Does the Demographic Dividend Forecast Economic Growth?

Guenther Fink, Harvard University
Jocelyn E. Finlay, Harvard University

Demographic variables have been established as major determinants of countries’ long run economic performance. In this paper, we take the analysis a step further and test whether demographic variables can be used as a predictor of future economic growth. Applying estimates based on the period 1960 to 1980 to predict economic performance in the period 1980 to 2000, we find that a model including initial life expectancy, fertility and age structure significantly outperforms simple autoregressive models. We decompose the forecast errors into random shocks, parameter mis-estimation and parameter instability over time. The main source of forecast error is parameter instability, particularly a large fall in the intercept due to low economic growth in the period 1980-2000. The forecasting model does much better predicting relative rather than absolute economic performance, and is not improved significantly by the inclusion of an extended set of socio-economic, geographic and institutional variables.