Copenhagen Consensus Center
Home Menu

Post-2015 Consensus: Population and Demography Perspective, Galor Casey

Summary

In all facets of life, people must make decisions about how to allocate scarce resources. Potential parents must decide how many children to have and how much to invest in the future of each child. This decision is known as the ‘quantity-quality’ tradeoff. At the most fundamental level, when individuals invest more in the human capital of each child and have fewer children, they raise the future per capita earnings power of the next generation. Developing countries have high rates of fertility, which place a great burden on governments and aid agencies hoping to alleviate poverty and deprivation. In these settings, policies inducing parents to have fewer children and invest more in the education of each child will have positive effects beyond those captured by short-term cost-benefit analysis.

Rich countries face the opposite problem, of falling fertility and rising numbers of older dependents. Countries can make up the shortfall in public revenue by encouraging high skill immigration, which has positive effects also on sending countries by raising the return to human capital accumulation.

For much of human history, differences in per capita income across the globe were negligible because increases in productivity were used to support larger populations. This negative feedback loop between productivity and population, as described by Malthus, began to unravel at the turn of the 19th Century in parts of Western Europe. Fertility began to lag behind increases in productivity, leading to higher living standards. Eventually, fertility rates began to fall as incomes continued to rise. This process led to a rapid increase in the living standards of Western Europe and its offshoots as well as a corresponding rise in the degree of global inequality. Understanding this demographic transition is essential for devising policies to help spur economic and demographic change in developing countries.

Having fewer children but investing more in their education produces a more educated workforce, drives up living standards and increases technological progress. Meanwhile, increased technological progress raises the return to human capital investment, inducing parents to substitute towards child quality. This relationship between fertility and economic growth is the basis of Unified Growth Theory. The rising importance of human capital also lowers the return to child labor and increases the earning power of women, reinforcing this pattern. Understanding these links, therefore, provides important insights into the most effective ways to influence fertility and growth through public policies.

For developing countries to become rich, resources need to be devoted to increasing income per person rather than supporting larger and larger populations. Policies that lower the cost or raise the benefits of investing in child quality relative to having more children will generate a positive feedback cycle between higher levels of human capital and further economic development. Lowering the cost of education is a commonly suggested policy, but standard benefit-cost analysis will underestimate total benefits, which will unfold slowly as fertility and economic structure adapt.

Developed countries may attempt to boost fertility to help support an aging popuation, but risk undoing the positive effects that increased child quality investment and female labor force participation have had on economic growth. Increased immigration of high-skilled individuals provides another, and more immediate, way to generate tax revenues needed to support retirees.

The various components of the post-2015 development agenda interact in complex ways. For example, increasing the returns to education will help reduce fertility rates, while increasing access to contraceptives will help increase the investments parents make in schooling. These factors have a positive effect on gender equality, which can itself affect future schooling and fertility decisions. Policies that raise the return to education in developing countries have positive implications well beyond the already substantial effects identified by standard cost-benefit calculations. For developed countries, increased skilled migration helps to raise public revenues without undoing the positive effects of low fertility and high educational standards.