Effect of demographic transition on economic growth: does economic freedom matter? Evidence from ECOWAS countries

Abstract

According to the economic literature, for a country to benefit from the demographic dividend, it must first undergo a demographic transition, which describes the shift of a population from a stage of high fertility and mortality to one of low fertility and mortality. This transition, which results in a temporary increase in the share of the working age population, opens up a huge window of opportunity if the sound policies are implemented. Indeed, the literature indicates that local conditions can limit the expected effects of the change in age structure on economic growth. In this study, we focus on the role of economic freedom institutions in ECOWAS region by analysing the consequences of the interaction between economic freedom indicators and the growth rate in the share of the working age population on economic growth over the period 1996–2018. To do so, the study uses a robust technique, namely the Augmented Mean Group (AMG) method, which takes into account both the dependence and the heterogeneity of the individuals in the panel. The estimation shows that an increase in the share of the working age population only has a positive effect on economic growth when countries have better economic freedom institutions. This contribution is made in particular through improvements in indicators of investment freedom, financial freedom and government integrity. These results call on policy makers in the region to improve these dimensions in particular to enable their economies to benefit from the demographic transition dividend.