Analysis of the Nexus between Demographic Changes and Economic Growth in Pakistan: Role of Capital Stock

Pakistan has been experiencing a decrease in population growth since the early 1990s, which has led to an increasing ratio of the working-age population, known as the demographic dividend. The demographic dividend may lead to higher savings and investment, which spurs economic growth. Given this postulation, the study is the first of its kind to empirically analyze the impact of demographic variables on economic growth through physical capital for Pakistan from 1960 to 2018. In this regard, the demographic change is captured by taking four alternate measures: population growth, young-age dependency ratio, old-age dependency ratio, and working-age population ratio. In the first step, the direct impact of demographic changes on physical capital is estimated to examine the channel effect. Later, the effect of demographically-induced capital stock is estimated on economic growth. 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 the 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 enhance savings to maximize the benefits of the demographic dividend.