The enormous economic potential of developing countries depends on their response to a global demographic shift--a response that'll fail without universal, affordable access to financial services.
That's the case made by a new MasterCard-funded report on global demographics by the Center for Financial Inclusion (CFI).
A growing population fed by an increase in life expectancy and moderated by a decrease in birth rate produces a unique situation CFI calls a "demographic window." In this instance, an unusually large majority of a population can be found in their youthful, productive years with relatively few very young or very old people to support. A society can benefit from having many members who are both able to work and eager to consume.
Countries enjoying this "demographic window" have middle incomes, in between those of the least-developed countries, those still characterized by high birth and death rates, and those of the graying nations of the developed world. This position, argue Peter Kasprowicz and Elisabeth Rhyne, authors of the CFI report, presents a unique opportunity for economic development. However, neither high population growth nor a bulging youth cohort can, on its own, deliver better economic performance. As the demographic makeup of developing countries shifts, financial inclusion--the ability of everyone to save, purchase consumer goods, and access credit--becomes increasingly important.
"New savings products are needed to help the poor invest in education and for longer lives," the report says. "Health and life insurance products would help to manage longevity risks; credit is needed to grow microenterprises; technology can lower costs for payments and remove barriers to the formal financial system. Financial education is important to help people plan and deal with demographic change."
Financial inclusion is important across the board, but, this report argues that countries with different demographics need different financial services. For instance, "in demographic window countries, financial inclusion should focus more on the shifting needs of mature families--including savings and investments and pensions--while continuing to support young families." Alternatively, in the least developed countries, the main goal is to provide universal youth access to basic products and banking services. Most of the financially excluded population is in least-developed countries. These societies must take preemptive measures to ensure they can take advantage of their demographic window as it opens.
On CFI's Financial Inclusion 2020 blog, Yuwa Hedrick-Wong, global economic advisor to MasterCard, warns:
There is nothing more counterproductive than excluding a growing young population from full access to financial services. ... Without adequate investment in educating and providing health care for the young; and more importantly, without sufficient investment in the economy to generate productive employment, all that a society can expect are demographic burdens of mounting youth unemployment and underemployment with all the associated social and political malaise.
In other words, the Arab Spring may be just the first of many powerful youth uprisings--evidence that financial exclusion has social and political ramifications in addition to financial ones.
"And with continuing high population growth expected in the developing countries in the coming decade, there will be no middle ground: they will get either demographic burdens or demographic dividends."
Likewise, societies need to prepare for what happens after their "window" closes. As life expectancies increase, there’s also rising demand for long-term savings by mature adults who must care for aging parents and their own retirements. The demographic window requires the right policies in place to improve labor productivity and prepare for an older population as a country's baby-boom generation leaves the workforce.
The report, Looking through the Demographic Window: Implications for Financial Inclusion, is the first from CFI's Mapping the Invisible Market project. Sponsored by MasterCard, this research project examines forces that are instrumental in the world achieving full financial inclusion by 2020. For data and more information on country demographics, visit CFI's interactive map.