Analysis of the Nexus between Demographic Changes and Economic Growth in Pakistan: Role of Capital Stock

Abstract

Pakistan has been experiencing a decrease in population growth since the early 1990s, which led to increasing the ratio of the working-age population known as the demographic dividend. The demographic dividend may lead to higher savings and investment which resultantly spurs economic growth. Given this postulation, the study is first of its kind to empirically analyze the impact of demographic variables on economic growth through physical capital for Pakistan over the period 1960–2018. In this regard, the demographic change is captured by taking four alternate measures, namely population growth, young-age dependency ratio, old-age dependency ratio, and working-age population ratio. To examine the channel effect, in the first step, the direct impact of demographic changes on physical capital is estimated. Later, the impact of demographically-induced capital stock is estimated on economic growth. By using the FMOLS technique, the study concludes that the total negative impact is highest in the case of old-age dependency, which means that higher old-age dependency is the most threatening demographic change for economic growth. The least harmful demographic change is the young age dependency. Moreover, the empirical findings highlight the importance of capital stock as the mediating channel in the demographic change and economic growth relationship. The study recommends effective long-term policies to increase youth employment and to enhance savings for maximizing the benefits of the demographic dividend.