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  • Economic Implications of the Demographics in Kazakhstan

    05.10.2017 | Comments | Economy | 39 Kanat Makhanov

    According to the latest official report provided by the Committee on Statistics of the Ministry of National Economy of Kazakhstan based on the latest collected data, the population of Kazakhstan exceeded 18 million people by the beginning of June of 2017. Thus, from the beginning of 2017 the population of Kazakhstan increased by 0.54%. The demographic dynamics of Kazakhstan shows a positive trend since 2003. In 2016, for instance, the total population growth was at 1.31%, which can be considered as high. Such a significant growth of the population was accomplished due to a combination of several factors such as rising birth rates, longer life expectancy, decreasing death rate and migration. Apart from historical, social, political and other effects, this demographic evolution also has certain economic implications.

    The direct linkage between demographics and economics is one of the key instruments used in policymaking processes. One of the earliest attempts to establish a direct link between demographics and economics within the academic framework was that of Malthus (1826). Demographics is a powerful tool in making economic analysis and predicting mid-run and long-run economic developments since it reflects an average form of the economic behavior of individuals and households, which can be seen in such prominent pieces of academic research made in this field such as Samuelson (1958), Auerbach and Kotlikoff (1987), Cutler et al. (1990) Becker (1991, 1993), and many others.

    The positive demographic dynamics in Kazakhstan certainly has strong economic implications. One of the ways that demographics affects the economy is the size of the labor force and working age population. Figure 1 below depicts the evolution of the population, working age population, labor force and GDP in constant prices since 1991. As we can see in 1990s there was a clear demographic decline expressed in decreasing population and labor that was eventually followed by a recovery starting from early 2000s. As it can be predicted from the demographic economics theory, the rise in population and labor force was accompanied with the increase in real GDP.

    Demographic changes in 1990s and early 2000s also led to changes in the dependency ratio throughout sample period. As we can see from Figure 2 below, which depicts the dynamics of the birth rate, death rate and dependency ratio since 1991, the dependency ratio was high in early 1990s, which was caused by high proportion of youth under working age and elderly people. However, by the end of the 1990s the dependency ratio started to drop due to decreasing birth rates, increasing death rates, shorter life expectancy and net emigration (Rakhmetova and Abenova 2013). Further decrease of the dependency ratio until around 2010 was primarily due to the entry of the population born in late 1980s and early 1990s. However, starting from 2010-11 the dependency ration took off mainly due to two reasons, which are high birth rates in early 2000s and gradually increasing life expectancy. Further projections provided by the United Nations (UN) predict further increase of the dependency ratio due to fertility rates, which are expected to decline, and life expectancy, which will increase in the near future. Obviously, based on these projections we can expect that the pressure on the working age population will continue to increase.

    The generally accepted theory from demographic economics states that variations in the age structure of the population causes changes in the business cycle. This fact is the direct reflection of the patterns of consumer behavior. The working age population always tends to spend more on consumption compared to other age groups. Therefore, variations of the share of working age population in the total population up to certain extent affects the total consumption in the economy and the GDP. The economy of Kazakhstan rely very much on internal consumption. Generally, consumption makes about two thirds of the GDP. According to the data from the Committee on Statistics, in 2016, the share of household consumption in the total GDP of Kazakhstan were 53.2% whereas the public consumption was only around 11.8%. The relationship between consumption, GDP and labor force is shown in Figure 3. As we can see, changes in the private consumption and GDP go hand in hand throughout the sample period. However, the relationship between the working age population and private consumption doesn’t seem to be so clear. The size of the working age population and private consumption growth go downwards from 1991 to 1994. However, further decrease of the working age population is accompanied with a rise in private consumption. We can also observe two sudden falls of consumption that took place in 2009 and 2014 most probably as a response to falls in GDP caused by crisis. There has been a significant growth of the working age population between 2002 and 2012. This, however, does not match with changes in private consumption growth.

    Another way through which age structure of the population can affect the economy is the change of savings. If to consider the lifecycle model, for example, working-age adults save in anticipation of their retirement whereas elderly people dis-save in order to sustain their retirement (Modigliani and Brumberg 1954). The positive relationship between the working age population and gross savings holds for Kazakhstan as we can see from Figure 4. Throughout the period from 1999 to 2015, there is a smooth and gradual rise of the working age population. The gross savings increased proportionally to the working age population with minor drops in 2009 and 2015.

    As we can see, there are a number of aspects that show the interrelatedness of certain demographic and economic processes. The economic decline during 1990s was accompanied with decrease in total population, working age population, labor force and dependency ratio. After 2000, we can see a reversal of these patterns and the increase of the gross savings along with the increase of the working age population.

    In demographic terms, Kazakhstan can be classified as a country of the third demographic transition stage with a slowing natural population increase. The UN demographic projections on Kazakhstan predict further natural increase of the population that will gradually slow down and stop by the mid-21st century. This would imply further continuation of the current trends in the labor market. Higher birth rates that persisted during 2000-2015 would start to expand the labor market around five years from now. At the same time, the share of the working age population would rise along with the median age. From the point of view of the economic policy, making this would open new prospects for development, as it will be easier for the government to promote economic growth through stimulating private consumption, which makes more than a half of the country’s GDP. On the other hand, the feasibility of the economic development in the near future would also strongly depend on the labor productivity and human capital of the population that is about to enter the labor market starting from 5-20 years from now. The UN demographic projection for Kazakhstan is presented in Table 1 below.

    Table 1: UN Demographic Projections for Kazakhstan

    Year

    Population

    Yearly Change

    Median Age

    Fertility Rate

    2017

    18,064,470

    209,086

    29.6

    2.62

    2020

    18,616,175

    198,190

    31

    2.53

    2030

    20,072,162

    130,442

    32

    2.35

    2035

    20,664,749

    118,517

    32

    2.28

    2040

    21,264,723

    119,995

    32

    2.21

    2045

    21,875,012

    122,058

    33

    2.15

    2050

    22,447,181

    114,434

    34

    2.10

    Source: United Nations, Department of Economic and Social Affairs, Population Division

    In June of 2017, the population of Kazakhstan exceeded 18 million people making it the 65th most populous country in the world. The demographic dynamics of Kazakhstan has had highly correlated reflections on the economy of the country. The demographic downturn of the 1990s has had also huge economic effects. The economic recovery that began in early 2000s was also accompanied with such demographic shifts like rising birth rates, falling death rates, and most importantly with expanding labor force. As would the theory suggest, the level of the gross saving increased along with the number of the working age population. Kazakhstan is classified as a country that is on the third demographic transition stage heading towards the fourth demographic transition stage. The demographic projections for Kazakhstan provided by the UN predict further increase of the country’s population that will gradually slow down. The working age population therefore would increase in the near future. The economic implications of this demographic landscape is such that Kazakhstan should start to rely on quality of its labor force rather than on its quantity. In order to take advantage of the largest age group of today that is about to start entering the labor market 5-10 years from now the public policy of Kazakhstan should now be focused more on investing in human capital.


    References

    Auerbach, A.J., and Kotlikoff L.J. (1987): “Dynamic Fiscal Policy”, Cambridge: Cambridge University Press.

    Becker, G., (1991): “A Treatise on the Family”, enlarged edition. Cambridge, MA: Harvard University Press.

    Becker, G., (1993): "Nobel Lecture: The Economic Way of Looking at Behavior." Journal of Political Economy, 101(3): pp. 385-403.

    Cutler, D.M., Poterba J.M., Sheiner L.M., and Summers L.H., (1990): "An Aging Society: Opportunity or Challenge?",Brookings Papers on Economic Activity, 1: pp. 1-56.

    Malthus, T.R., (1826): "An Essay on the Principle of Population: A View of its Past and Present Effects on Human Happiness; with an Inquiry into Our Prospects Respecting the Future Removal or Mitigation of the Evils which It Occasions" (Sixth ed.). London: John Murray. Retrieved 2008-pp. 11-22.

    Modigliani, F., and Brumberg R., (1954): "Utility Analysis and the Consumption Function: An Interpretation of Cross-Section Data", Post-Keynesian Economics, edited by K.K. Kurihara. New Brunswick, N.J.: Rutgers University Press.

    Rakhmetova, R., and Abenova, K. (2013): “Economic Mechanisms of the Demographic Policy of Kazakhstan”, Procedia Economics and Finance #5, pp. 631 – 636.

    Samuelson, P., (1958). "An Exact Consumption Loan Model of Interest with or without the Social Contrivance of Money." Journal of Political Economy, 66, pp. 467-482.

    United Nations, Department of Economic and Social Affairs, Population Division (2017). Retrieved from http://www.un.org/en/development/desa/population/theme/trends/index.shtml.  Accessed on September 14, 2017.


    Note: The views expressed in this blog are the author's own and do not necessarily reflect the Institute's editorial policy.

    Tags: Kazakhstan, Demography, Economy

Author

  • Junior Research Fellow

    Kanat Makhanov

    Kanat Makhanov is a research fellow at the Eurasian Institute of the International H.A Yassawi Kazakh-Turkish University. He holds a BA in Business Economics from the KIMEP University from 2012.