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Dr. Orin Levine

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A Dividend That Might Be Missed

Posted: 07/12/2012 4:31 pm

Investment bankers would be wise to turn their attention to the news coming out of London this week, as it provides an unusual yet compelling discussion of dividends. This week's discussion among dignitaries such as Andrew Mitchell, Rajiv Shah, Melinda Gates and numerous heads of state has been on family planning and its potential to help provide perhaps the most important global payout of all -- the demographic dividend.

The demographic dividend is an enormously simple but important concept to anyone searching for investment opportunities in new markets. It starts with a demographic transition from a stage where the rates of births and deaths are high -- that is, people have lots of children because a high proportion of them will die as young children -- to a stage where children survive and overall death rates decline. This realization that children are surviving their early years is typically followed (between 15 or more years later) with a decline in birth rates as people realize that they don't have to have a lot of children to have a lot of children survive.

This transition into a lower rate of births and deaths leads to a major shift in the ratio of children to adults, called the dependency ratio. In the era of high birth and death rates, there are often more children than adults (that is, the dependency ratio is greater than 1.0). When this shifts down to a ratio of about 0.5 (that is, there are now about half as many children as adults), a country typically begins to experience their demographic dividend.

The demographic dividend is a result of several factors, but it includes the obvious fact that when adults outnumber children they have more of everything to share with those children (wages, food, parenting). Consequently, they invest more in each child and may also save more of their earnings. Countries also arrive at a more stable and slower population growth rate that makes it easier for economies to grow. With a population growth rate of 4%, the economy needs to grow at the same rate (4%) just to keep up with the population. Obviously, if the population was growing at only 2% per year, this same economic growth of 4% suddenly becomes a real positive economic growth of 2%.

As the demographic dividend slows down in some of the "Asian tiger" countries, and the search continues for new market opportunities, it is time for investors to pay attention to child survival, family planning, demographic transition rates and dependency ratios. These indicators will quite possibly make a huge difference in where to invest and what returns they can (or cannot) get out of their future investments. Importantly, like their other investments, this dividend is not a gift and must be earned. The actions of investment bankers could help to influence the likelihood that the dividend will be realized by helping assure that the declines in death and especially birth rates are rapid, not gradual.

Here are four ways that investment bankers can play a part in helping to assure that the demographic dividend realizes over time:

1. Help end preventable child deaths. Rapid declines in child mortality are a key feature of the successful demographic transition. Alliances such as the GAVI Alliance, the MDG Health Alliance and the Global Fund use contributions to help assure access to life-saving technologies and stronger delivery systems. Contributions like the one that was recently made by JP Morgan Chase to the GAVI Alliance to buy life-saving pneumonia vaccines for children in Ghana can make an important impact on accelerating death rate declines.

2. Enhance access to safe, effective contraception. To pay out the dividend, a country needs a rapid decline in birth rates that accompanies (usually lags by some years) the decline in death rates. Investments in local manufacturing and distribution of appropriate technologies could accelerate the fertility decline needed for the demographic dividend to accrue.

3. Invest in health care and education. Investments in future technologies and innovations can also increase the rate by which both deaths and births decline. Expansion of education by building schools, universities and technical training institutes, especially those that cater to girls and women, can help improve the ability of women and families to accept and effectively harness these technological innovations.

4. Expand the use of 'development impact bonds.' By securitizing aid commitments over the long-term, development agencies can front-load their spending in ways that help to drive the rapid declines in deaths and births needed to help increase the likelihood that the demographic dividend is realized.

While investments in large countries like Nigeria and Indonesia makes obvious sense for moving into emerging markets beyond the BRICS, there are four countries that may not top the traditional investment banker's list of 'high return' investment locations but where a demographic dividend is possible if efforts are made right now to improve its likelihood. These countries include Ghana, where the child dependency ratio is falling and economic growth is high; Kenya, where dependency ratios are falling and the middle class is growing; Ethiopia, where demographic changes are happening rapidly, making the dividend possible; and Bangladesh, which has a dependency ratio of less than 0.5 and is just entering the demographic window of opportunity.

The health benefits of family planning are well known and obvious. Family planning enables women and their families to choose how big a family they want to have, and to reduce the health risks to mothers and children from having too many children, or having them too young. By accelerating the demographic transition and shifting dependency ratios, it turns out that investing in family planning can also be a solid investment producing dividends for years to come.

 

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