In emerging markets, reaping the economic benefits of changing demographic structures - the demographic dividend - is complex. Huge demands from exceptionally young populations, including good quality education and healthcare, as well as access to financial inclusion to boost entrepreneurship and thus enable job creation for low-income households are often hard to meet. In countries with rapidly aging populations other pressures are building, including social transfers and large health expenditures, particularly where in the past the benefits of a young population where not fully taken advantage of.
Capturing the demographic dividend
The relationship between demographics and a country’s affluency is known as the demographic dividend. Shifting demographic age structures, by which countries show a rapid decline in fertility and mortality rates, can lead to a larger working age population and fewer children to support. This frees up resources for investments in an economy and leads to a higher national income. Divided by a relatively smaller total population, countries will reach a higher income per capita - a measure of affluency of a country. A demographic dividend is transitory, but if realised, it creates a positive feedback loop that further stimulates domestic production, job creation and innovation. Not all countries, however, are equally well positioned to capitalise on this dividend. The Philippines has a favourable demographic structure to capture the demographic dividend but still needs to do more in improving the quality of its workforce - with better health and education - to make the most of it. China and South Africa are in a relatively weak position, for reasons that are explained below.
Removing hurdles in China
China’s aging and shrinking population is seen as one of the drivers of the country’s economic slowdown over the past years. The government is taking measures to increase the size of the working-age population. The one-child policy, in place for several decades, has been abolished a couple of years ago. Couples now even have the option to have a third child. The government recently also increased the retirement age and is also avidly investing in automation and education to increase labour productivity. The real challenge in China, however, is increasing the participation level. The large rural population is a huge potential for China’s urban workforce, but due to its hukou status finds itself on the sidelines. The hukou system determines where residents can access credit, government jobs, education, subsidised housing, welfare and other social services. Under the system, individuals are either categorised as urban or rural status. Abolishing or reforming this system would allow China to use this potential and still seize the demographic dividend.
Demographic challenges in Africa
Africa’s population has reached 1.4 billion, around 18% of the total world population. In the coming decades, Africa is expected to have the highest rate of population growth among major areas. The working-age population is expected to grow faster than any other age group compared to other regions. Fertility rates are taking longer to fall than elsewhere and several countries still have the highest fertility rates in the world. The World Bank has pointed out that only a quarter of African men and just 10% of women will get jobs in the formal labour market before they reach the age of thirty. Given the demographic pressures, many African countries share similar challenges when trying to improve the quality of their workforce. These include the improvement of health and education provisions, as well as access to financial inclusion for new job entrants. The case of South Africa is well documented, showing that education attainment improvements and a broader reach of financial inclusion both enable capturing the demographic dividend. South Africa, as many other countries in the region, was an early adopter of digital technology thanks to its tech-savvy young population. This shows the potential of a young work force if given the right opportunities. Time is ticking though and the window of opportunity is starting to close for many African countries.
Integrating demographic trends in investments
Changing demographics create attractive investment opportunities. Companies using demographic foresight and well positioned to capture new population trends will have an advantage over their competitors. Integrating demographics in investments means companies need to have a long-term vision. Investing in sectors including financial inclusion helps to activate the labour force, while healthcare and appropriate housing provide the services needed to different segments of the population across the world.
Triodos Investment Management’s financial inclusion funds invest in non-listed companies in emerging markets, including Baobab in Senegal and SAFCO Micro Finance Company in Pakistan. Both companies address the financial needs of low-income households and help create jobs in countries with a large workforce, paving the way to benefit from the demographic dividend.
Our listed equity and bond portfolios include Vonovia, and Sonova. Vonovia is a residential real estate company in Europe, an example to follow in those emerging economies where housing needs of aging populations are growing. The company is committed to building more senior-friendly apartments with a positive community spirit, while supporting climate protection. Sonova is an innovative healthcare company active in more than 100 countries, aiming to increase the number of hearing aids sold in low-and middle-income countries. Both companies have made the demands of a changing population an important part of their business strategy.
In conclusion, understanding and integrating demographic trends into investment strategies is crucial for navigating the shifting global landscape. Countries with young, growing populations present opportunities for investments in education, healthcare and financial inclusion, while aging populations create demand for sectors like healthcare and automation. The ability of nations to harness their demographic dividend depends on thoughtful policies and strategic investments in human capital. Investors who recognise the long-term potential of these shifts will be well-positioned to benefit from the evolving needs and opportunities presented by demographic changes worldwide.
