Does demography rhyme with knowledge?

We often hear that Latin America has a young population and that the region is yet to enjoy the benefits of that youth as an instrument to boost economic growth. Although young – the average age is 29.2 years versus 41.6 in richer economies – there is a relatively rapid change in the population’s demographics.

While there are large differences between countries, there are common demographic trends. Consider the cases of the three largest economies, Argentina, Brazil, and Mexico, which together gather about 2/3 of Latin America’s population and GDP. In these three countries, the population growth rate is slowing down drastically, the fertility rate is converging with that of richer economies, and the share of the elderly population as part of the total population will increase significantly in a relatively short period. But there is another important common feature: the demographic dividend is already in an advanced stage.

Thus, the benefits of the demographic dividend should already be reflected in the per capita income dynamics. But that is not happening. The annual GDP per capita growth rate of the three countries has stood around 1% over the past 40 years and this pattern has not changed over the past 10 years.

The problem is that, as the demographic transition progresses, the challenges of economic growth for Latin America are increasing, for two reasons. The first is that the expansion of the workforce, which was the main component of growth in recent decades, will have to slow down and eventually stagnate. The second is that the increase in the costs of pensions, health and social assistance resulting from an ageing population requires new sources of financing, which could put pressures on fiscal accounts, savings, public investment and interest rates.

In addition, new challenges for growth, such as globalization, technological changes and business models, must be taken into account, which make the price of labor lose relevance as an appeal to attract investment and to become part of global value chains.

What can be done in this situation? Each country, at its own pace, must promote a transition from the current growth model based on including more people in the labor market, towards a model in which knowledge, productivity and competitiveness gain relevance as drivers of growth. This is a long but very rewarding journey.

At least five types of policies should be considered. The first group should aim to promote an increase in labor productivity. In the end, since the region won’t have more people to produce more, the solution is doing more with the same amount of resources. The opportunities to raise productivity are plenty and are associated with the proverbial half-empty glass, which allow for substantial gains in relatively short timeframes. With the decline of the child and young population derived from this demographic change, we will be able to focus our attention on improving the quality of education, which will have huge repercussions.

Another action is to devise continuous and distributed vocational training programs throughout the productive lifecycle, which allows not only aging workers to remain productive, but also to be able to adapt to technological changes. Devising policies aimed at formalizing and improving labor skills in SMMEs, which is where most workers are active and where productivity is especially low, is another promising strategy.

A second set of actions deals with increasing competitiveness. In the end, doing more of the same will no longer be enough to raise income levels as needed by the growing rate of dependent elderly population.

Skills and conditions will need to be developed for young people to produce higher value-added, world-class goods and services. Tackling this challenge requires more investment in science, technology and innovation. These knowledge efforts must be coupled with sectoral and international trade policies, regulatory reforms, infrastructure investment policies, and policies to attract foreign investment.

The third group deals with active employment policies that optimize production, generation and distribution of income in the labor market. The fourth set of actions aims at attracting immigrants and nationals living abroad, so that they can contribute with their knowledge and work skills, thus adding value. Finally, these policies should be coupled with reforms in pension and social security laws consistently with increased life expectancy and economic needs and conditions of the countries.

As the case of South Korea suggests, modest growth and demographic changes should not necessarily be seen as obstacles to development. Although phonetically incorrect, demography does rhyme with knowledge. In the end, only those countries willing to combine their demographic transition with a knowledge agenda will be able to cruise through it.