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The demographic dividend is a window of opportunity in the development of a society or nation that opens up as fertility rates decline when faster rates of economic growth and human development are possible when combined with effective policies and markets.
Most of Western Europe has undergone a demographic transition in the past four centuries. Prior to the Industrial Revolution, before the 1700s, the European population was stable as both birth and death rates were high. The Industrial Revolution in the 1700s and 1800s led to a population explosion as the birth rate remained high while the death rate fell rapidly. By the 1900s and 2000s, the birth rate dropped to match the death rate, and the population stabilized or, occasionally, began to shrink sightly.
According to scholar Thomas Malthus, population growth is limited by available resources. But if that's so, why is the world's population growing so rapidly in the regions that have the fewest resources? In part, this puzzle can be explained by the demographic transition theory.
The demographic transition theory is a model describing the transition from high birth and death rates to low birth and death rates that occurs as part of the economic development of a country. This transition can be broken down into four stages.
Stage One: The Pre-Industrial Stage
During the pre-industrial stage, societies have high birth and death rates. Because both rates are high, population grows slowly and also tends to be very young: many people are born, but few live very long.
In pre-industrial society, children are an economic benefit to families, reinforcing high birth rates. Children contribute to the household economy by carrying water and firewood, caring for younger siblings, cleaning, cooking, or working in fields. With few educational opportunities, raising children costs little more than feeding them. As they became adults, children become major contributors to the family income and also become the primary form of insurance for adults in old age.
Stage Two: The Industrial Revolution
In stage two, countries begin to industrialize, and death rates drop rapidly. The decline in the death rate is due initially to two factors: improved food production and improved health and sanitation. Food production is improved through more efficient agricultural practices and better transportation and food distribution, which collectively prevent death due to starvation and lack of water. Health is improved through medical progress as well as more advanced sanitation methods, especially water supply, sewerage, food handling, and general personal hygiene.
As death rates fall, birth rates remain high, resulting in a population explosion. Population growth is not due to increasing fertility, but to decreasing deaths: many people continue to be born, but more of them now live longer. Falling death rates also change the age structure of the population. In stage one, mortality is especially high among children between 5 and 10 years old. The decline in death rates in stage two improves the odds of survival for children. Hence, the age structure of the population becomes increasingly youthful.
In Western Europe, stage two occurred during the 19th century with the Industrial Revolution. Many other developed countries entered stage two during the second half of the 20th century, creating the recent worldwide population explosion.
Stage Three: Post-Industrial Revolution
During the post-industrial stage, birth rates fall, eventually balancing the lower death rates. Falling birth rates coincide with many other social and economic changes, such as better access to contraception, higher wages, urbanization, commercialization of agriculture, a reduction in the value of children's work, and greater parental investment in the education of children. Increasing female literacy and employment lower the uncritical acceptance of childbearing and motherhood as measures of the status of women. Although the correlation between birth rates and these changes is widely observed, it is not certain whether industrialization and higher incomes lead to lower population, or whether lower populations lead to industrialization and higher incomes.
As birth rates fall, the age structure of the population changes again. Families have fewer children to support, decreasing the youth dependency ratio. But as people live longer, the population as a whole grows older, creating a higher rate of old-age dependency. During the period between the decline in youth dependency and rise in old-age dependency, there is a demographic window of opportunity called the demographic dividend: the population has fewer dependents (young and old) and a higher proportion of working-age adults, yielding increased economic growth. This phenomenon can further the correlation between demographic transition and economic development.
Stage Four: Stabilization
During stage four, population growth stabilizes as birth rates fall into line with death rates. In some cases, birth rates may even drop below replacement level, resulting in a shrinking population. Death rates in developed countries may remain consistently low or increase slightly due to lifestyle diseases related to low exercise levels and high obesity and an aging population. As population growth slows, the large generations born during the previous stages put a growing economic burden on the smaller, younger working population. Thus, some countries in stage four may have difficulty funding pensions or other social security measures for retirees.
The original demographic transition model has just four stages, but additional stages have been proposed. Both more-fertile and less-fertile futures have been claimed as a Stage Five.