Demographic change: Headwinds for economic growth

With fertility rates falling and populations ageing worldwide, the impact of demographic change on economic prosperity has become a central policy concern. This column uses a neoclassical growth model to quantify the economic cost of ageing in the economies where the EBRD invests and beyond. It contrasts the headwinds facing emerging Europe with the potential demographic dividend in Central Asia and Africa, highlighting that rapid fertility declines are quickly narrowing this window of opportunity.

Demographic change has long been a source of concern, but the nature of that concern has shifted profoundly. In the 1960s and 1970s, fears centred on overpopulation, driven by worry that rapid population growth would outpace the growth of food supplies and infrastructure, and deplete natural resources (Ehrlich 1968). Today, while some economies are still experiencing pressures from high population growth, fertility rates are falling in much of the world. As a result, policymakers’ attention has turned to shrinking workforces, ageing societies, slower growth, and mounting fiscal pressures (Bricker and Ibbitson 2019, Spears and Geruso 2025). This column discusses the macroeconomic effects of ageing and potential policy solutions.

Getting old before getting rich

Around the world, countries are experiencing a profound demographic transition. Fertility rates have been falling, life expectancy has been rising, and population growth has been slowing. This is a global trend, and many emerging and developing economies are experiencing fertility declines at much earlier stages of economic development than advanced economies.

Historically, advanced economies saw their fertility rates drop below the long-run replacement rate of roughly 2.1 births per woman only after reaching high levels of income. However, post-communist economies have experienced this transition much earlier in their development paths (as illustrated in Figure 1). This divergence has led to a rapid rise in the average age of the population, meaning that many economies where the EBRD invests are “getting old before they get rich”.

This phenomenon is captured starkly when plotting the median age against GDP per capita (Figure 2). The median age in post-communist economies has risen sharply, now nearing that of advanced economies, even as their income levels remain significantly lower. The rapid ageing process is primarily driven by a sustained decline in birth rates, a trend in some countries exacerbated by significant emigration.

While former transition economies in the EBRD regions have, on average, seen fertility rates fall short of replacement rates since the early 1990s, the southern and eastern Mediterranean (SEMED) region and EBRD economies in sub-Saharan Africa (SSA) continue to have higher fertility rates and younger populations, with median ages of less than 26 and 20 years, respectively. Together with Central Asia and other economies in the Middle East and North Africa, these are among the few areas globally where fertility remains above the replacement rate. However, fertility rates in the EBRD’s SEMED and SSA regions have been declining rapidly, suggesting that population growth in these regions may also be reversed in a matter of decades.

Figure 1 Fertility rates are falling earlier in the development paths of EBRD economies than in advanced economies

Notes: Lines represent population-weighted averages. “Advanced economies” are those classified as high income by the World Bank’s income classification in 1990 with data available for 1870-2023. The “EBRD post-communist” grouping comprises 26 post-communist economies in the EBRD regions. SEMED comprises Egypt, Iraq, Jordan, Lebanon, Morocco and Tunisia. SSA comprises Benin, Côte d’Ivoire, Ghana, Kenya, Nigeria and Senegal.
Source: Gapminder, World Bank WDIs, and authors’ calculations.

Figure 2 Many EBRD economies are getting old before they get rich

Notes: Lines represent population-weighted average GDP per capita in the region and median age of the combined regional population. See the notes to Figure 1 for definitions of the various regions.
Source: Gapminder, UN WPP, World Bank WDIs, and authors’ calculations.

Population structure and growth

Historically, the impact of demographic structure on income per capita growth was relatively small compared to increases in productivity and employment rates. A historical decomposition of GDP per capita growth from 2000 to 2023 shows that, for most EBRD economies, the effect of changes in the working-age share of the population was small and in some economies in emerging Europe, this contribution has been negative, while productivity dominated as the main driver of income increases (Figure 3).

Figure 3 Historically, working-age population changes have been a minor growth driver in the EBRD economies relative to improvements in productivity and employment rates

Notes: The average annual growth in real GDP per capita in 2000-23 is decomposed into (i) changes in labour productivity growth (GDP per employed person), (ii) changes in the employment rate (employed persons per working-age population) and (iii) changes in the working-age share of the population
Source: UN WPP, World Bank WDIs, The Conference Board, and authors’ calculations.

Quantifying the demographic drag: The cost of ageing

To quantify the impact of population ageing on per capita income growth and assess the effectiveness of potential policy responses, the analysis in the new EBRD Transition Report (EBRD 2025) applies a neoclassical growth model with demographics, based on the framework developed by Fernández-Villaverde et al. (2025). Within this framework, aggregate output is generated by combining physical capital and labour, with productivity gains driven by exogenous labour-augmenting technological change. The working-age population is incorporated into the production function as the labour input and is treated as exogenous to the model.

This setting deviates from the standard neoclassical growth model by explicitly decoupling the working-age population from the total population. In standard models, these two groups typically grow at the same rate, rendering the ratio of workers to population constant and irrelevant to the model’s dynamics. In this adapted framework, however, the ratio of the working-age population to the total population varies over time based on demographics. A decline in this ratio functions economically like a negative technological shock: it lowers production, generating persistent effects on output and investment.

The model highlights two channels through which ageing creates headwinds for GDP per capita growth: declining working-age ratios affect growth both directly through reduced labour input and indirectly through lower incentives for capital investment.

By comparing projected GDP per capita growth under the UN World Population Prospects medium variant demographic projections to a hypothetical “no-ageing” scenario (where the working-age ratio is held constant at its initial level), the model quantifies the economic cost of ageing.

Timing and regional heterogeneity

The timing of this demographic drag varies significantly across the EBRD regions, reflecting their different stages in the demographic transition (Figure 4).

• Emerging Europe: These economies are facing the strongest negative impact of the demographic headwinds now. The model projects that the declining share of the working-age population will reduce average annual GDP per capita growth by a substantial 0.36 percentage points between 2024 and 2050. This effect is severe because these regions are already relatively old, and large cohorts are actively retiring. However, the pressure is expected to ease significantly in the second half of the century (2050–2100) as the large cohorts that caused the initial bulge exit the population, stabilising the working-age ratio.
• Central Asia and SEMED: In contrast, Central Asia and the SEMED region currently benefit from younger populations. These regions are projected to enjoy a small, modest demographic dividend of about 0.1 percentage points per year through 2050. This is due to their large youth cohorts moving into prime working ages. However, this is a window of opportunity that is expected to close quickly. As fertility rates fall rapidly in these regions (Figure 1), they are projected to face a demographic drag averaging 0.15 percentage points annually over the second half of the century (2050–2100).
• Sub-Saharan Africa (SSA): In contrast, SSA, with a young population, is positioned to experience a significant demographic dividend, potentially boosting annual GDP per capita growth by an average of 0.37 percentage points between 2024 and 2050. However, the analysis emphasises that this dividend is not automatic – there is a window of opportunity conditional on overcoming specific structural constraints. Realising this dividend requires the effective absorption of a rapidly growing workforce that often finds itself in low-productivity informal employment (Canning et al. 2015). Furthermore, success depends on the expansion of high-quality education and health systems to build human capital, alongside the mobilisation of domestic savings to deepen financial systems capable of allocating capital to young entrepreneurs (Bloom et al. 2003).

Figure 4 Demographic headwinds will increasingly weigh on GDP per capita growth in EBRD economies

Notes: This chart reports the annual contribution of changes in the share of the working-age population to the growth of GDP per capita in real terms. The projections are calculated under the UN medium variant scenario (see UNDESA, 2024). Estimates are generated using a calibrated neoclassical growth model with endogenous capital accumulation, where declining working-age ratios affect growth both directly through reduced labour input and indirectly through lower incentives for capital investment.
Source: UN WPP, World Bank WDIs, Penn World Tables, and authors’ calculations based on Fernández-Villaverde et al. (2025).

Conclusions

Demographic change will reshape economies over the coming decades. No single policy tool is likely to be sufficient on its own to counteract the economic impact of demographic change. Instead, mitigating the projected drag on growth requires a combination of measures, including greater labour force participation by women and older adults, the use of technology to boost productivity, and, to some extent, increased migration.

While younger economies in Central Asia and the SEMED region currently benefit from a demographic growth premium, the analysis highlights a significant time dimension to these trends. Fertility rates in these regions are declining at a much faster pace than was observed during the demographic transitions of advanced economies. As a result, the window of opportunity to leverage favourable age structures is projected to narrow rapidly, with these economies expected to face comparable ageing-related headwinds in the second half of the century. Similarly, the demographic dividend projected for SSA represents a temporary period during which the working-age population grows faster than the dependent population. The window of opportunity to reap the demographic dividend may be relatively short before ageing exerts the same fiscal pressures as in higher-income economies that are rapidly ageing today.

Source : VOXeu