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

Zainab Jehan, Faiza Azhar Khan


Pakistan has experienced a decrease in population growth since
the early 1990s leading to an increase in the ratio of working age
population, known as demographic dividend. The demographic dividend may
lead to higher savings and investments, which spurs economic growth.
Given this postulation, the study is the first of its kind to analyse
the impact of demographic variables on economic growth through physical
capital for Pakistan from 1960 to 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, first the
direct impact of demographic changes on physical capital is estimated.
Later, the impact of demographically induced capital stock on economic
growth is estimated. 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 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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