Demographic Dividend

The demographic gift, also known as the demographic window of opportunity is defined as having a large working-age population and low dependency ratio. The dependency ratio is the ratio of the economically dependent population to those who are productive. Dependents are those aged 0 -14 and over 65. Currently  the Middle East is experiencing its largest demographic gift  in its history. This can be attributed to the declining death rates and high fertility rates between 1950 and 2000. In 1985, the region had a large share of its population in the 0 - 10 year age bracket. By 2005, the youth population of Middle Eastern countries was large, with its hare of the population either peaking or will peak in the next five to ten years (except in Yemen and in the West Bank and Gaza).

Middle East economies should therefore follow in the footsteps of the many Asian economies that took advantage of their fast-growing working populations and seized the opportunities from their “youth bulges.” Timing is critical, as the demographic window of opportunity is expected to close by 2045. Until then the region has the potential to take advantage of these conditions to increase incomes per capita, bolster savings and investment, and improve social welfare.

However, as is evident in the Middle East, an increase in the working-age population does not always translate into a dividend. In fact, the Middle East is not taking full advantage of its falling dependency ratio. In "Inclusion: Meeting the 100 Million Youth Challenge," we determine a country’s “true” dependency ratio by comparing the number of the unemployed working-age population over those who are working. For example, if a country's dependency ratio is low, but unemployment is high, the "true" dependency ratio takes into account the segment of population who are of working age but dependent because of lack of employment.

Therefore, when a country has a lower dependency rate, it has greater prospects for higher growth and savings. However, in 2005, because of low participation and high unemployment, the Middle East's "true" dependency ratio was 2.19 compared with the actual dependency ratio of 0.59. If the region can match the 2000 labor market characteristics of East Asia from now until 2025, it can reduce its true dependency rate to 0.96. Conversely, if current labor market outcomes persist, the region’s true dependency ratio will not fall below 2 by 2025, and the region’s demographic dividend will be largely squandered.

All of this underscores the importance of strong youth inclusion policies. If, over the next 20 years, youth participation rates were to rise from 39 percent to 67 percent (similar to that of youth labor force participation in East Asia in 2005), and youth unemployment were reduced by half, the true dependency rate of the region would drop below 1.5 by 2025. These results would occur even assuming there were no change in adult labor market outcomes. Through policies that increase the number of economically productive youth, the Middle East can capitalize on the area’s demographic dividend.