‘Old’ Countries Versus 'Young’ Countries? How Demographics matter

Demographics matter a lot. Why? Because economic models are built on growth and productivity and need a lot of people of working age to be, well, working.

To grow, any economy needs lots of people of working age, which in economic terms is anyone between age 15 and 64. If this age group, the so-called working population, is larger than the combined group of children and retired people, an economy will be in good shape, assuming most of those of working age are actually ‘in work’.

Economists call the relationship between working age and non-working age people the dependency ratio. This ratio calculates how many people – too young or too old to work- are financially dependent on each working person. To get to a number, or percentage, you take the total population of a country and split them into their separate age groups and then divide them by one another.

Number of dependents (0-14 & over 65s): working age population (15-64) x 100%.

If there are a lot of dependents, the dependency ratio will be high, which means that those who are of working age carry a large burden. They may have to pay higher taxes - to pay for services for both the young and the old as the young need money for education and the old need money for health- and social care.

Young countries

If a lot of the dependents in a country are young, a high dependency ratio is a temporary economic problem, because the future workforce and hence productivity are guaranteed. This is of course only true if kids can go to school and be properly educated. Many African countries have extremely high dependency ratios, and the bulk of these dependents are children. The average amount of dependents below 15 years of age for each working person in Sub-Saharan Africa is 76! That is a huge number. It means that, obviously, families are large, but also that the average life expectancy is maybe not that high, as the over 65s simply die earlier (and do not live to 90 like in in Japan for example). If countries that have very young populations do not provide adequate education and training for all these young people, (future) unemployment, economic migration and potential social unrest could be consequences.

Old countries

Many Western economies fall firmly in the ‘old’ category. Meaning that the over 65s are an increasingly large part of the population and there are not enough dependents in the 0-15 age group to fill future ranks. Families tend to be small and the shrinking working age population leads to slowing economic growth. The dependency ratio in these cases is also very high, but on the other side of the age spectrum. The top 3 oldest countries in the world are Japan (with 48 elderly people for each working person) and Finland and Italy (both with 36.6 elderly people per each working person). Ageing economies bring their own set of issues; productivity may become stagnant or decline as taxes must go up to support the increasing costs for health- and especially social care.

The US and China have more balanced demographics – still. However, China – having had 25 years of a near infinite supply of labour - now has 17 dependents for each working person and the demographics point to potential lower growth as the population is aging. Reason why China recently abandoned its one-child policy and now encourages women to have 3 children each please.

Be it young or old, countries can take measures to protect their (future) economic growth; old countries – for example - by allowing immigration, having more women in work and/or delaying the retirement age and young countries by making sure that a high quality and compulsory education system is in place as well as the infrastructure to get to places of education, be it transportation or fast internet connections.

Today, most old countries are (still) richer than young countries and their wealth – ironically - keeps people alive longer and in power longer. Young countries, often with inadequate education today, are not yet able to use their demographic dividends for better economic growth, but if they play it well, their future may be very bright.

If you were president of an old or young country, how would you tackle the issues of each?

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