PROGRAM ON THE GLOBAL DEMOGRAPHY OF AGING AT HARVARD UNIVERSITY Working Paper Series Prospects for Economic Growth in Nigeria: A Demographic Perspective David E. Bloom, Jocelyn Finlay, Salal Humair, Andrew Mason, Olanrewaju Olaniyan, and Adedoyin Soyibo October 2015 PGDA Working Paper No. 127 http://www.hsph.harvard.edu/pgda/working/ The views expressed in this paper are those of the author(s) and not necessarily those of the Harvard Initiative for Global Health. The Program on the Global Demography of Aging receives funding from the National Institute on Aging, Grant No. 1 P30 AG024409-11. Prospects for Economic Growth in Nigeria: A Demographic Perspectivea October 2015 (Revised) David E. Bloom,1 Jocelyn Finlay,1 Salal Humair,1 Andrew Mason,3 Olanrewaju Olaniyan,4 Adedoyin Soyibo4 1Harvard T.H. Chan School of Public Health, Boston 3University of Hawaii–Manoa and the East West Center, Honolulu 4University of Ibadan, Nigeria We quantify the potential for economic growth created by Nigeria’s demographic transition. Using a cross-country economic growth model, we first estimate the size of the demographic dividend Nigeria could enjoy under appropriate enabling conditions. Then, using an original analysis of the economic lifecycle of Nigeria’s population, we explore the conditions needed to realize the dividend, focusing particularly on labor productivity and investments in health and education. We conclude with a policy discussion on the challenges Nigeria must overcome to realize its full potential for economic growth. Contents 1 Introduction .......................................................................................................................................... 2 2 Understanding Nigeria’s potential demographic dividend ................................................................... 5 2.1 Model ....................................................................................................................................................... 5 2.2 Data .......................................................................................................................................................... 6 2.3 Estimation ................................................................................................................................................ 8 2.4 Potential dividend .................................................................................................................................. 11 3 Realizing the potential dividend: challenges and opportunities ......................................................... 13 3.1 Features of Nigeria’s generational economy ......................................................................................... 14 3.2 Human capital investment for Nigeria ................................................................................................... 18 3.3 Potential pathways for Nigeria ............................................................................................................... 24 4 Conclusions ......................................................................................................................................... 27 5 Bibliography ........................................................................................................................................ 28 6 Appendix ............................................................................................................................................. 32 6.1 Descriptive data for Nigeria’s economy and demography ..................................................................... 32 6.2 Nigeria’s institutional quality in comparison with select other countries ............................................. 35 6.3 Nigeria’s economic lifecycle ................................................................................................................... 36 6.4 Funding Nigeria’s lifecycle deficits ......................................................................................................... 37 6.5 Nigeria’s economic support ratio ........................................................................................................... 38 a An earlier version of this paper was presented at an IUSSP Seminar on “Demographics and Macroeconomic Performance” held in Paris on June 4-5, 2010. The authors are grateful to Alyssa Lubet and Liza Mitgang for helpful research and editorial assistance, and to the conference participants and two anonymous referees for valuable comments. 1 1 Introduction Nigeria’s political and economic prominence within Africa, along with the country’s position on the threshold of a major demographic transition, raises three related questions: (1) What is the potential for economic growth created by Nigeria’s demographic transition? (2) What conditions must exist for the country to realize this potential and to sustain higher standards of living once the demographic transition is over? And (3) what are the challenges Nigeria will face in creating those conditions? To answer the first question, we use a cross-country econometric model to estimate the following effects of demographic change by 2030 as compared with a business-as-usual scenario: the added per capita income, the additional size of the economy, and the number of people who can be lifted out of poverty because of added growth. To provide answers to the second question, we use an economic lifecycle analysis that highlights some surprising features of Nigeria’s economy. To shed light on the third question, we discuss the policy challenges Nigeria faces in utilizing its demographic potential, and the opportunities it will see if it does realize this potential. Our work builds on the concept of the “demographic dividend,” the idea that economic growth in a country is correlated with an increase in the share of the population that is of working age (i.e., ages 15– 64). For most low- and middle-income countries, changes in population age structure follow a well- observed pattern in which countries move from a high-fertility and high-mortality regime to one characterized by low fertility and low mortality (Bloom and Canning, 2008). These changes usually happen asynchronously, with death rates declining first and birth rates falling later. This lag produces a transitional period of population growth and a very young population. As fertility declines, population growth slows and the share of the population of working age rises. The demographic transition creates potential for economic growth in several ways (Bloom et al., 2003). Mortality declines in high-mortality populations are usually associated with declines in infant and child mortality, driven by increased access to vaccines, antibiotics, clean water, and sanitation (Bloom and Williamson, 1998). This mortality decline produces a baby boom, not by causing more births, but by increasing survival among those births that take place. The baby boom ends when couples realize that fewer births are needed to reach their targets for surviving children and economic development simultaneously moderates these targets. Baby booms can induce adverse economic consequences because more children require more resources such as food, clothing, housing, education, and medical care. Those resources must be diverted from other uses, such as building factories and infrastructure or investing in research and development, for example. This diversion of resources tends to slow economic growth, conventionally measured as the growth rate of income per capita. However, individuals born as part of this baby boom soon reach working age, within 15–25 years of the initial decline in mortality. When that happens, the productive capacity of the economy expands on a per capita basis. This leads to a transitory increase in the share of the working-age population and an increase in female labor force participation (Pritchett, 1994; Bloom, Canning, Fink, and Finlay, 2009). Potential economic output also increases because the typical adult working years are also the prime 2 years for savings, which are key to capital accumulation and technological innovation. Finally, savings get a further boost as expected longevity increases in the latter phases of the demographic transition (Mason and Lee, 2007; Lee et al., 2003; Kinugasa and Mason, 2007; Bloom, Canning, Mansfield, and Moore, 2009). Several studies provide empirical evidence for the effects of the demographic dividend. In Asian countries, an increase in the working-age share of the population was a significant driver of economic growth in the years between 1960 and 2005 (Bloom and Finlay, 2009). In East Asia, demographic change may account for one-quarter to one-third of the region’s economic “miracle” (Bloom et al., 2000b; Mason, 2001). In Ireland, a similar process followed the legalization of contraception (Bloom and Canning, 2003). Similar evidence is emerging in African countries, as well (Canning 2013; Ashraf et al., 2013). However, dividends from the demographic transition are not realized automatically. Obtaining these benefits requires good governance and judicious public policies. Latin America’s recent history is an illustration of the consequences of inadequate public policies. After 1970, Latin American and East Asian countries experienced similar demographic conditions, but GDP per capita grew by only 0.7% annually over 1975–1995 in Latin America, compared with 6.8% in East Asia (World Bank, 2008). A combination of rigid labor markets, a somewhat closed economy