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Africa’s $500 billion-a-year treasure fleet

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I usually tell my students that understanding the world is much like understanding the flow of a river. We busy our lives floating on its surface, unaware of the tremendous forces below. Those forces, or currents, have various layers. Just below the surface are the forces still visible to us, the things we might still want to influence. Media, popular culture, sport. Below that is the more established institutions – political, judicial. And below that, I would argue, are the economic forces, pushing us down the river without us ever knowing the true source of the current.

But I often neglect a perhaps even deeper current, a current so slow-moving that in the business of our day-to-day operations, we fail to see its significance. Demographic change.

The world has witnessed massive demographic change over the last two centuries. In the eighteenth century, Reverend Thomas Malthus predicted that because humans increase at a geometric rate but food production only grow at an arithmetic rate, humans will continue to live just above subsistence. What he did not consider was human ingenuity. Since his famed prediction, not only has global population numbers increased by a factor of 7, our average level of prosperity has increased by at least a factor of 8 (and in many countries much more).

But demographic change is more than just an increase in numbers. As medical knowledge and modern medicine expanded, mortality rates, especially those of young children, have fallen to historically low rates. As families recognised that many of their children now survive into adulthood, they have begun to reduce the number of children they have. (When Adam Smith wrote about Scottish Highlands mothers in 1776, he noted that of the 20 children they might bear, only two would survive into adulthood. In 2014, the average Scottish women had 1.56 children.)

The difference between the decline in mortality and the decline in fertility is known as the demographic dividend. A demographic dividend essentially means that there are many more people of working age than there are dependents (very old and very young people); thus, there are more paying taxes than those needing the tax money. Most developed countries experienced their demographic dividend somewhere during the nineteenth or early twentieth century. Most Asian countries experienced theirs during the latter half of the twentieth century; even in Bangladesh, one of the most densely populated countries on earth, the fertility rate is now 2.21, just above replacement level.

Africa has not seen fertility rates fall to the same extent. A new NBER Working Paper by David Bloom, Michael Kuhn and Klaus Prettner argues that this is likely to happen in the next few decades, which means ‘Africa has considerable potential to enjoy a demographic dividend’. This will be a boon to Africa’s economic prospects, but, as the authors argue, only if countries implement good policies.

One place to start is to give women the freedom to choose the number of children that they have. Access to contraceptives and family planning services are among the reasons for the decline in fertility rates elsewhere, and too many women in African countries still lack access to such services. Policies focusing on female education will boost female labour force participation, which not only reduce fertility rates, but also increase investment in their children; more educated, working mothers tend to have fewer, more educated children. The main challenge, as the authors acknowledge, is the capacity of many of the weakest governments to coordinate such policies effectively.

Once fertility rates in African countries start falling – as they already have, down from a high 6 in the 1960s to a still relatively high 4.7 in 2015 (South Africa is an outlier, with a fertility rate of only 2.4) – and the demographic dividend begins to boost government coffers as the number of child dependents fall relative to the working age population, governments will have to make clever, forward-looking decisions about what it is they want to invest in. Education, particularly tertiary education, is an obvious candidate.

Barriers that might prevent African countries from realising these gains include climate change (which affects migration decisions) and, more alarmingly, the wastefulness of government expenditure (corruption, state capture). The authors calculate that a demographic dividend could ‘yield’ as much as $500 billion per year in additional expenditure possibilities. It is easy to see how such a boon could lead to political opportunism in the worst degree.

Because a demographic dividend ‘only’ lasts a couple of decades, after which the working age population grows old and become dependents again, governments must ensure that they invest wisely during the good years. Many developed countries, from Italy to Japan, are today struggling with aging populations, and the fiscal demands of promised pensions.

That is why long-term fiscal planning is essential. In those African countries where fertility rates have already fallen significantly, notably in South Africa, these issues are much more prescient than in others where the demographic dividend is still to be realised. What is clear, though, is that we should be more cognizant of the deep underlying currents that determine the flow of the river, and the direction our boat is likely to go.

*An edited version of this first appeared in Finweek magazine of 22 September.

Written by Johan Fourie

October 27, 2016 at 06:33

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