Demographic Changes and Economic Growth in Pakistan: Role of Capital Stock

Zainab Jehan, Faiza Azhar Khan

Abstract


Pakistan has been experiencing a decrease in population growth
since early 1990s which led to increasing the ratio of working age
population known as 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 analyse the impact of demographic variables on economic
growth through physical capital for Pakistan over the period 1960–2014.
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. In order to
examine the channel effect, at 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 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 maximising the benefits of demographic dividend. JEL Classification:
J11; O47 Keywords: Direct and Indirect Impact, Demographic Transition,
Demographic Age Structure, Capital Stock, FMOLS

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DOI: https://doi.org/10.30541/v59i1pp.15-38

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