The Financial Inclusion 2020 campaign at the Center for Financial Inclusion at Accion is building a movement toward full financial inclusion by 2020. Accordingly, this blog series will spotlight financial inclusion efforts around the globe, share insights coming out of the creation of a roadmap to full financial inclusion, and highlight findings from research on the “invisible market.”
One common reason for getting excited about emerging markets in recent years is the notion of demographic dividends, because population growth is generally higher in developing countries with bulging younger age cohorts and few elderly people. This is supposed to be good for economic growth. Demographic dividends are usually explained in terms of higher population growth leading to an expanding working age population, which in turn means that the society can benefit from having more people who are both able to work as well as eager to consume. Such potential benefits have been conceptualized as a “demographic window” in a recent research report by the Center for Financial Inclusion, which argues that financial inclusion has a powerful role to play in capturing such benefits.1
The demographic dividends are seen as especially enticing during the phase in which high population growth is gradually being moderated by a dropping fertility rate, which reduces the growth rate of the very young while the working age population is still large and expanding. This has the virtue of lowering both the child dependency and the old age dependency ratios, with the result that the society is endowed with mostly people of working age with relatively few young and old people to support. Over time, a more mature working age population tends to save more, looking to their future retirement needs; consequently the society’s savings rate is raised, and a larger savings pool can in turn better support the economy’s investment needs. So far, so good.
However, neither high population growth nor bulging young age cohorts can on their own deliver better economic performance. This is easily illustrated with the example of Sub-Saharan Africa. Over the period of 1960 to 1995, it had the highest population growth rate among all the key regions in the world, averaging around 3 percent per year. In many Sub-Saharan African countries, the working age cohorts bulged impressively. Yet, for 18 out of 25 years in this period, the per capita GDP growth was actually negative in Sub-Saharan Africa.2 In other words, in this two-and-a-half decade period, Sub-Saharan Africa’s population grew faster than its economy for 72 percent of the time. Not surprisingly, incidence of poverty in that region rose over the same time period as well. What happened to the demographic dividends? The stark reality is that a society has to invest in and prepare its young people before there are any demographic dividends to be had. Without adequate investment in educating and providing health care for the young; and more importantly, without sufficient investment in the economy to generate productive employment, all that a society can expect are demographic burdens of mounting youth unemployment and underemployment with all the associated social and political malaise. To a large extent, the phenomenon of Arab Spring in 2011 can be interpreted as a consequence of the demographic burdens spinning out of control.
So the challenge is how to ensure that the expanding young population in the developing countries is converted into demographic dividends, not demographic burdens. And with continuing high population growth expected in the developing countries in the coming decade, there will be no middle ground: they will get either demographic burdens or demographic dividends. There are no simple turnkey solutions that can guarantee an outcome of demographic dividends. But financial inclusion, both as an effective tool of empowerment for the poor as well as a means to improve efficiency of capital allocation, must be an integral ingredient in any workable solution. There is nothing more counterproductive than excluding a growing young population from full access to financial services. The negative consequences of lack of financial inclusion are not just economic, but social and political as well.
Yuwa Hedrick-Wong is currently Adjunct Professor at the Sauder School of Business, University of British Columbia, Vancouver, B.C. Canada. Yuwa is a business strategist and economist with 25 years of experience gained in over thirty countries. He is a Canadian who grew up in Vancouver, British Columbia, and spent the last 20 years working in Europe, Sub-Sahara Africa, the Indian Sub-continent, and Asia/ Pacific. He has served as strategy advisor to over thirty leading multinational companies in the Asia/Pacific region. In 2009, Yuwa was appointed as Global Economic Advisor to MasterCard Worldwide.
Have you read?
1. See Looking through the Demographic Window: Implications for Financial Inclusion by Peter Kasprowicz and Elisabeth Rhyne.
2. Estimated with data from the World Bank.