How Demographic and Fiscal Policy Shocks Affect Per Capita Income: Evidence from Zambia’s Orthogonalized Impulse Response Analysis

Vollständiger Abstract

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Globally, driving socio-economic development is a primary government objective, yet various policy and demographic factors often hinder success. This paper models how demographic shifts and fiscal policy impact income-based socio-economic outcomes. Using Zambia’s time-series data from 1975 to 2023, we conducted a cointegration analysis on first-order integrated variables and quantified the impact sizes using the orthogonalized impulse response functions. The long-run analysis reveals that demographic variables, that is working-age population, life expectancy, and dependency ratio, positively affect per capita GDP. Conversely, taxation levels exert a negative long-run effect, while government expenditure is statistically insignificant. Specifically, a unit shock to the working-age population triggers a non-transitory orthogonal increase in per capita income, rising from 1.4 percent in year one to 9.2 percent by year ten. Shocks to life expectancy and the dependency ratio yield similar non-transitory gains, rising to 22.2 percent and 39.2 percent by the tenth year, respectively. In contrast, a unit shock to taxation reduces per capita income by 4.8 percent initially, worsening to a 9.1 percent decline by year ten. Consequently, we conclude that demographic shifts and taxation are critical drivers of Zambia's per capita GDP growth, with taxation causing adverse long-run effects despite producing short-run expansionary benefits. We recommend that Zambia implement policies to sustain working-age population growth and restructure its fiscal framework, shifting government spending from consumption to investment, productive spending, to escape the developing-world underdevelopment trap.