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No Country for Old Men? Demography’s Impact on the Global Economy

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Editor’s Note: This is the first of three pieces examining global demographic trends and their impact on the global economy.

By William Reinsch: 

One of the relatively untold stories of economic policy is the decisive role demography plays in how countries grow and prosper — or not. By “demography” I mean population size and growth as well as gender and age distribution. While there is plenty of scholarly work on the subject, it rarely makes the headlines because its effects are long-term, and it is relatively immutable. 

For example, the entire global work force in the year 2030 has already been born. We can’t do anything about making it bigger, though wars and stupid policies can certainly make it smaller by killing people off. If a government wants to adjust its population, as some do in the face of declines in absolute terms not just in terms of slower growth, it means making adjustments that will take decades to play out. In other words, if Japan wanted to do something to arrest the decline in its birth rate, it should have acted well before the turn of this century. Now is too late for any short term impact. Looking at it that way, you can see that this is not exactly the stuff that makes the evening news or the front page of your daily newspaper.

Unfortunately, we seem to live in a culture where if you can’t Tweet it, it either didn’t happen or is not important, so we don’t think about demographic trends nearly as often as we should, and we do something about them even less often.

Fortunately, thoughtful people have not disappeared entirely from the face of the earth, and scholars are busy analyzing demographic trends and making forecasts, most of them gloomy. One of the more interesting (and short) pieces appeared recently in ISA’s News Update of October 12. Its basic conclusions, based on forecasts of shrinking populations in Europe and Japan, are:

“First, lower numbers of workers will result in lower levels of economic output without corresponding major increases in productivity. Second, lower numbers of consumers will reduce demand levels in many of the world’s most important consumer markets. Third, without major changes in working patterns, the dependency ratio (the ratio of non-workers to workers) in most major economies will rise dramatically in the coming years. As such, many countries will face a major challenge in managing to maintain and boost economic growth rates as a result of these dramatic demographic changes.”

Declining worker populations are most obvious in Japan and Central and Eastern Europe, including Russia, but they are also becoming an issue in China and — less dramatically — in parts of Asia and Latin America. The United States is a bit of an outlier among developed countries, with a worker population projected to grow more than its competitors over the next 30 years although less than it has grown in previous decades (Australia appears to be the biggest winner amongst developed economies,  apparently they’re having a lot of babies there).

These trends raise a couple of issues worth considering, although there may be no right answers. 

First, it puts back on the table an old economic argument about whether people are fundamentally producers or consumers. China has struggled with this for years. Mao Zedong thought people were producers and wanted more of them so China could grow economically. His successors thought they were consumers which China, at the time, was having trouble feeding; hence the one child policy. That policy, in turn, has led to the decline in the number of workers and China’s slowing economic growth. The lessons to be learned from this are that people are both producers and consumers and that messing with population policy can have unintended long term consequences.

Second, it puts on the table the question of what, if anything, governments can or should do about the problem. History suggests that both carrots (subsidies for having more children) and sticks (one-child policies) don’t achieve their objectives, can have unexpected costs, and are always long-term solutions to an immediate problem. The Japanese are also trying robots as a solution to worker shortages, but it’s hard to see that as a permanent solution except in science fiction movies (anyone remember A.I. Artificial Intelligence?)

Instead, a solution that has not been fully explored and which admittedly comes with baggage of its own, is immigration. Japan, Italy, Germany, and other countries may be facing a worker shortage, but the world as a whole is not. In fact, it’s awash with people — they’re just somewhere else, mostly in Africa, South and Southeast Asia, and the Middle East, and they are young.  Moreover, many of them want to move because they don’t see opportunities where they are. The United States has tapped into this reservoir of workers for more than 200 years, and it one of the main reasons for our economic success.  The people that have come here have not only been good workers, they’ve been — and produced — good artists, musicians, writers, athletes, innovators, and even politicians. We are stronger and richer economically and culturally because of them.

The current wave of migrants into Europe, some of which is economic-inspired, some of it political, presents countries with declining populations an unusual opportunity to put themselves back on the path of growth without waiting for a generation of babies to grow up. It is a win-win strategy. So far, it does not look like many of them want to seize the opportunity, which is understandable. There are enormous cultural differences that both sides would have to overcome. The Europeans are not doing a very good job of that now, and our own history over those 200 years shows it is not easy to do it under more favorable circumstances.

So, I am not optimistic that Europe or Japan will seize the opportunity, but we can always hope there are politicians in those countries who understand that their responsibility is to care not just about next week but about the next generation and the one after that.  

___
William Reinsch is a Distinguished Fellow with the Stimson Center, where he works principally with the Center’s Trade21 initiative

Photo credit: Roberto Saltori via Flickr
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