Population and Poverty Tom Merrick World Bank Institute August 21, 2002

Recent research findings: Slower population growth creates the potential to increase the pace of aggregate economic growth Rapid fertility decline at the country level helps create a path out of poverty for many families

I. Growth II. Poverty III. Policy Implications

New Findings on Growth Recent studies of effects of demographic change on growth help explain the past experience of different countries and regions (slow growth in Africa versus the burst of growth in East Asia, 1960-1995) The demographic experience of East Asia is good news for countries on a similar path of fertility decline (e.g., Latin America and more recently, Africa)

The Demographic Transition Population growth rate Birth rate death rate time

Population Growth Rate Over the Course of the Demographic Transition birth rate minus death rate TIME

Changing Age Structure Produces a “Demographic Bonus” As the gab between birth and death rates narrows, the ratio of workers to non-workers is unusually high and increasing. During this demographic ‘bonus time’ more workers are potentially producing more total output, greater wealth accumulation, and an increasing supply of human capital. The changing age structure is driven mostly by fertility decline.

Population Growth and the Age Structure Population share at working ages Population growth rate time

Ratio of Workers to Dependents 2.2 2 East Asia 1.8 Latin America 1.6 Ratio of Workers to Dependents S.C. Asia 1.4 1.2 Africa 1 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 Year

The Effect On Savings An increase in the worker-dependent ratio can increase savings and investment In the case of East Asia, the increase in that ratio and the associated increase in savings can be associated with 1/3 of the total 6% average annual per capita growth rate, 1965-1990

Stylized Model of Economic Growth and the Demographic Transition Growth rate of real GDP per capita Other Transitional Forces Economic Miracle Demographic Gift Youth Demographic Burden Sustainable Growth C. 1945 C. 1960 C. 2010 C. 2025 Time

The Policy Environment Matters Benefits from a ‘demographic bonus’ depend on the policy context. In East Asia, demand for labor rose rapidly, absorbing rising supply at rising levels of labor productivity. What happened? 1. Fiscal discipline 2. Open and competitive markets 3. Public investment in education and health care In Latin America, the demographic bonus has been less effectively exploited.

Institutions Matter Too 1. Rule of Law 2. Property Rights 3. Political Stability Policies and institutions moderate negative effects of rapid population growth, and reinforce positive effects of the demographic bonus.

Reinforcing effects: Endogenous factors can be important Higher life expectancy + good policy environment Higher economic growth Technological change Lower fertility & Higher life expectancy + good policy environment Higher & sustained economic growth In East Asia, there may have been no ultimate “cause”, only a process

Poverty and Fertility Change On the one hand... The association of high fertility with poverty does not prove that one causes the other; Moreover, even if poverty leads to high fertility, that may reflect parents’ sensible decisions to trade off current consumption for greater future family income (when children work or for greater old age security); So, economists have traditionally hesitated to endorse policies and programs to reduce fertility.

On the other hand... New studies confirm that fertility at the country level does appear to increase absolute levels of poverty by: Slowing economic growth and growth-induced poverty reduction Skewing distribution of consumption against the poor

Slowing economic growth & poverty reduction Household surveys in Brazil show that the decline in poverty associated with what has been a dramatic reduction in fertility is equivalent to what would have been produced by a 0.7% greater annual increase in per capita GDP. An analysis of 45 developing countries reveals that had the average country reduced its birth rate by 5 per 1000 throughout the 1980s, the average country poverty incidence of 18.9% in the mid-1980s would have been reduced to 12.6% between 1990 and 1995.

Moreover, high fertility may not even be optimal, even for poor families. Poor parents have severely constrained choices. The apparent alternative of fewer ‘higher quality’ children does not exist, if public spending on health and schooling is inadequate. The poor may lack critical information: The market for information is far from perfect. The poor often lack information on declining infant mortality, increasing returns to schooling, and improving financial markets. Men may dominate the choice in # of children, while not fully sharing the costs.

And evidence increasingly suggests: A higher prevalence of unwanted pregnancies among the poor A strong response to reduced costs of controlling fertility. (In the last decade, fertility has fallen among the poor and uneducated who had access to health and family planning services.)

So, both theory and improved and expanded empirical efforts support the likelihood that high average fertility at the country level hurts the poor, and that their own high fertility can contribute to their and their children’s poverty

Policy Implications Undo existing policy-induced distortions Ensure economic policies that strengthen land, labor, and financial markets Invest heavily in education and health programs Improve status of women Subsidize voluntary family planning and information services