Like many regions, Latin America’s birth rates are falling and life expectancies rising. This demographic transition can yield two dividends – first, as more young workers boost growth, then when their retirement savings boost investment. However, the window for Latin America to benefit from this first dividend is closing and it is poorly placed for the second dividend.
The region’s population has quadrupled since 1960 to 650 million – mostly in Brazil and Mexico. But birth rates peaked in the 1960s: households have shrunk, one person in five is over 65, and the population is expected to reach 767m in 2060 then decline by about 0.2 per cent a year.
People are working longer to finance their retirement. Colombia and Mexico have the world’s highest old-age labour participation rate: more than 28 per cent of Colombia’s over-65s still work.
Some 80 per cent of the region’s population lives in towns or cities – up from 40 per cent in 1950. Uruguay and Argentina are above 90 per cent. But while the attraction of industrial jobs drove Asia’s urbanisation, in Latin America a lack of agricultural opportunities forced people to move, leading to shanty towns that widen income inequality.
But the under-65 working population is close to peaking before smaller families and more women earners yield a first dividend from greater consumption and investment in health and education.
Poor earnings mean Latin America’s savings rate is 18 per cent compared with 40 per cent in East Asia. And access to banks and credit is also low.
That limits a potential second demographic dividend – the increased savings and investment of an ageing society that boost productivity and incomes. It will require policies that help workers accumulate assets – property, pensions, and personal savings.
Latin America is set to age fast. Its birth rate has dropped from 5.8 children per woman in the 1960s to 2.0 – below the replacement rate for a stable population. Brazil’s rate has plunged from 6.1 to 1.7.
This is one of the most prosperous emerging-market regions but annual GDP growth in the past 10 years averaged just 2.1 per cent compared with 6.4 per cent in the previous decade, when commodity prices were higher. Incomes have grown at just 0.6 per cent a year since 2011, compared with China’s 6.8 per cent.
Productivity has turned negative, most steeply in commodity-exposed Peru and Colombia, but other countries have been hit by reversed structural reforms, premature de-industrialisation, weak investment, poor use of capital, slowing capital flows and lower export growth.
And most Latin America economies have not cultivated value-adding industries as Asia did. The region’s 74 cities of over 1 million people – expected to grow to 94 by 2035 – include mega-cities of 5 million but growth will focus cities of 1 million to 3 million.
However, these cities need to invest in infrastructure such as high-speed Internet, quality education and healthcare.
Investment in education impacts birth rates besides labour productivity and growth. Cuba, Venezuela and Puerto Rico score well, as do Chile, Colombia, Peru and Panama, but many people miss out on higher education in Brazil, Mexico and Argentina.
Some 52 per cent of women over 15 now work, partly explaining the smaller families, but Peru, Bolivia and Guatemala need to invest in female education.
In the absence of domestic, demographically driven growth, investors in Latin America should consider alternatives such as commodity or global industrial cycles. A higher required return on investment should make the region attractive, which implies a value-driven approach.
First published 30th June 2021.
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