# **1. Introduction**

This paper analyzes the effects of demographic change on economic growth, savings, and poverty. We first describe the main mechanisms of how demographic change impacts economic outcomes based on the concepts of first and second demographic dividends. We then estimate the effects of changes on the share of working age population on per capita GDP growth, savings as a share of GNI, and poverty rate.<sup>3</sup> We use changes in the share of working age population as a measure of demographic change. The data are for about 160 countries between 1950 and 2010, and come from different sources.<sup>4</sup> Overall, we find that on average an increase in the share of working age population can benefit countries on boosting per capita growth, increasing savings, and reducing poverty.

Demographic patterns are becoming increasingly diverse across economies. Many developing countries, especially in Sub-Saharan Africa and South Asia, are expected to see continued growth in the proportion of working-age people for several decades, even as the working-age population share declines in high-income countries and many middle-income countries (Lee 2003, World Bank 2015a).<sup>5</sup> These demographic changes can affect economic prosperity in several ways. First, changes in the working-age share of the population impact income growth and savings, by changing the relative number of people in the economy that are able to work. Second, changes in the age-structure at the household level can disproportionally benefit poorer families, which usually tend to have higher child dependency ratios.

The development impact of changes in age structure is usually decomposed as either a first or a second demographic dividend (Lee and Mason, 2006). The first dividend is a direct and immediate consequence of the rise in the working-age share of the population. The effect is straightforward, since a larger share of working age people means that the economy would have proportionally more people able to produce at the most productive stages of their lives. The second demographic dividend arises if changes in age structure create space for higher savings and lead to increasing investments on human and physical capital. Thus, the paper focuses on how changes in age structure may affect growth per capita, savings, and poverty, as key outcomes associated with the first and second demographic dividends.

We examine the impact of the share of the working-age population on several economic outcomes (per capita growth, savings, and poverty) using a common framework and econometric techniques to deal with endogeneity issues. Addressing the endogeneity issue is critical since changes in income per capita are known to affect fertility, mortality, and migration, and may thus affect

> 3 Gross domestic product (GDP); gross national income (GNI).

> 4 The database includes information from the World Development Indicators, Penn World Table, Barro and Lee (2013), and World Population Prospects.

> 5 Throughout this paper, high-income, middle-income, and low-income will refer to the income per capita–based country classification used by the World Bank Group for FY 2016.

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