New global population trends are worrisome

Demography matters. But it’s not destiny as the French philosopher, Auguste Comte, would have us believe. Other things also matter. Certainly its impact endures far longer and has far wide-ranging effects. Nevertheless, even demographic trends do change. What’s happening right now is extraordinary. The UN’s “State of World Population 2011” points to ominous trends. The world’s population reached 7 billion on October 31, 2011, of which only 1.2 billion (17%) live in the rich world; 5.8 billion (83%) are found in developing economies including 851 million in the least developed.

More than 4 billion (57% of the world) reside in Asia and the Pacific. What’s remarkable today is that about 900 million people are over the age of 60 worldwide; by 2050, they will rise to 2.4 billion as population ages and live longer, and birth-rates slide further. The 20th century was marked by the greatest fall in death rates. Low birth rates look likely to be the defining demographic event of the 21st century. Total fertility rate (TFR) now averages below 2.1 in more than 70 nations (representing 50% of world population). This level of TFR measures number of births the average woman would need to bear over her life time to prevent population from falling in the long run. All European nations have low TFRs today and so do many Asian economies, including Japan, China, South Korea and Taiwan. Russia, Japan and Italy now have the lowest TFRs – typically not more than one child during her life time. Without strong immigration, their populations will fall. The US, by contrast, still has a growing population because its TFR is at about the 2.1 replacement level and continues to attract significant immigration.

Not long ago, many were concerned, and some still do, about the rapid rise in population. This poses an ominous policy dilemma – while the falling population brings with it the benefits of inverse correlation between fertility and income per capita which should please neo-Malthusians (those who still believe population will rise faster than the means of sustenance, bringing with it war, famine & epidemic), the current trend of low TFR and rising life expectancy will result in eventually, falling economic growth and rising costs, including health and related spending on social safety nets, as the workers pool supporting retirees fall. Today 4 workers support one retiree in the European Union; by 2060, the number of such workers will drop to just 2.

Dispelling the myths

—Overpopulation: Is 7 billion too many? No one knows for sure; not economists, not demographers. UN forecasts world population will reach 9.3 billion in 2050 and more than 10 billion by the end of this century. So? Population density can’t be used as the yardstick: Monaco has more than 16,000 persons per square kilometre, whereas Bangladesh has only 1,000. So? Some scholars even tried to determine the “optimum population.” Part of the problem lies in uncertainties forecasting the impact of future technologies on food production. Using resource scarcity isn’t helpful either. Real prices of corn, rice and wheat fell during the 20th century when world population exploded from 1.6 billion to more than 6 billion. Since prices are supposed to reflect scarcity, the world should be less “overpopulated” today than 100 years ago? Don’t match common sense, does it?

—High population growth keeps poor nations poor: Experience of Asian tigers South Korea and Taiwan don’t bear this out. In 1960, they were poor with fast growing populations. Over the next 2 decades, South Korea’s population rose 50%, and Taiwan’s, 65%. Between 1960 and 1980, these nations boomed; income per capita rose an average 6.2% a year in South Korea, and 7% in Taiwan. That’s not unique. Between 1900 and 2000, world population exploded but per capital income grew faster by fivefold.

—As population declines, so does growth: Again, empirical evidence showed otherwise. Between 1940s and 1960s, Ireland’s population collapsed, falling from 8.3 million to less than 3 million. Yet Ireland’s per capita income tripled. More recently, most of the former Soviet-bloc nations experienced depopulation since the end of the cold war. Yet, today, economic growth has been rather robust in this region; e.g. Bulgaria and Estonia suffered sharp population contractions of close to 20% – but their income per capita rose 50% and 60% respectively.

—Small is beautiful: A contrarian view that Japan should accept a smaller population and hence, less competition for space and resources. “Support a smaller Japan with a higher quality of life” (Prof. A. Matsutani). This challenge to the orthodoxy urging Japan to re-examine its social and political priorities could yet gain ground. The call to “populate or perish” remains compelling for most developed nations, including Japan.

—China’s one-child policy boost growth: This restrictive policy and China’s adoption of Deng’s pro-market reforms began in the late 1970s. Since then, China’s per capital income rose more than 8-fold. Both outcomes are not necessarily linked. Before the one-child policy, China’s TFR was 2.7; today, it’s 1.6, or 40% lower. Between 1960s and 1970s, Chinese TFR fell from 5.9 to 2.9, a sharper 50% drop. Yet, China’s per capita income only rose modestly. Its falling trend in fertility reflected also the experience of many East and South-east Asian societies. Myanmar also experienced very low fertility, but without state intervention. Nevertheless, reform is on the cards even though many exceptions are already being granted to minority groups; rural families whose first child is female; and couples who are both from one-child families.

Tale of two “bellies”

The demographic divide between nations (“bellies”) with high and low population growth has enormous economic and political significance. Today, Europe is following the traditional normal demographic path: as it became richer after the ‘50s, its TFR fell sharply to 1.4 now, below the replacement 2.1 rate. US followed a similar pattern until ‘80s. Then the TFR reversed its fall and even rose to about the replacement rate. With immigration, US population actually rose. UN expects US population to rise from 315 million today to 350 million to 400 million over the next 25 years, and to 400 million to 550 million by 2050. Europe’s population will likely peak at 740 million in 2025 and fall thereafter. So what? With a fertility rate 50% higher than Germany, Russia or Japan, and well above China, South Korea and Italy, and virtually higher than all of Eastern Europe, the US is the outlier among its traditional competitors, all of whose populations are destined to eventually fall after 2035.

Today, Russia’s low TFR (1.3) suggests its population will drop 30% by 2050 to less than one-third of US’s population. Equally serious is the emerging gap between US and East Asia. By 2050, a third or more of East Asia’s population will be more than 65 years old (30% in China). A slowdown in population growth can offer short-term economic and environmental benefits, but will soon cut deep into the nation’s savings and income.

Between 2000-2050, US workforce will grow 42%, while the same will decline 10% in China and 25% in Europe, and 44% in Japan. Unlike Europe and East Asia, US’s imperative is not in meeting the needs of the aging but in promoting jobs and opportunities for its expanding workforce. What the US does with this “demographic dividend” derived from its new “sweet-spot” of a robust young workforce, will depend on the entrepreneurial spirit of and innovative initiatives taken by the private sector – an issue that’s worrisome even now as more than 15 million are already unemployed. But the eventual loss of human capital as generation–Y ages means that this dividend has to be repaid.

Similarly, Europe and East Asia’s aging demography also needs to set their agenda – to find ways to ease pension and health burdens and grow productivity at the same time. Both regions need to bring new sparkiness into their midst through entrepreneurial vigour. They have to become more open to immigration.

The billionaires

Asia is home to more than four billion people. Its population will peak at 5.2 billion in 2052 and then start a slow decline. It claims the world’s two billionaires: China with 1.35 billion (and TFR of 1.6) in 2011; and India, 1.24 billion (and TFR, 2.5). China’s population will stabilise in 2025 (its workforce had started to shrink for the first time in 2012) and India, in 2060. In 2028, India will overtake China (with 1.39 billion) as the world’s most populous nation with 1.46 billion.

China’s population will stop growing by 2032 and then decline to 1.3 billion by 2050, while India will continue to grow to 1.7 billion by 2060 before it begins to fall. Global population shrinkage is real: Russia’s population will fall by 22% in first half of 21st century; Ukraine by a staggering 43%.

This is creeping all over the rich world: Japan has started to shrink (from 127 million to 100 million by 2050); Germany and Italy will follow soon. By 2050, populations will be lower than today in 50 nations.

Demographic decline is worrisome because it is perceived to be accompanied by economic decline. When population contracts, growth will slacken. Companies worry because domestic markets shrink. People worry about their economic welfare. Yet all these need not happen. Productivity growth will keep per capita growth up through the smart use of technology and the free spirit of entrepreneurship. With political will, the new demographics can herald a golden age.

Aging time bomb

The world is greying and Japan is greying at an unprecedented rate. Fifty years ago, only 5% of its population was over 65, well below US, UK, France or Germany. Today, it’s risen to 20%, the highest in the world and is forecast to reach 30% by 2025. After WWII, it had a more defined population pyramid than US. Now, its demographic profile looks more like a Japanese lantern.

Soon, it will turn into a narrow based urn, with serious consequences. Soon enough, there will be fewer productive workers, and more and more dependent elders. Also, the demographic shape of the workforce will eventually assume an inverted pyramid, with fewer young workers at the base where once there were many. The old consume more resources than the young, mostly in health related resources.

The baby-boomers have now started to retire and become custodians of years of accumulated technical and managerial skills. Their absence will be sorely missed by Mama-san at Ginza bars. Japan at least had a chance to grow rich before it grew old. Most developing economies, including China, are growing old before they even get rich. Bear in mind China’s per capita income is only US$6,000 in 2012, against US$50,000 in US, US$36,800 in Hong Kong and US$22,600 in South Korea. China’s low TFR means that by 2020, 20% of its population will more than 65 years old (14% in 2012); on current trends, it will reach 30% by mid-century.

It is estimated that by 2038, there will be as many people more than 65 as they are below age 20. Post 2038, older consumers will outnumber younger ones. Today, 1.4% of Chinese is more than 80 years old; by 2050, 7.2% will be. The implications on state finances are stark. The nation’s social security system, which covers only a fraction of the population, already has debts far exceeding its ability to repay. It also needs reform to put social spending, especially on healthcare, on a more sustainable footing.

What then, are we to do?

Yes, demography does matter. The new demographic trends are worrisome. Birth rates are low for good reasons, particularly the high time cost involved in raising children (especially for career women) and the desire to invest more in each child than in another. Birth rates can be raised by incentives and generous subsidies, but they are found in cross-country studies to have only modest impact. I am of the view that once nations (like Japan and Russia) have TFRs far below the replacement level of 2.1, even the most generous financial support will not significantly raise TFR in the next few decades. The viable solution to an ageing and falling population is to open the immigration gates. US studies have shown that significant inflows of immigrants: (i) have proven to be active venture capitalists; (ii) their ventures do create jobs and investment; (iii) they often act as critical catalysts in high-tech manufacturing and in information technology; and (iv) they can also make-up a large portion of new graduates in engineering and computer science, who are crucial in supporting growth of the finance and IT sectors. They help expand the pool of intellectual capital. Sure, immigration can create political, economic and social problems. That’s why Japan & Russia face a worrisome demographic and economic future. It’s not surprising people ignore the Greek philosopher Plato’s keen insight: “We easily forgive a child who is afraid of the dark; the real tragedy of life is when men are afraid of the light.”

• Former banker, Dr Lin is a Harvard educated economist and a British Chartered Scientist who speaks, writes and consults on economic & financial issues. Feedback is most welcome; email:starbizweek@thestar.com.my