(November 2018)

Implication of Demographic Changes for GDP Growth of 106 Countries to 2028

  • GDP growth is a function of many things and demographics changes are some of the influences.

  • Analysis shows that if a country has stronger growth/improvement on each of (a) the size of workforce, (b) education standard of the adult population and (c) the investment behind each worker then it will generally have stronger GDP growth.

  • As two of these three variables can be forecast with very high reliability and the third with moderately good reliability, analysis of the potential performance of a country on these variables will give a good indication of its likely potential total GDP growth.

  • This insight ranks the countries we cover on these variables for the decade ahead (2018 to 2028).



While GDP growth is a function of many things - demographic characteristics of a country do place some constraints on what can be achieved by an economy.  This month’s Global Demographics Insight looks at the relative performance of the 106 countries we cover on what we find are the best demographic determinants of GDP growth.  That is, the trend in each of:

1.    The size of the employed labour force,

2.    Education standard of the working age population and

3.    Accumulated Fixed Capital Investment per worker.

Figure 1 shows the overall pattern of influence of these variables.  The stronger the growth of a country on these three variables generally the stronger will be the growth of the overall GDP of a country. 

Figure 1:  How Demographics Impact GDP Growth



The advantage of using these demographic variables is that they can be forecast with quite high levels of reliability.  Particularly the number of employed persons and education profile of adults.

The number of employed persons is a function of the number of persons of working age (defined as 15 years to 74 years for developed countries and 15 to 64 for others) multiplied by their propensity to be employed.  The number of persons of working age in 10 years’ time is known with a high degree of accuracy as they are already alive – and will simply get older in the next 10 years.

Propensity to be employed is also a very stable variable over time.  It is affected by education (discussed below) and generally the higher the education standard of the population the more likely it is they will be employed and the more stable is the trend in overall propensity of people to be employed.

Hence, we know the likely trend in, and size of, the ‘engine of the society’ (workers) for the next 10 years with quite good reliability.

Education standard of the working age population is the second key variable to consider.  It impacts the economy in two ways.  As mentioned above, the higher the education standard of a person the more likely it is that they will be employed and also the more stable is the overall employment levels.

But education also impacts on productivity of the worker.  This is shown in Figure 2.  The horizontal axis (Education Index) is a composite measure of the education profile of the population.  At an index level of 170 around 50% of the working age population have lower secondary or above education.  As shown in this chart the potential of a country to lift its productivity per worker increases after that point.  All countries below that level have low productivity   

Note this variable would appear to be a ‘necessary but not sufficient condition’ in that having a higher education standard does not ensure higher productivity but being below that level prevents higher productivity.

Figure 2: The relationship Between Education and GDP per Worker

Fig 2.jpg

 The value of education as a forecast variable is that there is good data on current enrollments as well as the current education standard of the adult population.  As such its future profile can be forecast with some reliability.

Finally, on education, appreciate that there is a positive relationship between it and the next variable, Accumulated Fixed Capital Investment.  The better educated the workforce the more investment in technology, plant, etc takes place to leverage that education into productivity.  But the relationship appears to have around a ten year lag.

Accumulated Fixed Capital Investment per worker is the sum of annual Fixed Capital Investment over the last 10 years depreciated at 10% per annum.  This 10-year cycle stabilizes the estimate of resources available to the worker and reflects reality. If Fixed Capital Investment declines sharply in any one year it does not mean the worker has significantly less equipment/resources to use.  Rather the growth in it will be slower.

Testing the hypothesis

The argument is that the more a country is improving on these three variable the better is the growth prospects of its total GDP.

Figure 3 below shows the picture for 2007 to 2017 using the average performance (Compound Average Growth Rate) on these three variables. This is the blue line.  It is expected that the higher a country is on this then the higher will be its GDP growth rate – and that is the orange line (CAGR of real total GDP as per the World Bank).

While it is not a perfect correlation, it is a strong one at 0.77.  Of the 53 top ranked countries in terms of performance on the ‘drivers’ 44 of them were in the top half in GDP performance and the overall standardised average deviation is 11.

Figure 3: Relationship between CAGR of Drivers and CAGR of Total Real GDP 2007-17

Fig 3.jpg

Table 1 below shows the data for this chart in detail and also the projected performance (in terms of the three demographic drivers) for the next decade.   Obviously, one should treat the outliers with care.   The countries are listed according to their expected performance in 2018 to 2028 based on the projected changes in the three ‘drivers’ over that same period.  It should also be noted that the countries with the highest ‘driver’ score are all ones where the data is potentially less reliable.  Excluding them improves the overall historic fit significantly.

Table 1: Historic and Projected relative performance of Countries on the Three Demographic Drivers.

(Note Countries are in descending based on Projected Average Growth Rate of Drivers for 2018 to 2028)

Table 1.jpg

To conclude, this analysis is not a definitive guide as to where the best GDP growth will be.  Rather it identifies potential constraints on countries which would impact total real GDP growth. For example, a declining working age population and hence workforce means that better gains must be made in the other two drivers to maintain overall growth. So the chances of a country with a declining work force having an above average total GDP growth rate is reduced.

In addition, the reader is reminded that there is such a thing as political risk.  A simple change in trading relationships, government financing etc can invalidate these results.  So, guidance only – use with care.


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