Economic implications of Mexico's sudden demographic transition

Mexico is in the midst of an unprecedented demographic transition that is changing the size and age structure of its population  Over the past three decades, lower mortality rates and higher life expectancies have been coupled with dramatically reduced fertility rates.

The purpose of this paper is to provide a conceptual insight into the Mexican demographic story and discuss implications for the country's economy and for the United States, given the central role that Mexico is playing in the current U.S. immigration debate.

Main observations include:

• Mexico's demographic transition is proceeding at a rapid pace: age distribution is projected to shift significantly toward the older cohorts. As a result, the country's median age will rise from the current 25.6 years to 43.1 in 2050, a level that will be higher than that projected for most developing countries
• Mexico is one of the few developing countries facing negative rates of population growth, a clear consequence of one of the world's most pronounced fertility declines
• Mexican migrants are overwhelmingly of working-age and therefore a disproportionate migration of young male Mexicans to the United States has contributed in slashing the country's fertility rates
• Mexico's demographic projections suggest that before experiencing a dramatic surge of the elderly population, the country will see a rising share of the working-age cohort. These demographic patterns offer Mexico a limited window of opportunity in the next two decades to capitalise on the demographic dividend and raise the income of its citizens before a sizable portion of its population grows old and poor
• better education and training coupled with labour and tax laws that make the creation of formal jobs less expensive, and improved infrastructure, particularly in the southern states, might all raise the country's overall economic welfare
  
• a positive development is the introduction in the 1990s of mandatory individual savings accounts, managed by private institutions known as Afores. Under this system, workers save for their own retirement and the accumulated sum is converted to an annuity at the time the worker retires
• for those in the informal sector, the ECLAC recommends a system in which people who never made a contribution could receive a retirement payment over the poverty line

The paper offers two contrasting potential economic scenarios that will have distinct implications for the United States:

• the first scenario is one in which Mexico's economic progress continues to disappoint. For U.S. businesses, this picture is not promising because a larger Mexican population in the next 20 years will not translate into a larger market with enough purchasing power to demand sophisticated U.S. made goods and services. Weak economic development will lead to an aged society with insufficient incomes to afford goods and services
• the second scenario is one in which Mexico implements further reforms to make its economy more competitive, creating a sizable number of jobs. Under this scenario a larger, better educated (due to reforms) and, therefore, more productive workforce finds employment opportunities, raising the living standards of a large number of Mexicans and stimulating the demand for U.S. products
• for the United States, the bottom line of a stronger Mexican economy, one that is able to capitalise on the demographic dividend, seems to be higher exports of goods and services and smaller inflows of Mexican workers. Therefore, while many people in the United States see large-scale immigration from Mexico as an unending process, the current and projected demographic trends presented in this study (at least under a scenario of strong economic growth south of the border) suggest otherwise
• but having been unable to capitalise on the demographic dividend so far, the Mexican economy might face a surge in dependency ratios due to population ageing before reaching the next stage in the economic development ladder. The shift to an older population may prove painful, as a relatively smaller workforce does not provide sufficient savings to finance the basic consumption needs of the elderly
• large scale migration of Mexican workers to the United States will continue to reduce the size of the actual workforce, exacerbating the coming ageing process and its undesired economic consequences. But disproportionate migration might also become a source of potential savings for the Mexican economy in the form of remittances. Policy makers should find ways to channel sizable inflows of remittances into investment-rather than just consumption-and therefore, stimulate long-term economic growth and development