# **3.2 Simulation Design**

The sensitivity of growth and poverty to demographic change will thus be examined using the modified LINKAGE and GIDD by implementing simulations that reconstruct the global economy through the historical period of 2007-2011 and then project forward to 2030 under some assumptions about the exogenous drivers discussed earlier (e.g. size and nature of labor force growth). A range of demographic and growth assumptions are considered in various combinations to characterize a total of eight scenarios: four sets of assumptions about demographic impacts interacting with two alternative future growth paths. Two growth paths are considered to capture possible interactions between demographic changes and economic growth. In all these scenarios, the skill composition of the labor supply is held constant over time. The sensitivity of the results to changing skill compositions is then examined. The scenarios are elaborated upon below.

# The baseline demographic scenario

The baseline (for a given growth path) incorporates two potential effects due to changes in the demography. The first is the age-structure effect on labor supply (or labor supply effect for short), which simulates the rising share of population entering the workforce and the growth of labor supply over time. The second is the age-structure effect on savings and investment due to shifts in the dependency ratio as the shares of the young and the old also change over time (the savings effect). The simulation establishes the reference growth path for the global (and country economies) inclusive of the two demographic dividend effects in Africa. It does not alter the skill composition of workers, which will be examined as a sensitivity test below. What this means in terms of the exogenous drivers of the simulation is that skilled and unskilled labor are assumed to grow at the same rate as the working age population, and the populations by age tranche grow following the medium fertility scenario of the United Nations (2013). This assumption preserves the skill share of the number of employed in a given economy over time and is useful for the purposes of decomposing the effects of demographic change on aggregate labor supply by controlling for the effect of improvements in the skill-share of labor. Data from the _Global Economics Prospects 2013_ (GEP) (World Bank, 2013d) are used to determine investment as a share of GDP from 2007 to 2011, after which investment is endogenously determined as the model solves for different equilibria over time. GEP data are also used to track the current account balances as shares of nominal GDP of the various countries from 2007 to 2015, after which they descend to sustainable long run levels by 2030. Finally, GEP data are used to track the real GDP growth from 2007 to 2015.<sup>10</sup> With the baselines thus defined,<sup>11</sup> three alternative simulations are designed to isolate the impact of demographics on the results in the two baselines. The alternative scenarios generally hold all the exogenous shocks the same as in the baseline, except that the GDP growth is endogenized, and the productivity growth that allowed for that GDP growth in the baseline is now applied as an exogenous shock. The three alternative scenarios are used to determine the sensitivity of growth in Africa to demographic change by isolating individually and together the direct demographic impact on savings and on labor supply.

> 10 The simulations do not account for Nigeria’s 2014 re-basing of the national accounts data.

> 11 The growth rates by country can be found in Table A3.

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