Demographic dividend and Asia's economic convergence towards the US

Abstract

This paper shows the possibility of a middle-income trap for Asia due to demographics. Using panel analyses for 93 countries from all continents for 1970–2011, we show that, first, the speed of convergence to the US in terms of GDP per capita is closely related to the share of working age population – the support ratio – as it drives national saving and various investments. In the case of Asia, the speed of convergence is more elastic to support ratios than other continents, suggesting that the first and the second demographic dividends have been extracted to a deeper degree. Second, fertility – the main driving force of support ratio dynamics – is determined by child rearing costs that are, in turn, a function of the level of GDP per capita relative to the US. Again, Asia's fertility is extremely sensitive to the level of development, implying that economic convergence leads to too high child rearing costs and too low fertility. These findings lead to the possibility of Asia's demography-driven middle-income trap: low fertility eventually turns the positive demographic dividends of the past into negative ones and forces the speed of convergence to slow down, so that the relative per capita GDP stagnates before it fully converges to the US. However, in the meantime, East Asia's declining support ratios and South and South East Asia's increasing support ratios imply that within-Asia convergence may occur for some time. In the long run, economic convergence cannot be sustained without demographic convergence.