Global Demographics and Economic Growth

1. 

   Jakarta - 30 million people and sinking

INTRODUCTION

Since the beginning of the Agricultural Revolution about 10,000 years ago, demographics meant high birth rates, high infant mortality rates and high death rates. Until the Industrial Revolution, starting in the late 1700s. At first, death rates fell faster than birth rates. Then better public health and health care reduced mortality rates from infection, epidemics and diseases. Then a combination of more effective birth control and social and economic change reduced birth rates. 

During these transition periods, average life expectancies increased. After World War II, the global population exploded:

1900 – Appoximately 1.6 billion people

1950 – 2.6 billion

2000 – 6.1 billion

2020 – 7.8 billion

The industrialized parts of the world now have low birth rates – mostly below replacement – and low death rates. Birth rates are also falling in much of the rest of the world. 

GLOBAL DEMOGRAPHICS

Demographics, the size and composition of population, will shape national and global economic growth and economic policy.  

The period from 1950 to 2000 was highly unusual. The American “baby boom” started, temporarily reversing the long-term decline in birth rates.  Not just the United States but the global population experienced high birthrates and high population growth rates. In the middle of this period, partly due to more effective and more available birth control, birth rates began a rapid decline. The growth rate in world population began to fall. At the same time, much of the world’s population experienced rising standards of living. One consequence was longer life expectancies and rising average ages in industialized countries.  

Countries with over a third of the world’s population and most of the world’s output now have birth rates below or at replacement. They are mostly the wealthy, industrialized countries, including the United States, Canada, Brazil, Western and Eastern Europe, Turkey, parts of Southeast Asia, Japan, Russia and China. Collectively, the size of their labor forces have stopped growing. All countries face the same challenges: Will they be able to invest in economic growth and development (innovation and structural change), deal with environmental costs and climate change, and support aging populations?  

There are falling birthrates for most of the rest of the world’s population, coming down from very high levels. Mexico is at replacement and India is close to the replacement birthrate. But total population continues to grow, partly because of lower infant and child mortality rates, public health programs, better medicine, and subsequently longer lives in most of the world.  

We are now in a period of a slowdown in total population growth rates. Global population is growing at about one percent per year and the rate continues to fall. But the increase in the number of people is large. In the most recent United Nations projection, the increase in global population from 2020 to 2050 is about 2 billion people, from 7.8 billion to 9.7 billion. The projected population increase over the following 50 years is lower, abour 1.2 billion. 

Changes in total population may be points on an exponential decay curve. The UN projects that zero population growth will be achieved sometime shortly before 2100. The rate of decline could change with changes in the availability and cost of birth control, anti-aging medical technologies and more available health care for an aging population. (Estimates of future population are from June 17, 2019 UN projections. UN projections are revised about every two years.)

The biggest unknown is future medical technology that will prolong life expectancies. Regardless of projection, the fastest growing age cohort is 65 years and over; within that cohort, the fastest growing age group is 80 years and older.

Countries with birthrates well below replacement and aging populations may experience accelerating decreases in population. Family planning, combined with urbanization and more education of females, could lead to birth rates declining faster than projected in high birth-rate countries. In Africa, Ethiopia, Malawi and Rwanda promoted family planning and have seen large decreases in their birth rates. Kenya, after investing in family planning clinics and information, has seen its fertility rate fall from 6.5 in the late 1980s to 2.4, marginally above replacement and half the rate of most African countries.

POOR COUNTRIES AND RICH COUNTRIES

Wealthy countries have below replacement birth rates, no growth or declining populations and labor forces, low real economic growth, and aging populations and labor forces. Population will continue to concentrate in cities; the population of a small number of cities will be responsible for technological innovation and economic development. Rural areas will continue to lose population.

Poor countries today have high but declining birth rates, young and increasing populations, and populations that want to emigrate (see case study below).

Most of the largest and fastest growing urban areas in the world are in poor countries, China and India. Over half of the world’s population live in cities and the percent is rising. Almost all of the increased population in poor countries will live in or move to cities, which are already ecological disasters - traffic gridlock, poor air quality, lack of infrasturcture, sinking, raw sewage, and power outages. Many are coastal cities that are already experiencing periodic flooding and storm surges; rising sea levels and the increased number and severity of hurricanes will intensify urban problems. 

Starting sometime in the 2050s, the world’s population outside of Africa will stop growing and then slowly decline. All of the world’s net population growth will then be in Africa. How soon the world reaches zero population growth will depend critically on how fast birthrates decline in Africa.

By 2100, Africa could have about as many people as Asia, about 4-5 billion. Together, Africa and Asia in 2100 could have about 80% of the world’s population.

Throughout large parts of the Middle East, Africa and Latin America, governments have not been able to provide effective management of economic development for their young, growing population, which have high rates of unemployment and underemployment. Many of the governments are corrupt and/or repressive without free elections or civil liberties. Political activism, partly caused by stagnant or declining standards of living and lack of economic opportunity for young workers, commonly takes the form of mass protests and street demonstrations, aided by Internet social media. Governments typically react with riot police and the military, arrest torture and prisons, rather than economic and political reform.

THE DEMOGRAPHICS OF SPECIFIC REGIONS AND COUNTRIES

A recent survey concludes that 46 countries have declining population or will have declining population in the near future. Declining population is already true in Japan (see below) and Russia and is about to be true in central and eastern Europe. South Korea, also with an extremely low birth rate, is looking at a demographic future similar to Japan’s (see below). South Korea’s current population of 51 million is expected to decline to about 30 million in 2100.

Russia’s population is declining. Male life expectancies in Russia have been going down for decades but might have recently stabilized. While birthrates are below replacement, the decline of the national population has been offset in recent years by immigration. But lower rates of immigration in 2018 and 2019 have led to large decreases in population. The UN projection is that Russia’s current population of around 146 million will fall to about 85 million by the end of the century. 

Because of very low birthrates and out-migration, central and eastern Europe is looking at population declines in this generation.  Some UN projections show that most countries in central and eastern Europe might have even larger total percent declines than Japan by the end of the century (over 50%).

Western Europe is further along the population aging curve but because of immigration of younger people, the decline will not be as precipitous. And western Europe, like Japan, currently starts with more resources to support an aging population.  But high structural unemployment rates, low economic growth, restrictive labor laws and generous early retirement benefits will strain western Europe’s ability to grow and maintain current social welfare levels. A few European countries realize that current levels of social welfare are not sustainable and have begun reviews of retirement and health care programs. This problem is exacerbated by the currently high unemployment and underemployment rates among younger employees.

China, which has enforced a “one-child” program since the 1970s, has a very low birthrate. Although this program has been relaxed in recent years, the national birthrate remains far below replacement. China currently has a young average-age population but the average age is rising very rapidly. 

China’s working-age population began shrinking in 2012.  By around 2050, the decrease will be about the size of the current U.S. total labor force. Next year, the median (half above, half below) age in China will pass that of the United States. By around 2045, the percent of China’s population over the age of 65 will be about equal that of the United States. 

A mature, experienced workforce should help maintain high but falling economic growth rates for another generation. After about 2050, demographics will begin working against Chinese economic growth. 

China will grow old before it becomes rich (high per capita income). Even after decades of spectacular growth, per capita income is still about one-third to one-fourth that of South Korea and Japan.  

Given current political strains and a large Chinese population outside of China, it is possible that China will have net outmigration in the future.

DEMOGRAPHICS AND ECONOMIC GROWTH

The following accounting identity shows the sources of economic growth. An accounting identity says nothing about causality, assumptions or feedbacks. But it introduces some general issues.

The economic growth rate of a country roughly equals the growth rate of the labor force plus the increase in productivity (output per member of the labor force).

If the labor force numbers are stable, all of the increase in output depends on the increase in productivity. The pressure on productivity is even greater if the labor force numbers are decreasing. So, for example, if a labor force is increasing at about 1% per year and productivity is increasing at about 1% per year, output will increase about 2% per year. If the workforce stops growing, productivity would have to double to 2% to yield the same economic growth. If the workforce were to decrease at 1% year, as it is in a number of countries already, productivity would have to increase 3% a year to achieve 2% economic growth. This is a high productivity growth rate for a developed economy.

There is a small amount of research that suggests that an aging labor force is one cause of slowing productivity growth.

Low rates of productivity growth with accelerating rates of labor force and population decline could lead to less output (negative growth rates) and declining standards of living.

A member of the industrial/information workforce today is better educated, with new skills, compared to a member of the labor force a generation or two ago. The difference should show up in an increase in labor productivity. Increase in total factor productivity will be due to innovation in capital equipment – including information technology, robotics and artificial intelligence algorithms – and demand for employees with new skills and knowledge. Other factors are public investment and organizational innovation. But these changes have not shown up in productivity measurements. Productivity growth rates are low, although I suspect that the methodology used to compute these figures underestimates the gains.

Demographics are heavily influencing the areas of investment in wealthy countries; these sectors will drive future economic growth. The three most active areas of research and net investment are robots and AI (reaction to declining workforce), driverless vehicles (same), and biotechnology (health care for an aging population).

Demographics also influence the demand side of economies. The changing age structure of the economy influences the "market basket" of consumer spending. Certainly the large increase in the number of senior citizens (and their income) is having a major impact on health care spending. To say nothing about the increase in demand for tourism, gambling and south Florida real estate. (I once predicted that marijuana would be legalized when a large number of baby boomers became 65 and older.)

An aging population is not necessarily bad for economic growth. A healthy population beyond retirement age is leading in the United States to an increasing percent of senior citizens remaining in the work force. With a rising percent of the population over 65 and living longer, health care is a growing percent of output. The health care sector is very innovative, which is a source of economic development and thus economic growth. 

Companies use demographic information when planning marketing and advertising strategies. Changing demographics are analyzed when developing new products, changing product mix, and segmenting markets. The explosion of detailed demographic information about smaller and smaller segments, including individuals, combined with online marketing technology, is revolutionizing marketing and advertising.

Areas of the world like Africa face the opposite problem. Working-age population will increase rapidly for a generation or two. But unemployment rates may be high and marginal productivity may be close to zero, or negative in rural areas. With high growth rates of population, economic growth rates will have to be high – over 6% per year – for a sustained period to raise real per capita income (standard of living) and reduce unemployment.  

IMPLICATIONS FOR ECONOMIC POLICY

The standard economic models demonstrate that the demographic changes we are seeing are a function of economic growth and development. Industrializing, better educated, urbanizing populations have declining birth rates. But the experience of the poorer regions of the world tends to indicate that these demographic changes are occurring even without economic growth and development.

Although wealthier countries concentrate on the costs of their rapidly growing retired population, for most of the world the critical question over the next two generations will be how to accelerate economic growth to provide jobs and opportunity for the growing working age population.  The related challenge is how to improve education, training, and economic opportunity to raise standards of living now to provide the resources for the aging population in the future. 

For the entire world, these objectives are complicated by how to pay for the social costs of past industrialization and environmental degradation, and the future costs of climate change.

Increasing population and rising real income in emerging economies, especially in Asia, are increasing the demand for energy. China, which had no privately owned cars in 1979, is now the world's largest automobile market. A dramatic increase in the number of cars is the main reason for the continuing increase in the global demand for oil.  Increased demand for electricity is being met largely with new power plants burning fossil fuels. For at least another generation, these trends will make it difficult to meet global goals to drastically slow down or stop global warming.

Demographics is interacting with climate change in another important area – food production. Many scientists believe the most serious effect of climate change will be its impact on food production. Global warming and more extreme weather events will make it more difficult to expand food production using current technology. As in other areas, trend projections can be changed by the development of new techology.

In the long run, the positive side of declining global population will probably be less demand for resources. Combined with substitute technology, global warming might slow down or stop. Climate change might not have quite the devastating effects trend projections indicate.

The advanced and industrialized countries with stable or declining populations and workforces will have to consider the following:

Economic growth will have to come from large increases in productivity (output per member of the workforce). To achieve this, and also meet social welfare costs, most countries and regions such as the European Union will have to make radical changes in economic policies. Particularly disruptive and contentious will be the adoption of automated factories and offices. On the positive side they will increase labor and total productivity; on the negative side they will probably eliminate or "deskill" a large number of existing and future jobs.

Large increases in retirement age populations is leading to serious underfunding of public and private pension funds. Taxes to fund public pension funds are rising rapidly, both in amount and as percent of government budgets. Despite this, unfunded liabilities – promised future benefits not covered by projected future revenue from taxes – are also rising rapidly.

Multinational corporations will develop and adopt the new technology. Countries that do not have quality education, encourage innovation and change economic incentives will not be able to attract investment and compete in the global economy. And their best educated and most motivated people may go somewhere else, as is happening in eastern Europe and many developing countries.

On the other hand, poor countries with decent transportation, energy and communication infrastructure will probably attract foreign investment. Real wages of at least part of the labor force will rise.

Attitudes towards immigration might change from the current restrictive policies of some countries. Attracting “human capital” will be just as important as attracting investment capital. Trans-border movement of people will increase. New national, regional and international agreements will have to be negotiated.  Remittances back to the home country will be a more important part of the economy of many countries and global capital flows. 

Attitudes about work, labor laws, retirement and retirement ages will change. The benchmark age of 65 was arbitrarily set by Bismarck almost 150 years ago when less than one percent of the German population lived that long. When the United States adopted Social Security, life expectancy was 56 years. The life expectancy of America’s younger workers is already over 80 years.

DEMOGRAPHICS AND PUBLIC ECONOMIC POLICIES

If the labor force is not growing or actually shrinking, as it is in most industrialized economies, and the non-working population is growing, one consequence is likely to be growing government budget deficits. Growing government deficits as a percent of GDP may be a function of no economic growth or slow economic growth, not the other way around as suggested by economic research.

It is how a government spends its income, more than the size of the deficit, that matters. Public investment substitutes for stagnant private consumption spending. Investment, both public and private, substitutes demand for innovation for demand for existing goods. This could increase productivity and result in new products and services. Economic growth then will depend on high levels of new technology and increased productivity (output per employee).

An aging population is not necessarily bad for economic growth. A healthy population beyond retirement age is leading in the United States to an increasing percent of senior citizens remaining in the work force. With a rising percent of the population over 65 and living longer, health care is a growing percent of output. The health care sector is very innovative, which is a source of economic development and thus economic growth. 

JAPAN AS A POSSIBLE MODEL (OR WARNING) FOR INDUSTRIAL COUNTRIES

Japanese demographers project than Japan’s population will decline from about 127 million people today to about 60-65 million by the end of the century. If the demographers continued their projection, then in another generation there would be very few Japanese and most of them would be very old. Already, about half of Japanese females and a quarter of Japanese males will live to be at least 90 years old. 

This population projection assumes no changes in very restrictive immigration policies.

Japan is a possible model for a country that has:

Below replacement birth rates combined with an aging population

Declining size of workforce

Limited immigration

Over the past 20 years, Japan’s working-age population has declined by more than 10 million workers, about 14% of the workforce. Projections are for an even larger decrease in the size of the labor force over the next 20 years.

In such an environment, demographics can overcome aggressive monetary and fiscal policy expected to stimulate economic growth. These policies have failed in Japan. Zero interest rates, large budget deficits and the highest national debt/GDP ratio in the world have not increased Japan's very low economic growth rate.

In Japan, the workforce and population are decreasing at about 1% per year. Productivity is increasing at about 1.3% per year, giving economic growth of 0.3% per year. But because of decreasing population, output per person is increasing at about 1.3% per year, or about the same as in the U.S. Growth rates are much lower but the increase in output per person is about the same. This may be one reason there is very little call for any economic, political or social reform in Japan despite almost no economic growth. And this has been going on since the early 1990s.

Domestic demand is weak even though unemployment is very low. Rather than raise wages, Japanese companies are substituting robotics and AI for workers. They are then exporting this and other manufaturing technology to other countries, including substantial investment outside of Japan. Much of Japanese manufacturing has moved to China and Asia. Debt-financed government spending makes up for weak private consumption and investment spending to ward off deflation and recession.

Japan admits few immigrant workers to increase its labor force. About 2% of its labor force are foreigners. Most are on short-term or limited work visas and are not expected to stay. Under current law, it is virtually impossible for immigrants to become citizens or permanent residents.

The high (46% - the highest in the world) and rising dependency ratio (the number of elderly divided by the number in working age groups) means that government budgets will find it very difficult to raise tax revenue to meet the rising social costs of an aging society. The government continues to run large budget deficits financed by borrowing most of the country’s savings. There is no chance of balanced budgets in the future. A rise in interest rates would make Japan’s financial problems worse.

An aging population contributes to social and political resistance to structural reforms. The dominant political party substitutes government spending and subsidies, combined with traditional appeals, for reforms that might threaten social stability.

All of this is before the economic costs of climate change and global warming. Japan in the recent past has suffered damage from earthquakes, typhoons and a tsunami that destroyed a nuclear power complex.

Figures are from The Economist, “Japan’s economic troubles offer a glimpse of a sobering future,” December 5, 2019.

Japan is a possible model for the future of other wealthy countries. Japan has a shrinking population and workforce. This will continue. It is not surprising Japan leads the world in developing and installing robots. Robots and AI are also alternatives to immigrants. Japanese companies export capital and technology. Facing falling population, Japan is slowly increasing the number of foreigners allowed into Japan on temporary work permits. But the number remains small.

Japan’s real GDP has been basically stagnant (about one percent per year) over the last 20 years. Without immigration and structural changes to Japan’s political and economic system, Japan’s real GDP in the future will grow slowly at best and eventually decline along with its population. In the long run, Japan will continue on its path to demographic and economic self-destruction.

CONCLUSIONS

Demographic trends have important consequences for economic growth and public policies. They cannot be seen in isolation. Neither can any of the other major trends. They are interrelated. 

·      Rising global population but at lower rates, mostly in poor countries, for the remainder of the century. After the 2050s, all of the world’s net population increase will occur in Africa. Global population may stop growing by the end of the century. 

·      Rising population in poor countries makes high rates of economic growth both pressing and difficult. Emigration pressure from poor regions of the world will probably increase unless there are high rates of economic growth.

·      Most of the world’s population increase will take place in cities and surrounding metropolitan areas, creating even larger massive urban areas. Large urban areas are increasing rapidly in poorer countries. 

·      Static, falling and aging populations in the wealthier, industrialized countries. Static or declining labor forces mean all economic growth will depend on increases in productivity. To counter demographic trends, technological innovation (robotics and software) leading to high rates of productivity growth will be necessary to increase standards of living (real income per person).

·      Problems with unemployment and underemployment, stagnant and declining real incomes and income inequality will probably get worse as artificial intelligence and robotics accelerates the substitution of capital for labor.

Economic development and growth since the beginning of the Industrial Revolution has been aided by large increases in populations and especially the working age population. But in the future, economic development and growth in most of the world will have to occur with stagnant or declining labor forces and aging populations.

=====================================================

CASE STUDY – LATIN AMERICA

This is mostly a summary of The Economist, “Continent of discontent,”

September 7, 2019, 81. 

Gallup polls reveal that 31% of the population in Latin America want to leave their countries, about the same percent of the people polled in Africa and the Middle East. Latin Americans are fed up with violence and poverty, especially in Mexico, El Salvador, Honduras and Guatemala. There were 64,000 murders in Brazil in 2017. Drug gangs are a threat in many Latin American cities and countries. Over 4 million people – about 13% of the population - have already left Venezuela. There have been recessions in Brazil and Argentina. Much of the post-war increase in income and wealth has gone to a small percent of the population, a reason for the recent demonstrations in Chile. Overall, Latin America has had almost no economic growth since 2015.

Corruption is everywhere, with another major scandal uncovered in Brazil. 80% of those polled in Latin America think their government is corrupt.  According to another poll, “the share of Latin Americans dissatisfied with how democracy works in their country has risen from 52% in 2010 to 71% in 2018.” 

In 2018, autocratic populists who campaigned agains corruption and crime won presidential elections in Brazil (a conservative) and Mexico (a leftist). Populist Peronistas returned to power in Argentina. Chile, democratic and Latin America’s economic success story, is being wracked by massive protests and demonstrations. Street demonstrations have led to the resignation and exile of the president of Bolivia. 

If voters remain disenchanted and disgusted, more autocratic leaders are likely to be elected. They are usually better at assigning blame than solving economic problems. And emigration pressure on the U.S. southern borders will continued.

=============================================================

For a discussion of demographics and economic growth in the United States, see the post United States Demographics, Immigration and Economic Growth.