On Pyramids, Bells, and Diamonds: The implications of getting older before getting richer in LAC

Demographics are a fundamental structural determinant of economic and social processes historically. Demographic transitions are accompanied by important changes in economic structure and social organization. In Latin America and the Caribbean, since at least the 1960s, the share of population that is older than 65 in the region has been increasing. At the same time, the share that is between 20 and 34 years old - that is, the young population- stagnated for twenty years, up until 2010 when it started to slowly but firmly decline.

Indeed, both fertility and mortality rates have been declining in the region, resulting in  a process of ageing that has implications for economy and society. This is, by the way, in line with a trend that is developing across the world as the process of economic growth leads to changes in households decisions. This #GraphForThought aims to exploring some implications of this demographic shift on economic  performance.  

The population pyramid of LAC is looking less and less like an actual pyramid, and more like a bell or potentially a diamond. If this trend and pace continues, in 2060 there will be more Latin-Americans older than 65 than young ones (20 to 34 years old). This demographic change will change consumption patterns for goods and services, create new markets, and, perhaps more importantly, affecting labor markets, fiscal structures and the overall economy.

An ageing population has an impact on output per capita through three different channels according to the economics literature. First, by changing the fraction of the population that is active in the labor market (as older workers retire), output should mechanically fall unless there is a change in the productive structure. For example, increasing the capital per worker (as there are fewer workers), might offset the first effect. Increasing productivity is the other offsetting option, as labor scarcity might induce technological innovation, which could also offset the first negative effect. In all cases, this involves basically that economies should become more productive before societies become older.

Made with Flourish

What is the situation of productivity and demographics in LAC? Figure 2 depicts the growth rate of GDP per capita against the growth rate of the share of population older than 65 (in both cases we look at variations over twenty years). The data reveals that, on the surface, until 1996 aging was negatively associated with growth and that starting in 1997 the association turned slightly positive. These two periods are separated by the outbreak of the Tequila crisis (1994) and the Asian Financial crisis (1997) both of which had contagious effects on the region and coincide with the stagnation in the growth of the share of young workers.

Now, what does this mean for a region like LAC? According to the theory outlined above, it would imply that either increased capital per worker or Total Factor Productivity (TPF) (or a combination of both) counteracted the negative effect of a smaller labor force. However, there is plenty of evidence that TFP in LAC is stagnant. It is thus likely that increased capital per worker might be the reason why we do not a decline in GDP per capita growth rates.

Certainly, this is not a definite conclusion on the matter but an invitation to think about the challenges and opportunities that an ageing population could bring, and its implications on inclusion, productivity and resilience in the region.