Demographic transition, consumption and capital accumulation in Mexico

Iván Mejía-Guevara, University of California, Berkeley
Virgilio Partida, Facultad Latinoamericana de Ciencias Sociales (FLACSO)
Félix Vélez Fernández-Varela, Instituto Tecnológico Autónomo de México (ITAM)

As age distribution of the population change, the ratio of income to consumption, the support ratio, varies along the demographic transition period. A transitory gain results when the proportion of prime-age adult population increases more rapidly than both young and elderly groups. A sustained period of high consumption, a second dividend, could be maintained even after the period of favorable support ratio vanishes, provided the consumption of elderly relies on capital deepening rather than on transfers. The decision on which mechanism followed to sustain consumption of the elderly is a matter of public policy. We analyze these hypotheses for the case of Mexico, based on estimates obtained from an interdependent altruistic sharing theoretical approach. We report evidence for a second demographic dividend, its timing and magnitude when we assume changes in current and future policy decisions.