Impact of Age Structure and Savings Rate on Economic Growth: The Case of Bangladesh.

Author:Pradhan, Mohammed Abdul Hannan

Bloom and Williamson (1998) predicted that demographic change would tend to promote more rapid economic growth in Southeast and South Asia. This effect operates only when the working-age population is growing at a much faster rate than its dependent population. Kelley and Schmidt (1996) pointed out that the national savings rate is a function of the age distribution of households, the age distribution of income, and the timing of consumption between child rearing and all other activities. How these three factors influence national savings can be analyzed separately. The impact on savings due to a change in the age distribution of households depends on the timing of consumption corresponding to earnings. If earnings in general exceed consumption, younger age distributions will likely favor higher savings rates. If household expenditures generally exceed earnings, a country with a high rate of population growth will have a higher proportion of households in the younger high-saving age group and a lower proportion in the older low-saving age group.

During the last few decades, important demographic changes in the structure of population aging have been taking place rapidly, not only in the developed countries but also in the developing world. Such changes may have long-range economic consequences. Many demographic variables such as fertility rate, life expectancy, population size, population growth, and population density can potentially affect an economy (Uddin, Alam, & Gow, 2016). However, each of these variables separately cannot reflect the full effect of the demographic transition of a nation. Uddin and colleagues (2016) argued that the dependency ratio represents the age structure of a population and can capture the overall impact of demographic changes in a more appropriate way. The systematic analysis of these changes is important as both young and elderly persons are likely to be more economically dependent on the working age population. An increase in dependent people may slow down economic growth (Santacreu, 2016) and affect other areas of the economy. Policy makers will need to consider this issue to design effective countermeasures.

Over the last five decades, the world has experienced a decline in the age dependency rates and an increase in life expectancy. Thus, the population is getting older with a greater share of people aged sixty-five and older. However, the world has observed a marked divergence in domestic savings rates; they have risen in Asia, stagnated in Latin America, declined in North America and Europe, and remained mostly low in Africa (Cavallo, Sanchez, & Valenzuela, 2016). Of the larger populated countries, it has been observed that the domestic savings rate has risen in China and India (Yang, Zhang, & Zhou, 2012).

Even in Bangladesh, the domestic savings rate has increased. In Bangladesh, the elderly population has increased slowly, the working age population has increased rapidly due to the increase in life expectancy, and the young population has decreased slightly or stayed flat. However, Bangladesh's age dependency ratio has gradually increased. A high adult dependency ratio implies a high level of burden on the workforce and may have some long-term economic consequences (Santacreu, 2016). Initially, as workers get close to retirement, they have a tendency to increase their savings through pension plans and health care insurance, for example. If younger workers were able to predict changes in demographic trends, they could start saving more for the future. This trend among younger workers might decrease long-term interest rates.

In the long run, as the elderly start retiring and birth rates start decreasing, the savings rate would start decreasing and long-term interest rates would rise. Hence, recent demographic changes could affect savings rates and long-term interest rates. If savings decline, the availability of funds to finance investment projects may face a significant decline. Consequently, long-term economic growth may be reduced. Additionally, the demographic composition of the labor force may contribute to changes in housing prices. Fewer young people, together with a large proportion of elderly, may result in a decrease in investment in the housing market. Finally, an increase in the elderly population may result in an increase in spending on health care services and leisure rather than on other items of regular consumption. The diminishing labor force, due to an increase in the elderly population and a decrease in the fertility rate, may lead to lower economic growth. However, high dependency rates reduce household savings rates in developed countries but not in the developing world. In developing countries, they become indirectly linked as development proceeds even with low birth rates (Leff, 1969).

Theories of saving suggest that lower dependency rates and greater longevity may increase domestic savings rates. Cavallo and colleagues (2016) found that these effects are statistically robust only in Asia. Latin America has undergone a remarkably similar demographic transition but has not experienced the same boost in savings rates as Asia. This study surveyed the relationship between change in the demographic structure and savings rates, followed by the impact of this change on economic growth using a time series data set covering the time period from 1981 to 2015.

Observing the variations in demographic trends and in savings performance across regions and over time, this article will address two questions. First, what is the impact of demographic factors, particularly the dependency ratio, on domestic savings rates? Second, how have domestic savings rate changes contributed to the evolution of economic growth in a country such as Bangladesh?

A number of researchers have considered the dependency ratio a key variable in economic growth (Rosado & Sanchez, 2017; Uddin et al., 2016; Wei & Hao, 2010). Prskawetz, Kogel, Sanderson, and Scherbov (2007) suggested the use of the dependency ratio instead of the population growth rate as the level of savings is affected by the growth of the working age population. Meanwhile, an empirical study by Bloom, Canning, and Graham (2003) confirmed that the level of savings is affected by the population age structure. This study used nonstationary time series data for the period 1981 to 2015 to reveal the effects of population age structure, in particular dependency ratio and savings rate, on economic growth. No analysis with similar characteristics has been conducted in Bangladesh, which highlights the contribution of this research, as our study findings may be crucial in the formulation of policies linked to the population age structure and economic growth.

The earlier empirical research on the influence of demographic transition on economic growth paid little attention to time series data for a single country. Uddin and colleagues (2016) highlighted the effects of population age structure and savings rate on economic growth using time series data for Australia for the period 1971 to 2014 by employing a vector error correction model (VECM). The same method was applied by Rosado and Sanchez (2017) to show the relationship among the dependency ratio, savings rate, and real GDP for Ecuador from 1975 to 2015. Nguyen and Nguyen (2017) examined the short- and long-range impacts of dependency ratio and domestic savings on economic growth in Vietnam during the period from 1986 to 2015 by using the autoregressive distributed lag (ARDL) bounds testing approach.

This article contributes to the literature by studying the impact of demographic factors, age structure, and savings rates on economic growth using a time series data set focusing on Bangladesh from 1981 to 2015. Using time series estimation, this article concludes that demographic factors have a significant impact on savings rates in Bangladesh. The ARDL approach confirms that demographic factors have been a significant contributor to savings rates; savings rates in turn have a significant positive effect on per capita GDP. On the other hand, the dependency ratio has not significantly contributed to accelerating per capita income.

The next section of this article will review the demographic transition and its role in changing domestic savings. In the third section, the models and estimation strategies will be introduced, as well as data and sources. In the fourth section, the study results will be outlined and discussed, followed by...

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