Reform and support systems for the elderly in developing countries : capturing the second demographic dividend

In many developing countries and in East Asia’s NIEs, demographic change has favored economic growth. A demographic dividend or demographic window arises because the working-age populations are growing more rapidly than the number of consumers. This provides an extra boost to per capita income. As is widely appreciated, the demographic dividend is transitory. In the coming decades, the number of consumers will begin to grow more rapidly than the number of workers as a large part of population growth is concentrated at older ages where labor productivity is low and importantly is less than the preferred levels of consumption. By 2050 the dividend will have entirely dissipated in many countries. This seemingly pessimistic scenario has a silver lining, however. Given appropriate policy formulation, population aging will yield a second dividend. The same demographic changes that lead to low support ratios (high dependency ratios) in the future, namely few children and longer life, also both raise capital per worker other things equal, and additionally create a powerful incentive for individuals to accumulate assets to provide for old age. The result can be a period of rapid growth in per capita income. The rapid pace of asset accumulation is also transitory. However, per capita assets and income stabilize at a level that is permanently higher. In this respect, the second dividend persists whereas the first dividend is transitory. The qualification “given appropriate policy formulation” is an important one because population aging may lead us down other paths. One possibility is that average incomes of and consumption by the elderly would be allowed to decline relative to others as they become more numerous and