By María José Gonzalez Rivas*

Uruguay is a case of study in terms of what governments must do to make the most of the demographic bonus.

Nearly 60 years ago, the average life expectancy in Latin America was 55.7 years. Today, it is almost 75 years. Latin Americans live longer mostly due to the improvements in public health, together with the increase of life quality and higher equity levels in our societies.

Because we are living longer, we need to rethink certain economic and social institutions, as we need to plan how to assure the population’s welfare after they end their working lives.

Uruguay is the country with the largest aging population in Latin America and the Caribbean. It has similar levels to certain European countries and is one of the first countries to start the demographic transition in the region. This means that while there are more senior adults, the number of births is going down.

“Uruguay is living a dynamic of demographic change, which is not really different to that of other countries, except for the fact that it is slower. It is what we call aging population. There are two major causes for this: people die at an older age and they just have the number of kids they want to have. Both aspects are indicators of the social development of a country”, says Rafael Rofman, specialist in social protection at the World Bank.

Should there be no changes in the economically active population, the size of the labour force will tend to go down. Therefore, the economy’s capacity to deal with the needs of retired people will be limited.

As a result, this country, with little more than three million inhabitants, has been the basis of a survey developed by the World Bank on demographic changes and the economic challenges that come with age. What do experts say?

According to the report Demographic change and social and economic challenges in the 21st century Uruguay  the main challenge a country faces with gradual aging is productivity. Greater levels of productivity during the demographic bonus stage – when there are more people who are economically active- can help in the mid and long term to keep a positive growth rate.

According to the study, by 2050, 22% of Uruguayans will be older than 65 years old and by 2100 the percentage will reach 30%. In the rest of the region, the population’s aging process is slower, but it gets faster by the end of the century and converges with OECD countries in 2100.

What does this mean? “If there are no changes in terms of policies, the percentage of GDP destined to basic social services (health and education) and social protection will go from less than 25% in 2013 to nearly 43% in 2100”, pointed out Rofman.

There will be more people demanding healthcare services, and the costs linked to the services that an older population needs will also be higher, as the typical diseases of the elder demand more complex and expensive treatments (treating an infection in a kid or a teenager is way simpler than treating chronical diseases in senior adults).

Demographic bonus

In the process of demographic change there is usually a period of time during which the proportion of working age adults growths substantially, before it starts going down. The reason is that, during the first stage, the drop of fertility causes the number of kids to fall quicker than the rise in the number of grownups. This period is usually known as the “demographic bonus”.

Uruguay is currently going through the period with the largest percentage of people in working age, which provides a major opportunity to increase savings in the economy and generate resources for investment. According to the authors of the study, in order to accomplish this, investments in human capital and physical capital are needed.

As regards human capital, a good quality educational system shall deliver better trained and more competitive workers who can produce more goods and services for the entire population. As regards physical capital, more and better equipment, plus new technologies, shall enable production to keep on growing in Uruguay, even with a smaller number of workers.

To sum up, the survey points out that, considering the growing tax demands, as well as the need to support economic growth in order to guarantee the population’s welfare and the development of the country, several fronts must be attacked, particularly the following four:

• The educational system, which must contribute to a more effective process of human capital development, improving its coverage and the quality of its results.
• The labour market, which must compensate the drop of the working age population, with a greater level of participation of women and senior adults in highly productive activities.
•  The rise in the internal savings capacity that promotes larger investments and the accumulation of productive capital.
• The development of productivity in the economy by the sustained promotion of innovation and adaptation to technological change.

*María José Gonzalez Rivas is an online editor at the World Bank.

Originally published by El País.