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March - April 2000

A demographic opportunity
Latin America is entering an unusual era when proportionately more workers will provide for fewer children and retirees



By ROGER HAMILTON

Strolling through the dusty streets of a Central American village, a visitor gets the overwhelming impression of children: children playing soccer in an empty lot, children peering from doorways, streets full of children in school uniforms, mothers holding children, children holding children.


Children entering the work force today will have fewer dependents to support (Photo: David Mangurian - IDB)

Latin America is famous for being a demographically young continent. But that impression is in the process of becoming obsolete. Over the last three decades the region’s fertility rate has dropped by half, from an average of six children per woman to three. In some countries, such as Uruguay, Barbados, and Argentina, ratios among the young, adults and the elderly are already similar to those of many industrialized countries. Fertility is forecast to continue its steady decline in the coming two decades.

This evolution will produce a unique demographic phenomenon in Latin America. As today’s still-numerous teenagers and children enter the work force in the coming 20 years, the number of working-age adults will temporarily exceed the number of dependent children and the elderly (because the new generation of workers will tend to have smaller families than their parents did). Eventually, as these workers retire and a comparatively smaller number of young people enter the work force, dependents will once again outnumber workers.

Therefore, during the next 20 years, Latin American countries have the potential to benefit from a very favorable "dependency ratio," because proportionately more workers will be earning money and paying the taxes necessary to educate children and support the elderly. The impact of this phenomenon could be at least as profound as the rise of globalization and the spread of information technology. But according to Development Beyond Economics , a recently published IDB report, only those countries that make the right policy choices now will be able to benefit from this so-called "demographic window of opportunity."

"Even if demographic conditions are right," the report’s authors state, "wrong policies or unexpected negative shocks could counteract any potential benefits." For example, if the growing numbers of young people entering working age do not find jobs, many will turn to violence and crime. If countries and families do not save enough, they won’t have the resources to support the elderly. If children do not get a better education, they will not qualify for productive jobs and will miss the chance to improve their living standards.

Policymakers who ignore demographics will do so at their peril. "Without understanding what demography is telling them, they are piloting their countries blindly, without instruments or even charts. And they will almost certainly end up planning for yesterday’s world and not tomorrow’s," the report states. If Latin America does not take advantage of this window of opportunity, it could pay the price for much of the 21st century.

Faster growth. Economic reform heads the policy agenda for translating the changing age structure into higher living standards for the region’s people. By 2020, 70 percent of Latin America’s people will be of working age, and a large portion of them will be in their most productive years. The key to absorbing these individuals into the economy is keeping markets open and encouraging growth.

The effect of economic liberalization can be dramatic. In an econometric analysis, the report describes a scenario in which a country’s working-age population is growing at 3 percent a year. If the country had a closed economy, the increasing number of workers would only boost its gdp by 0.5 percent a year. But if it were open, the new workers would boost growth by 1.5 percent. Sound policies, says the report, can triple the size of the demographic dividend.

The cost of not embracing these policies will be high. Workers will be condemned to low-productivity jobs and low incomes, says the report, "with the resulting frustration and potentially dramatic consequences for social cohesion."

Worker protection. As economic reforms proceed and Latin America becomes more open and competitive, the region’s economies will become more dynamic. More people will be changing jobs at any given time, so the risk of becoming unemployed will become more widespread. Labor reforms will be needed to accommodate this increasing work force mobility. At present, only a minority of workers with regulated labor contracts enjoys what the IDB report calls "notoriously high" levels of employment protection, even compared with workers in developed countries. But the vast majority of workers have no job protection whatsoever.

How can countries protect more of the work force without stifling the creation of new jobs in the most dynamic and productive sectors? First of all, new systems to support incomes must recognize that all workers, and not just the poor, need help in coping with economic shocks that can put them out of a job.

Crime prevention. There is another reason to create jobs and provide employment security: crime prevention. The number of young people—the age group most apt to commit crimes—peaked during the 1990s and will remain high during the next 20 years.

Creating economic opportunities for young people is one way to prevent crime. But there are others. Instead of focusing almost exclusively on expensive measures to control criminals, such as police and prisons, public agencies should attack the roots of the problem. Promising approaches include helping individuals and families by providing prenatal and postnatal care for high-risk single mothers, education programs for high-risk children and teens, and training in conflict resolution. Several Latin American cities have had success with programs that increase citizen involvement such as neighborhood-watch groups and business improvement districts aimed at increasing vigilance and providing work opportunities. Other relatively cost-effective measures include installing better street lighting, controlling access to weapons, passing and enforcing drinking- age laws, making police more visible and increasing the probability of punishment.

Finally, the machinery of law enforcement needs an overhaul. In nearly every Latin American country, says the IDB report, corruption, brutality and repression have resulted in low trust, low reporting rates, few crimes solved, and an overall perception of impunity.

Better education. While the changing age profile might make the streets a little less secure, it could be a boon for the classroom. As the proportion of children in the overall population shrinks, countries will have a golden opportunity to improve education. Instead of merely trying to keep up with constantly rising enrollment, school systems will be able to focus on raising the quality of instruction for a student population that should begin to stabilize. Similarly, parents will be able to spend more on their children’s upbringing, because they will have fewer dependents, and also because women with diminished child-raising responsibilities will be able to go out and get jobs. Meanwhile, proportionately higher numbers of working-age people will be paying more taxes, some of which can be spent on education.

But spending more money per student will not improve education automatically. The IDB report calls for a concerted drive to improve quality in the schools, a campaign in which parents will occupy the front lines. But first, parents must be armed with better information about their schools’ performance, from both on-site evaluations and standardized national test scores. With this data in hand, parents can lobby for improvements and take an active role in running the schools.

Local school administrators also need more control over how money is spent and in hiring, training and promoting staff. According to the report, the central government, long the lone decision maker in the business of education, should get out of the business of running school systems and concentrate on generating information about educational performance, evaluating progress and setting quality standards.

Healthcare reforms. The changing age profile will also expose the need to reform health systems in the region. Latin America will be experiencing a rapid epidemiological transition in which a greater proportion of people will suffer from noncommunicable diseases, such as diabetes, heart disease and cancer, which are more expensive to treat. As workers age, countries will face additional expenditures for treating the elderly, a category of care that costs roughly three times more on a per capita basis than care for the rest of the population.

What can be done to avert the health care squeeze? As with the issue of public safety, prevention must be a watchword in the coming years. Countries where young people still make up a large part of the population will have to continue campaigns against infectious diseases and intensify nutritional education, prenatal screening and other health promotion activities. Countries with aging populations will need to step up education about the risk factors leading to diabetes and high blood pressure and take steps to reduce smoking and alcohol abuse.

Another response must be to decentralize health services. National health ministries must continue to shift from providing healthcare services to regulating and leading a health sector landscape populated with a variety of providers—public, nonprofit and for-profit. For example, rather than establish more health facilities to help the poor, the public sector should subsidize the demand side, by buying insurance for the poor as a means of providing incentives to private sector providers.

Latin America is not the only region with an enormous stake in the outcome of its demographic transition. Latin America’s working-age population is increasing at the same time that populations in developed countries are aging. In the coming years, Latin America will have a large and expanding work force, while in the developed countries the stock of savings will increase. In a globalized world, both groups of countries will benefit from flows of capital entering into Latin America. In Latin America, this capital will raise the productivity of a growing number of workers while in the developed countries, investors will receive good returns to help finance their retirement years.

In today’s world, even demography is a global subject. How Latin America manages the enormous changes already underway will mean a great deal for the people of the region as well as for countries around the world.



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