The Chance of a Lifetime

Poor nations get a demographic dividend

It is a seemingly minor statistical tweak--but with enormous implications. In late February, U.N. demographers lowered their projections for future population growth in the developing world. Fertility rates in many huge developing countries, already dropping fast, are now expected eventually to dip below two children per woman--almost as low as the industrialized world (chart).

That means the population explosion in countries such as Indonesia, Brazil, South Africa, Egypt, and India could end by 2050, much sooner than expected. The report is already altering debates over everything from population control to prophesies of environmental doom.

But there's an important near-term implication: For the next few decades, the combination of falling fertility and death rates gives most developing nations a one-time window of opportunity to boost living standards dramatically. Economists call it the "demographic dividend." Better health care lets people work longer and more productively, swelling the prime-age workforce. At the same time, with fewer mouths to feed, parents can spend more to educate each child, making the next generation more productive. Smaller families have more income to consume and save, which in turn drives investment.

Recent history shows these factors can fuel strong economic growth. According to research by economist Andrew D. Mason of Honolulu's East-West Center, demographic shifts powered up to one-third of the amazing expansion of South Korea, Taiwan, and Singapore from 1960 to 1990. Over that period, fertility fell at one of the fastest rates in history, from 4.5 children per woman to two. The labor force surged 2.7% a year, providing the workers for the region's export boom.

Similar demographic shifts are now occurring in most of the developing world. "If countries can take advantage of these trends, they can leverage them into higher living standards," says Mason. Some nations such as Thailand, Mexico, and Iran will still have young working populations for another decade or two. Other poor, giant nations like India, Egypt, and Bangladesh are just entering their dividend years. If Africa can halt the AIDS epidemic, the trend will soon hit there.

But there's a catch: This demographic bonus will occur just once--and last just a few decades. Seizing this opportunity "depends on whether countries have good government institutions and functioning markets and invest in their children," says Harvard University economist David E. Bloom. But if they blow it? "The dividends could turn into debacles." In the short term, these countries will have masses of jobless adults. Decades hence, they'll be stuck with the huge burden of caring for the elderly. The problems now starting to face Japan and much of Europe will look tame in comparison.

Managing this age shift is especially crucial for developing nations because its speed is "without historic precedent," says U.N. Population Div. Director Joseph Chamie. In the U.S., it took 69 years for people over 65 to go from 7% of the population to 14%. France took 114 years. China will make that transition in just 25 years; Indonesia in 22.

Fortunately, most developing nations have time to exploit their demographic dividends. The median age in developing countries is now 24 and won't reach 35 for five decades. Harvard's Bloom figures Indonesia, Thailand, the Philippines, and Malaysia will be at their productive peaks until 2015. Currently, Southeast Asia's working-age population is growing five times faster than its "dependents"--those aged under 15 or over 65. Although the mismanaged economies of Latin America have already wasted years of opportunity, demographics will still be in the nations' favor for two decades because birthrates have dropped more slowly than in Asia.

But developing nations can take nothing for granted. To reap the benefits of age shifts, nations need open markets and flexible labor policies to draw manufacturing jobs. They need sound economic policies and financial systems to promote investment and savings. They must invest in education to boost skills. They also should start setting up viable pension and health-care systems for retirees. The key is for developing nations to use their bulging populations of workers to achieve enough growth to provide resources for the future. And they must do so now--before this opportunity escapes.

By pete engardio in new york

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