The effect of demographic bonus on economic growth in vietnam and 5 selected countries

UNIVERSITY OF ECONOMICS

INSTITUTE OF SOCIAL STUDIES

HO CHI MINH CITY

THE HAGUE

VIETNAM

THE NETHERLANDS

VIETNAM-NETHERLANDS PROGRAMME FOR MASTER IN
DEVELOPMENT ECONOMICS

THE EFFECT OF DEMOGRAPHIC BONUS ON
ECONOMIC GROWTH IN VIETNAM AND 5 SELECTED
COUNTRIES

By
BUI THAO VY

Academic supervisor
Dr. NGUYEN TRONG HOAI
This paper was submitted in partial fulfillment of the requirements for Master’s degree in
Development Economics

Ho Chi Minh City, November 2013


ACKNOWLEDGEMENTS

First off, I would like to thank the entire VNP’s lecturers for their profound knowledge, inspiring
spirit and enthusiasm in teaching process. Especially, I would like to send my most extreme
gratitude to Dr. Nguyen Trong Hoai for sharing his professional understanding, perceptive
guidance, precious advice and elaborate comments. Besides that, I would like to thank Dr.
Nguyen Thanh Tra and Dr. Luca Tasciotti for their valuable recommendations in the early stage
of Thesis Research Design.
I would like to express my special thanks to my classmates in MDE17, who contributed a
delighted academic atmosphere and supported me a lot in the learning process. I feel very lucky
when being acquainted and shared unforgettable memories with all of you.
I also would like to thank all staff in VNP office for their warm-hearted assistance.
Most of all, I would like to thank my parents and my husband for their encouragement and
affectionate care.

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ABSTRACT

Demographic change influences to both economic and society at different aspects, especially in
the demographic bonus period. These changes are not simple in creating the shift in total
population, the age structure but also establishing the new working age cohort. Therefore, the
role of demographic in economic growth and social stability could not be denied.
The purpose of this thesis is to access the effects of demographic bonus to economic growth
and to investigate the gap between countries at different demographic bonus stage. The
subjects used in this paper include Vietnam and five collective countries in East and Southeast
Asia.
This thesis identifies the factors of demographic bonus that affect to economic growth using
panel data of 6 East and Southeast Asian countries in the period 1995-2010 through fixed effect
and panel least squared method. The demographic bonus dummy variable is also taken into

account in this paper in order to examine the gulf between countries have experience in this
period and countries have not yet confronted with this unique stage of demographic history. It is
found that young dependency ratio and labor participants rate have a strong impact on
economic growth. In addition, all three channels that demographic bonus creates benefit have
influence to the economic growth, especially the channel of human capital. Dummy variable is
also explored that have a significant meaning in the regression model. This proves that there is
a difference in income between countries at distinguishes stage of demographic bonus.
Key words: Demographic bonus; panel data; fixed effects; dummy variable; East and
Southeast Asia; Vietnam

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TABLE OF CONTENTS
ACKNOWLEDGEMENT…………………………………………………………………………………2
ABSTRACT……………………………………………………………………………………………….3
CHAPTER 1: INTRODUCTION
1.1 Problem statement…………………………………………………………………………………...9
1.2 Research Objectives………………………………………………………………………………..10
1.3 Research Questions………………………………………………………………………………..10
1.4 Justification of the thesis…………………………………………………………………………...11
1.5 Organization of the thesis………………………………………………………………………….11
CHAPTER 2: LITERATURE REVIEW FOR DEMOGRAPHIC BONUS
2.1 Key concepts………………………………………………………………………………………..13
2.2 Theoretical literature………………………………………………………………………………..14
2.3 Conceptual framework……………………………………………………………………………..16
2.4 Empirical literature………………………………………………………………………………….19
2.5 Chapter remarks…………………………………………………………………………………….27
CHAPTER 3: DEMOGRAPHIC TRANSITION IN EAST ASIA AND VIETNAM, DATA AND
METHODOLOGY

3.1 Demographic in East Asia and Vietnam………………………………………………………….29
3.1.1 East and Southeast Asia………………………………………………………………………...29
3.1.2 Vietnam……………………………………………………………………………………………32
3.2 Data…………………………………………………………………………………………………..34
3.3 Analytical framework……………………………………………………………………………….35
3.4 Research methodology…………………………………………………………………………….36
3.5 Chapter remarks…………………………………………………………………………………….44
CHAPTER 4: FINDINGS AND DISCUSSIONS
4.1 Descriptive statistical analyses for demographic bonus………………………………………..45
4.2 Empirical results…………………………………………………………………………………….46
4.3 Chapter remarks…………………………………………………………………………………….50
CHAPTER 5: CONCLUSION AND POLICY IMPLICATIONS
5.1Conclusion……………………………………………………………………………………………51
5.2 Policy implications…………………………………………………………………………………..52
5.3 Limitations and directions for further studies…………………………………………………….54

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5.3.1 Limitations…………………………………………………………………………………………54
5.3.2 Directions for further studies…………………………………………………………………….55
REFERENCES…………………………………………………………………………………………..56
APPENDICE……………………………………………………………………………………………..62

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LIST OF TABLE
Table 2.1: Summary of empirical studies……………………………………………………………24
Table 3.1: Vietnamese age structure, 1979-2009…………………………………………………...33

Table 3.2: Vietnamese population projection, 2010-2050…………………………………………..33
Table 3.3: Data sources……………………………………………………………………………….34
Table 3.4: Variables’ expected signs…………………………………………………………………43
Table 4.1: Data descriptive statistics…………………………………………………………………45
Table 4.2: Estimation results…………………………………………………………………………..48

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LIST OF FIGURE
Figure 2.1: Relationship between demographic bonus and economic growth…………………...17
Figure 3.1: Share of Working-age population in East Asia and selected countries……………...31
Figure 3.2: Economic growth in 6 selected countries………………………………………………32

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ABBREVIATION

CPI: Corruption perceptions index
DB: Demographic bonus
GDP: Gross domestic products
HDI: Human development index
IMR: Infant mortality rate
IV: Instrumental variables
OLS: Ordinary least squares
UN: United Nations
UNFPA: United Nations Population Fund
TFR: Total fertility rate
TI: Transparency International

TLS: Two stage least squares
WB: World Bank
WDI: World development indicators

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Chapter 1: Introduction

1.1 Problem statement
The transition of population age structure is one of the top concerns of not only demographers
but also the economists all over the world because many direct and indirect relationships
between demographic factors and economic growth will contribute to form the prosperity and
the wealth of a nation. The shift in age structure will be different from country to country and
different from time to time. Many developed countries in Western Europe and North America
reached their demographic bonus in late 19th and early 20th century ( Lindh and Malmberg,
1999) and this period also could be seen as the noticeble mark in their process of motivate
economic growth. Adversely, some countries in Asia and Africa could not exploit the ‘real bonus’
from demographic bonus period and this problem become an encumbrance in their way of
economic development. Therefore, the effect of demographic bonus on economic growth is
ambigous if countries which have experience in this period do not have a right combination of
appropriate policies. This issue is mentioned in Bloom and Canning (2001) that demographic
bonus is not automatically come with free bonus.
With the smoothly co-ordination of social and economical issues in the right policies,
demographic can accelerate the economic growth through the channels of public health,
education and economic policies that foster the labor market, trade openness and capital
accumulation from savings. Some countries in East Asia which have experienced the
demographic bonus period and succeeded in alleviating poverty problem (Tahir, 2011) could be
lessons for Vietnam in the process of population transition and economic growth.
According to data and calculation from the United Nations Population Fund (UNFPA), Vietnam

now is in the period of demographic bonus. This period will last within 30 years in average and
is considered as a unique event in the long demographic history of a given country. As a result,
Vietnam should afford in making suitable policies, governor management ability and
coordinating between different parts of economy to take benefit from this rare period. Besides,
lessons from the previous successful countries in experiencing the demographic bonus period
could be taken into account.

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The early and recently researches on the relationship between demographic factors and
economic growth both use variety of methods and they also lead to different results. However,
the proportion of studies which support the effect of demographic factors, especially
demographic bonus on economic growth take a larger part than the contrary studies and the
familiar methods used in these papers are descriptive statistic or econometrics method. Thanks
to the heritance of the previous studies, this paper examine the effect of demographic factors on
economic growth especially in the period of demographic bonus in East Asia and test whether
there is any difference in countries which experienced demographic bonus with countries
without demographic bonus. In addition, the effect of demographic policy on economic growth in
the bonus period aslo put into consideration. After having draw the impact of demographic
factors and policies on economic growth, the policies and lessons for Vietnam will be
implemented.

1.2 Research objectives
The specified objectives of the study are to
(i) Examine the effects of demographic factors on economic growth in 6 selected
countries included Vietnam cover the period from 1995 to 2010
(ii) Test the difference between the countries which has experienced in the demographic
bonus period and the countries without this period
(iii) Draw some policy implications that Vietnam could learn from the previous successful

countries

1.3 Research questions
This thesis is intended to deal with the main research question is “What is the effects of
demographic bonus on economic growth?” In order to answer the main question, two subquestions will be employed elaborately (i) Does age structure significantly impact to economic
growth? and (ii) Do demographic bonus and its channels affect to economic growth
simultaneously?
The scope of the paper will be limited in using the data of 6 selected countries in period 19952010 to examine the effect of demographic bonus to economic growth. However, this collection
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was based on the different demographic bonus period among countries and these countries
have some develop patterns similar with Vietnam. In turn, Vietnam could learn from both
successful and unsuccessful countries in the demographic bonus period.

1.4 Justification of the thesis
This thesis attempts to embrace the effect of demographic factors, especially demographic
bonus on economic growth. Based on this result, the paper will contribute to the researches of
the relationship between economic and demographic bonus which are not attached special
importance as it deserves.
This study also try to use data of 5 selected countries which have some familiar economic
characteristics with Vietnam but different in demographic transition and growth level. In addition,
the exploitation in updating data to the year 2010 for each country and the combination of
different demographic variables from previous studies will expand the information about the
trend of demographic transition.
The demonstration from the thesis is useful for not only demographists but also policy makers.
Hence, they are able to have a comprehensive overview for the relationship between
demographic bonus and economic growth. As a final result, the proposal of practical policy
recommendations will be considered in order to accelerate Vietnam economic growth and
improve living standard as well.

1.5 Organization of the thesis
The rest of this study is organized into four chapters. Chapter 2 presents the key concepts used
in the paper, theoretical literature of the impacts of demographic bonus and its channel on
economic growth, conceptual framework and empirical studies which were considered at both
global and country level as different methods. Chapter 3 shows an overview of demographic
transition in different regions in the world and Vietnam, data, research methodology and
analytical framework. Chapter 4 will analyze the empirical results from different models and
specify the effect of demographic bonus as well as other demographic factors on economic
growth and give some quantitative analysis of these elements. The conclusion, suggestion of

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some practical policy, limitation of the study and the further researches will be discussed in the
final chapter.

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Chapter 2: Literature reviews for Demographic Bonus

2.1 Key concepts
Demographic bonus (DB) is a special stage of demographic transition in which a numerous rural
society with high fertility and mortality rates changes to urban industrial society with low fertility
and mortality rates. At an early stage of this process, fertility rates fall, leading to fewer young
population in the total size. As a result, the labor force temporarily grows more rapidly than the
population dependent on it, freeing up resources for investment in economic development and
family welfare during this bonus period occurs. Besides that, thanks to the development of
technology and science, the human well-being will be improved and the life expectancy

becomes longer than ever before. Other things being kept constant, per capita income grows
more rapidly and the country that experienced this situation will receive the benefit in both
economical and social aspect (Ronald Lee and Andrew Mason, 2006)
In another definition, Demographic Bonus is revealed by United Nations (2008) as occuring
when total dependency ratio including children (aged 0-14) and the elderly (aged 65 and over) is
less than 30 % and 15% of total population, respectively. This means that a person of nonworking age will be supported by more than one working-age persons. Demographic bonus are
also known as Demographic Dividend, Demographic Gift or Demographic Window of
Opportunity.
In this research, the definition of United Nations (2008) will be used for calculation of
Demographic Bonus period. With a clear and precise ratio defined by United Nations, it would
be more convenient for making comparisons among countries and using in the econometrics
model later.

The terms economic growth and economic development sometimes are used misleadingly, but
they are basically different. Economic growth is considered as an increasing in national or per
capita income and product without any reasons. A country, however, wants to achieve
economic development, it has to satify much more conditions including improvements in health,
education, environment and other aspects of human welfare. This means that economic
developmenent belongs to a higher level and a larger concept than economic growth but it could
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not be dissent that no sustained development can occur without economic growth. In this study,
we just take into account with the relationship between demographic bonus and economic
growth.

2.2 Theoretical literature
The linkage between population, labor force and economic growth was mentioned from the
early stage of economic science. Despite the lack of a dominant theory, alomost ecomic growth
studies argued that the differences in income level across countries are due to differences in

many elements from endowment factors to productivity factors and technology, a combination of
any two or all of them. Nevertheless, all economic growth theories, whether in primitive or
complex form, always mention about the role of labor force.
This relationship was explored by many famous economists under different models (Adam
Smith 1776; Harrod Domar 1939-1946; Cobb Doughlas 1947; Solow 1956). In these theories,
labor and population played as an essential factor beside capital stock and technical level in
economic growth. Basically, the core of every economic growth models lies behind a series of
production function. At the level of microeconomics or individual firms, these production function
relates the number of employees and machines, land or real estate comparing with the output of
the firm. At the national or economy level, production functions describe the relationship
between country’s output and its total labor force and capital stock. One of the famous model
which was based on these production functions is the fixed coefficient production function of
Harrod – Domar (1939-1946). This model also concerned about labor and capital in the
relationship with economic growth. However, the weaknesses of Harrod – Domar are the rigid
assumptions of fixed capital-to-labor, capital-to-output and labor-to-output ratios. As a result,
these assumptions makes the gap between the model and real world more broaden because
that it is very strict to keep capital, labor and output grow at an exact same rate. Until Solow
(1956), the fixed-coefficients production function was dropped and developed into neoclassical
production function. Like Harrod-Domar and other previous economists, the main elements of
Solow model were labor and capital. But these factors became more flexible and it could
substitute for each other in the economy and growth process. So according to the neoclassical
growth model, population growth would prevent economic growth because of capital dilution.
However, Keynessians and recent studies have challenged the above opinion, they proved that
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population growth has no effect on economic growth if the growth rate of the total population
was used as the only demographic variable in the economic growth models. In addition, these
economists plused that the demographic factors will matter the level of per capita income,
especially tha age structure, the human capital and life expectancy (Coale & Hoover, 1958;

Bloom & William, 1998).

From the point view of the eocnomists who have supported the idea of demographic factors
affecting the income level, demographic bonus could be archieved through three main
channels: labor supply, savings and humand capital

The channel of labor supply is delivered through the changes in population size and age
structure. At the demographic transition stage, the ratio of working age population to total
population will increase once children born during the earlier stages of this process enter in the
labor force which brings potential workers and thus lowering the ratio of dependent population.
Demographic bonus may also have contributed to economic growth by providing women an
opportunity to participate in the labor market. Women could find themselve a job because of
smaller number of children to take care of (Bloom, Canning and Sevilla, 2002).
In the second channel, an analysis of the relationship between the high fertility rate and the
savings rates by Coale and Hoover (1958) explains why the aggregate savings rates have been
depressed by higher fertility with the resulting higher proportion of children in the total
population. In another paper represented by Leff (1969), the impact of dependency ratios on
national saving rates was corroborated. Recently, Kelly and Schmidt (1996) argued that working
people tend to have a higher level of monetary output and also higher level of savings between
the ages of 40 and 65 which ultimately make an overall increase in the national savings. In other
studies of Higgins and Williamson (1997) and Lee et al. (2000), they illustrated the same results
with Kelly and Schmidt and stressed that in one way these savings can be further risen up by
having less number of children.
The final channel, human capital could be seen at the last but not least factor that accompanies
with demographic bonus process and contributes to the economic growth. This element is
characterized by increased life expectancy and having fewer children in connection with the
improved health of women. More explicitly, demographic bonus creates human capital in three
ways. Firstly, with the longer life expectancy, the attitudes of people tovwards education, family
15

future, retirement and position of women will be changed as a better way. Secondly, more
educational opportunities are created for fewer children which in turns make them more
productive and effective employers in the future labor force. Lastly, the decrease in number of
children in the family and society finally enhances the health of women as well as their
participation in the labor force, which contributes to the economic growth (Kalemli – Ozcan,
2002). Other papers concerning this aspect are Croix and Licandro (1999); Ryder and Weil
(2000) and Zhang and Lee (2003). They claimed that there was always a trade-off between
quantity and qualtity of labor force during the demographic transition period. However, a country
will receive the highest benefit if they have a well preparation for quality of population while
waiting for demographic bonus occurs.
The impacts of these three channels above on economic growth could be reviewed through
famous theories about economic growth. If the relationship between labor supply and level of
income could be found in any economic growth theories from the early stage of economic
science to recent modern eocnomic models, the linkage between savings and economic growth
have been mentioned in many researchs. As is well known, the Solow – Swan models (1956)
predict that a rise in the savings rate positively affects the level of per capita income. The same
results illustrating the connection between savings and per capita level have also been
presented in other studies under several different levels (Sato, 1966; Barro and Sala-i-Martin,
1995; Romer, 1996). The role of human capital in economic growth have been emphasized in
both theoretical and empirical studies, such as those of Nelson and Phelps (1966); Lucas
(1988); Romer (1990); Barro (1991); Sala-i-Martin (1992) and Barro & Lee (1992). These
studies suggested that all of three channels above were important determinants of growth
process. So, the relationship between demographic bonus and economic growth could be
demonstrated indirectly through three essential determinants of economic growth: labor supply,
savings and human capital.

2.3 Conceptual framework
The contribution of demographic bonus to economic growth is an indirect stimulation through
three main channels: labor supply, savings and human capital which directly affect to the per

capita level. The relationship between demographic bonus and economic growth through these
channels are illustrated in the diagram below.

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Figure 2.1: Relationship between demographic bonus and economic growth

Bloom, Canning
(2002)

Demographic
Bonus

Kelly & Schmidt
(1996)

Harrod Domar
(1939-1946)

Labor Supply

Coale and
Hoover
(1995)

Savings

Kameli &
Ozcan (2002)

Economic
Growth

Barro & Lee
(1992)

Human Capital

Other factors: Openess to
trade, Corruptions
perceptions index,…

Demographic transition will operate continuously and it reaches demographic bonus point when
the dependent population only accounts less than the working-age population. Children born in
the early stages of the transition will enter the working-age population automatically, and this
mechanism creates the potential for labor market in particular and economy as a whole. In
addition, this movement of youth population will lower the ratio of dependents to non dependent
people. In the other hand, women would be released from the responsibility of familial activities
because of the fewer number of children they have to take care. This innovation provides
women more opportunity to participate in the labor force. The combination of two impacts above
eplains for the increase of labor supply when demographic bonus phenomenon occurs.

17


The findings of Kelly and Schmidt (1996) shown that the young and elder had a tendency of
consumption higher than the level of whom in working-age population. Besides that, improved
health and longer life expectancy make saving more important. A healthy person has to plan for
the future if he or she wants to maintain the standard of living in the retire period ahead.

Moreover, with the baby-boom generation in the previous stages of demographic transition, all
government seem to have many policies to tighten the fertility rate growth. So, with the fewer
children born, those countries and families which experienced the demographic bonus period
could save more instead of investing in young people as the previous generations.
Demographic bonus may also affect on human capital because of decreased mortality and
improved health. Parents with fewer children now pay more attention to invest in education for
their sons and daughters. As a result, labor force with higher educational level and longer life
expectancy would become more productivity and in turn receiving higher wage and better
standard of living. It is obviously seen that the economy will absord these merits and last the
growth process longer.

In the right hand side of the conceptual framework above, the three mechanisms including labor
supply, savings and human capital, in turn, are the important elements in the contribution of
economic growth. The linkages between these elements and economic growth have been
discovered in many studies along the development of economical science. The first factor –
labor supply is one of the most essential that occurred in most of economic models from the
early stage of economic history to nowadays. The most notably works in this field included the
literature by Harrod Domar (1939-1946), Solow (1956), Lucas (1986), Romer (1989) and
Mankiw & Weil (1992). These efforts mainly tried to examine the relationship and how to extent
the labor force impact to the economic growth. The second factor – savings, is also an
indispensable part in any economical research. The influence of savings on per capita level
could be found in some typical works of Solow & Swan (1956) and Barro & Sala-i-Martin (1995).
The final factor – human capital, is a new element that has been received more and more
concerning nowadays because it becomes a vital key in the openning the door of economic
growth.
However, there are many other different determinants affected to the economic growth. So, in
order to examine the impact of demographic bonus on economic growth under comprehensive
point of view, it would be better if the other factors are taken into account with demographic
factors simultaneously.
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2.4 Empirical literature

There is a large volume of published studies describing the role of demographic factors on
economic growth since a phenomenon called “East Asian Miracle”. The term miracle was used
to the portion of economic growth that could not be explained by conventional factors such as
expanding trade openess, high saving rates, higher level of education, and effective
macroeconomic policy. These factors were identified as key element of rapid economic growth
in East Asia. The role of the change in age structure has been shown to have a much more
significant effect on economic growth throughout Asia than these above factors. This means
that demographic characteristic could be seen as a miracle ingredient in the marvel economic
growth of East Asia (Bloom & Williamson, 1998).
At the global level, the study of Malmberg and Lindh (2004) used age structure projections to
forecast the economic growth of different parts of the world. The focus in their research is to
evaluate the forecasting performance of demographically based models and ultimately answer
the question about the gaps between the developed and developing world. The authors
estimate demographically based models of income as a function of some important
demographic factors including age structure, urbanization and life expectancy. The combination
of the results from their estimation and UN projections of age structure will be exploited the
forecast global income levels up to 2050. They collected averaged data of 82 countries for the
period cover from 1950 to 1990 in the regression step and then use this result for the next step
to forecast the income of different countries throughout the world. In their study, per capita
income was used as proxy for economic growth and age structure as proxy of demographic
transition, life expectancy and mortality rate as proxy for human capital. In detail, the model they
have chosen to estimate contains per capita income as dependent variable and life expectancy,
population size of the largest city, age structure and mortality rate as independent variables.
After constructing and estimating the demographically based model, they also created
interaction variable between age structure and life expectancy to capture the different levels of
mortality between countries. The main findings in Malmberg and Lindh ‘s study is that countries

with the shorter life expectancy, the effect of age structure on income level depends on the
balance between children and young adults and countries with higher level of life expectancy
would have a good economic prospects whether having or not high share of working age
population. Their findings stressed that changing life expectancy can alter the demographic
19


structure effects. Additionally, the forecasting results in this research showed that developing
countries have a tendency of grow faster and start converging to the income levels of the
developed nations. The strong points of Malmberg and Lindh ‘s study are investigating the direct
effects of demographic factors to per capita income and focusing on the different life expectancy
levels between countries. However, the lack of control variables in the model makes the effects
of demographic factors on economic growth becoming vague and lack of comprehensive.
Similarly to the research of Malmberg and Lindh (2004), Kogel et al. (2004) also concluded that
age structure took a significant role in the output per working age person. The authors applied
instrumental variable methods to control for the endogeneity fo demographic variables and then
they combined the estimated coefficients of the regression on economic growth with
probabilistic population projections of India to forecast the growth potential moving with the
India’s changing age structure. The model used in this study differs from the model in Malmberg
and Lindh (2004) from dependent variable to independent variables. In Kogel et al. (2004),
output per working-age person is exploited as dependent variable and independent variables
consist demographic variables such as youth dependency ratio, annual average growth of
working age population, life expectancy at birth and control variables including indicator of rule
of law, ratio of exports and imports to output, openess to trade, and economic zones dummy
variables. From this model, it is obviously seen that the proxy of economic growth is output per
working-age person and the proxy for demographic bonus measured by youth dependency
ratio, proxy for labor supply illustrated by annual growth of working age population and life
expectancy is used as a proxy fro human capital. They run regression for 97 developing and
developed countries averaged over the time period between 1960 and 1995. Finally, they
concluded that there was a negative and significant effect of youth dependency ratio to

economic growth and the forecast result showed that India would reach today’s level of output
per working age person of Singapore in 9 years. The interesting marks in Kogel et al. (2004)
paper are the instrumental variable method and the relationship between age structure and
social infrastructure. However, Kogel et al. just focused on the youth dependency ratio, and
ignored the impact of elderly denpendency ratio which plays an essential role in the well-being
of a nation.
At the country level, in their early working papers, Lee and Mason (1997) explored the effects of
demographic transition stages on aggregate saving and then on productivity growth rate as a
comprehensive review for Taiwanese case. They concluded that the change in demographic
20


situation in Taiwan from a high level of fertility and mortality to the low one has an essential role
in the contribution of the rise in the saving rate, and ultimately creates the growth in capital
output ratio. In this paper, Lee and Mason extended the life cycle saving model constructed by
Tobin (1967) to find down the role of changing demographic structure on life cycle and national
saving. First, they applied the basic model of Tobin at the steady state and their own baseline
set of assumptions to make the comparative statics for Taiwanese experience in the period from
1950 to 1990. In the baseline set of assumptions, they strictly defined the life expectancy, total
fertility rate per woman, interest rate, productivity growth rate and time preference rate. Based
on the results of comparative statics, in the next steps, they did a dynamic simulation as well as
the projections to the year 2100 of savings and capital accumulation with the changing in age
structure during the demographic transition. In the simulation, the authors set up two scenarios
in which adults only concern about the current demography situation and the other case is that
adults also embrace their future fertility and mortality rate. The most important lesson from this
paper is the authors’ concern about the impact of demographic transition to saving rates as a
channel lead to the growth of total capital output.
More recently, Lee and Mason (2007) have also showed that changes in age structure have had
a very substantial effect on Taiwan’s income growth. However, the gains from demographic
bonus are not equally shared by all age groups, children and young adults have benefited the

most while the elderly have benefited the least. They used age-specific data from annual
income and expenditure surveys of Taiwan between 1978 and 1998 and overlapping families
model to analyze the intergenerational familial effects. This model allowed them to investigate
the effects of the family dependency ratio and the population dependency ratio seperately. All
regression estimates for the per capita income of each generation (children, workers and
pensionners) were used Ordinary Least Squares method. After that, they used the coefficient
estimates to construct a series of counter-factual simulations that allow dependency structures
change in accordance with their observed historical trends. In conclusion, they found that both
the population age structrure and the family age structure influence the income level although
the population age structure had a dominant effect. The difference of this study compared with
previous studies is that it considered the possibility of the effects differ by age groups on income
per capita and took into account the integrated analysis of population and family level.
Nevertheless, measure of familial dependency ratios in this paper was ambiguous and need
more refined to archive the larger estimated effects.

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One of the lastest studies of Bloom and Finlay, who have many papers and reseachs
concerning demographic aspects, is to reexamine the role of the demographic transition in
contributing to cross-country differences in economic growth through to 2005, with a particular
focus on Asia (Bloom and Finlay, 2009). They constructed a model that illustrate the relationship
betweeen economic growth and age structure, then they estimate the parameters of the model
derived in previous stage to project the contribution of future shifts in working age and
population growth rates to economic growth throughout Asia. Bloom and Finlay used the
convergence model outlined by Barro and Sala-i-Martin (2004) and constructed a 5-year panel
dataset from 1960 to 2005 using country level data of a global sample which includes 102
countries. The methods used in their study were Ordinary Least Squares and Instrumental
Variables method. They estimated the coefficients of the best model, geographic and
demographic specification model, using an instrumental variables estimator. Their expectation is

that the growth of population and the growth of the labor forcce could affect the growth of
income per capita and the results in their model indicate that even when controlling for potential
reverse causaltiy, the growth of labor force has a positive and significant effect on economic
growth. In the final stage, they used the cofficients from their best model to calculate the
contribution of the growth of the working-age shate, growth of the labor force and growth of the
population to economic growth in Asia. Their conclusion is that demographic factors remain an
essential contribution to economic growth in Asia and wil continue in the future. These results
are consistent with their previous study (Bloom et al., 2000). The best model in Bloom and
Finlay ‘s study includes the demographic variables such as working-age shares, labor force to
working-age population, life expectancy, education level, population density and population
growth. Other control variables are geographic variables, capital stock in the base year, trade
openess and institutional quality. It could be seen easily that the growth of income per capita in
their model was used as a proxy to measure the economic growth, working age share and labor
fore as proxies for labor supply, life expectancy and education level as proxies for human
capital. We could learn the significant and important variables from their model and construct
our own one later.
In Vietnam, the relationship between demography and economic growth recently have been
reseached by Minh (2009). The estimated results from her study indicate that Vietnam could
utilize the opportunity from the changing of age structure, especially in the demographic bonus
period. Minh also proved that the change in demograhics has contributed up to 15% of
22


economic growth during the period 2002 to 2007. This research was based on the data of
demography of 61 provinces across Vietnam with the period time from 2002 to 2006 and
ordinary least squares method. Dependent variable in regression model is growth rate of GDP
per capita and explanatory variables includes working ratio intitial level, working ratio growth,
youth ratio, old ratio and investment ratio. The advantages of this research are concerning both
youth and elderly dendenpent population and the study focused on the provincal level.
However, by the use of few demographic proxies and few control variables, it is vulnerable to

examine the relationship between dynamic demographics and economic growth as a
comprehensive view.
These above empirical studies are all used different econometric methods to examine the
linkage between demographic factors and economic growth, especially focus on the change of
age structure. Besides that, this connection is consolidated by many descriptive statistic
researchs such as those of Phang (2006) and Nasir (2011). In the paper of Phang, the benefits
from demographic bonus was evaluated how and to what extent it affected the Korean
economy. After that, the author used future fertility rates in the population projections of Korea
and United Nations Population Division to predict the movement of Korean population and its
impact on economy in the future. The main remarks in Phang’s study were that Korean
economy and society have got dividend from the demographic transition during the second half
of the twentieth century and in future, this bonus would change into a burden when the labor
force and young population becoming older. The responsibility of Korean government is very
important in preparing many policies in order to confront this obstacle on their growth process.
Results in the paper of Nasir (2011) was consistent with the findings in Phang (2006). The
author concluded that demographic bonus motivate the economic growth, especially in East
Asia region because these countries underpin their merits through the combination of many
policies.

23


The following table summarizes the empirical studies above in a more evident way.
Table 2.1: Summary of empirical studies
No

Authors

1

Lee & Mason Tobin (1967) life Taiwanese
(1997)

Methodology

cycle

Data

Results
Demographic

transition

in

saving demography data Taiwan with the lower fertility

model + dynamic in the period 1950 rate
simulations

to 1990

and

mortality

significantly

rate,

consolidated

the

increase in the saving rate
through

the

comparative

steady

state

analysis.

The

contribution of the change in
age structure to the growth of
savings

and

capital

accumulations is strengthened
via dynamic simulation analysis.

In both scenarios, the saving
rates first increase and then
decline as a forecast projection
by 2050. However, the capital
output ratio will rise more than
10 times as compared to the
base year 1950.
2

Kogel et al. OLS
(2004)

method, Cross section of From the result of the OLS and

Instrumental

97 developing and Instrumental variable method,

variable method, developed

the authors concluded that age

Probabilistic

countries

structure had a significant effect

population

averaged over the on output per working age

projections
forecast

to period

between person.

growth 1960 and 1995

moving

Based

on

the

combination of coefficients in
the instrumental variable model
and probabilistic demographic

24


projections, Kogel forecasted
the India’s economic growth
until 2035 and calculated the
number of years it would take

India to reach the level of output
per working age person in
some developed countries.
3

Malmberg & OLS
Lindh (2004)

method

+ Cross section of The estimate results show that

UN projections of averaged data of life

expectancy

has

an

age structure to 82 countries from important role in the level of per
forecast

global 1950 to 1990

income levels

capita income and it also affects
to the demographic structure.
Besides that, the forecasting

models illustrate the convergent
trend

in

economic

growth

around the world in which
developed countries will have a
slow or even a negative growth
tendency

while

developing

countries have a speeding pace
in their develop race.
4

Phang

Descriptive

Korean

(2006)

statistic

demography data provided young population and
from 1950 to 2004

Demographic transition period
and labor force for Korean
economy

throughout

the

second half of 20th century.
Thus, this lead to the result that
Korean economy had a rapid
growth and society had been
improved
However,

substantially.
this

baby

boom

generation will become older in
the first half of the next century
and may create burden for

25