Impact of Demographic Transition on Economic Growth of Pakistan

Abstract

Demographic transition is a crucial determinant of long-term economic growth because changes in population structure influence labor supply, productivity, savings, and investment. This study examines the impact of demographic transition on economic growth in Pakistan using annual time-series data from 1988 to 2023. A comprehensive Demographic Index (DI) is constructed through Principal Component Analysis (PCA) by incorporating population growth rate, fertility rate, life expectancy, dependency ratio, working-age population, population aged 65 and above, and inverse population density. The Autoregressive Distributed Lag (ARDL) approach is employed to analyze both short-run and long-run relationships between demographic transition and economic growth, while labor force participation, education expenditure, health expenditure, foreign direct investment, and inflation are included as control variables. The empirical findings confirm the existence of a long-run relationship among the variables. The results reveal that the demographic index has a negative and significant effect on economic growth, indicating that Pakistan has not yet fully transformed its demographic changes into a demographic dividend. Conversely, education expenditure, health expenditure, foreign direct investment, and labor force participation positively contribute to economic growth, whereas inflation exerts a negative effect. The error correction term is negative and statistically significant, confirming the stability of the long-run equilibrium relationship. The study concludes that demographic transition alone cannot guarantee economic growth unless supported by effective policies aimed at human capital development, employment generation, and investment promotion. Therefore, Pakistan should focus on improving education and healthcare services, creating productive employment opportunities, and strengthening investment-friendly policies to convert its demographic potential into sustainable economic growth.