new millennium, but

that it has also been sustained for a longer period of time, defying the one-in-four

probability of a deceleration. With the recent improvements in SSA’s growth and

policies and as more SSA countries enter the second phase of demographic

transition, can demographic change be converted to a dividend and contribute to

sustenance of this growth into the future?

This paper explores three aspects of the issue by analyzing counterfactual

scenarios of SSA’s future using a dynamic structural modeling framework. This

framework allows for quantitative analysis of the possible magnitude of

demographic effects under different economic assumptions. The first aspect is then

to analyze the likely effects of the demographic dividend on SSA’s future savings,

investment and growth.

The second aspect is to move beyond growth and explicitly examine the

demographic dividend for poverty reduction. The World Bank has the stated goal

of eliminating extreme poverty by 2030, which means reducing the global poverty

headcount rate measured at the US$1.25 poverty line to less than 3% (World Bank,

2013a). This global poverty target is meant to guide the institution’s future

operations and can serve as a useful target for the international development

community as whole. Poverty reduction success in SSA is critical to the feasibility

of reaching this global poverty eradication target. SSA’s poverty rate—measured at

the US$1.25 a day poverty line—was 48.5% in 2010 with 413.8 million poor, and

accounting for 35% of the world’s poor (World Bank, 2013b). Forecasts suggest

that by 2015 the poverty rate will still be a substantial 42.3%, with the region

accounting for 42.1% of the world’s poor. Basu (2013) projects poverty rates in

SUB-SAHARAN AFRICA’S DEMOGRAPHIC DIVIDEND 763

©2016 John Wiley & Sons Ltd

2030 under assumptions of low and high historic distribution-neutral income growth

and finds that even if countries grow at the high growth rates experienced in the

early new millennium, the global poverty rate in 2030 would still be 5.5%.

2

For the

case of SSA in particular, the poverty rate would be 26.4% and the region would

be home to more than 78% of the world’s poor.

Finally, if the countries of SSA are to fully realize the resulting demographic

dividend, policy makers must create the necessary enabling environment, and

different policy environments can lead to different growth paths, irrespective of the

demographic effect. To avoid overemphasizing findings based on an overly sanguine

growth scenario, the third aspect explores the robustness of the demographic effect

under both a low growth case and a high growth case. The low growth case

characterizes a scenario similar to the sluggish growth of SSA from 1980 to 1999,

with corresponding low capital and skill accumulation.

3

This means the recent

higher growth performance of SSA is only temporary, reflecting a future where

there is a reversion to the poor policy environment of the 1980s and 1990s. The

high growth case characterizes a scenario where the higher growth performance of

the period 2000–2009 will persist as stable and enabling policies are maintained.

4

Clearly, the effects of education policy on human capital accumulation will also

change the potential demographic dividends. Hence, among the counterfactual

simulations introduced, the analysis includes a contrast of three cases on how

education affects skill accumulation: a conservative case where skill composition of

labor supplies remain unchanged over time; the skilled pipeline scenario—even

without changes in the enrollment and completion rates of students, there is a

skilled related improvement simply owing to the fact the some of the young will

move through the educational system over time and gain additional skills; and, an

improvement in the education completion rates and outcomes. The paper finally

considers the sensitivity of the results to other key assumptions, such as the savings

rates of the different age groups, the elasticity of substitution in the value-added of

factors of production, including skilled and unskilled labor, and the labor

participation and unemployment rates.

The next section will examine the evolution of SSA’s demographics and the

possible channels by which a country may experience a demographic dividend for

growth. Section 3 will discuss the methodology of the analysis, while section 4

discusses the results. Section 5 will conclude.

2. Recent Evidence on Demography and Growth

The literature on the relationship between population change and economic growth

is varied and includes work that argues that the former can have a range of effects

on the latter: enhancing growth, restricting growth, or having no relationship.

5

However, Bloom and Williamson (1998) and Bloom et al. (2000) have found strong

evidence that the rapid growth that East Asia experienced over 1965–1990 was due

to the effects of the working-age population growing faster than populations as a

whole.

Eastwood and Lipton (2011) summarize some of the key channels by which

demographic change may affect economic growth, specifically output per capita.

These channels include the dilution of natural capital (i.e. the number of workers

grow and the stock of natural capital falls over time), rising returns to the

population via productivity improvements and scale economies owing to higher

population density, the dilution of reproducible capital (i.e. investment does not

764 S. Amer Ahmed et al.

©2016 John Wiley & Sons Ltd