Sunday, September 10, 2006

The Economics of Demographics

(various typos have been edited 9.11-06)

This one is a real treat for anyone simultaneoulsy interested in demographics and economics and as such also a treat for the DM team and hopefully for our faithful readers as well. What am I talking about then? In short, the IMF has chosen to devote their Septemper issue of Finance and Development to 'The Economics of Demographics' and obviously this cannot go un-noticed here. On that note we should thank fellow blogger Pienso for brining the IMF publication to our attention via E-Mail. So what do we have here?

Well in so many words; a lot! I honestly do not have time to go through the publication in detail so this post will serve as a pointer. However, I am sure we will re-visit the study later and go a bit depper into its content. At first hand though, there are some articles which at an intial glance come off as particularly interesting ...

Asia: Ready or Not? - Peter S. Heller

'The challenges faced by industrial countries in the West and Japan with the prospective retirement of the "baby-boom" generation are well recognized. Governments face a growing financial burden from pension costs, medical care, and possibly long-term care, implying either sharp increases in taxes or a reneging on the promised level of benefits. But less appreciated is the fact that many Asian countries also face their own demographic "time bomb." Although they lag two decades or so behind the industrial countries, the sharp decline in fertility rates and rising longevity will result in a growing proportion of elderly people, relative to both the overall population and the number of working-age people, by 2020–30.'


Can Europe Afford to Grow Old - Giuseppe Carone and Declan Costello

(Watch out the final sentence here ;))

' The population of the 25-member European Union (EU) in coming decades is set to become slightly smaller—but much older—posing significant risks to potential economic growth and putting substantial upward pressure on public spending. The region's old-age dependency ratio (the number of people 65 and over relative to those between 15 and 64) is projected to double to 54 percent by 2050, meaning that the EU will move from having four persons of working age for every elderly citizen to only two. In addition, upward pressure on spending has fueled concerns that unsustainable public finances could jeopardize the smooth functioning of the single currency, the euro.'

What is the Demographic Dividend? - Ronald Lee and Andrew Mason


'Industrial countries have largely completed what is called the "demographic transition"—the transition from a largely rural agrarian society with high fertility and mortality rates to a predominantly urban industrial society with low fertility and mortality rates. At an early stage of this transition, fertility rates fall, leading to fewer young mouths to feed. During this period, the labor force temporarily grows more rapidly than the population dependent on it, freeing up resources for investment in economic development and family welfare. Other things being equal, per capita income grows more rapidly too. That's the first dividend.'

(On this one we might need a disclaimer/note since a large part of the research undertaken by the contributors here are specifically concerned with the DD, the mechanisms by which this process operates, and how it relates to and affects the demographic transition. In short, expect the mainstream view to be challenged here :))

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These three articles above are consequently my immediate reading list but by no means necessarily yours too. I thus encourage to shop around in the publication because it seems to contain some very solid work in terms of background analysis of the major trends and salient issues pertaining to demographics and economics anno 2006.

Enjoy!

15 comments:

S.M. Stirling said...

In historical terms, one should note that Europeans (north and west of the St. Petersburg/Trieste line) never did have very high fertility rates.

CBR were often well below 35 per 1000 in pre-Industrial Revolution times, sometimes as low as 25. The ratio of never-married females often rose as high as 25%, and age at marriage was generally higher than it is today.

There was an period of exceptionally high nuptiality and fertility between about 1750-1850, but neither were ever as high as was common in 3rd-world countries in the 20th century.

Edward said...

"In short, expect the mainstream view to be challenged here"

Yes, well quite.

"'Industrial countries have largely completed what is called the "demographic transition"

Well this mainstream and traditional view of what the demographic transition was thought to be about is simply inadequate. This is a 'hard' theoretical topic, and I've been struggling away at it myself. But until we get this bit clear we simply aren't realistically going to be able to get to grips with modelling what is going on. Which means any longer range economic forecasts aren't even worth the paper they are written on (electronic or otherwise).

Basically the traditional view assumed that fertility would stabilise around replacement level. Mason and Lee 'fudge' this by talking about 'low' fertility. Where is the fertility floor? We simply don't know. I will post on this, soon.

CV said...

Doesn't Lutz help us here? I know he has made an elaborate study on the effect of 'lowest-low fertility' in a European context. We have referred to it here a couple of times.

However, in a theoretical context we obviously do not know what we are dealing with because things are very much in motion towards something we cannot see.

Migration flows will be interesting to follow as this represents the idea of 'compensation' for a domestic environment of low fertility. The Senegal/Spain case is interesting in this regard. But in a way we are bumping our heads against some real big questions here; i.e. your exchange with Stirling in another post Edward about natural selection ... i.e. the continuing and sustained environment of low fertility in Japan and elsewhere.

Take the quantum effect for example (quality/quantity trade off) which leads to below-replacement fertility as a function of changes in life course parameters ... that is cultural evolution selecting for people with low propensity to reproduce ... no?

ramki830 said...

A serious question i have to all demographers and demography Experts -

Are we all correct in making assumption that the population in developing nations will continue to grow such that world population peaks out at 9-10 billion by 2050?

What about the recent advances in ICT (Information and Communication Technology) in last 10 years and the rapid spread of such ICT Tools (like mobile phones) into dirt poor 3rd world nations?

Will it have unexpected spinoffs by way of increasing women's choice and voice in the process of births? Will it increase awareness of merits of delayed and avoided births to the underdeveloped nations?

I strongly suspect that the ICT revolution would speed up the fall of birth rates in 3rd world nations, and that would fall much faster than what is predicted over next 30-40 years.

Any takers for this view ?

joeimp said...

There is only one real demographic dividend. The first one results in greater worker to dependant ratios, greater economic efficiency, and higher GDP per capita.

The second demographic dividend is fool's gold. It is the result of the workers becoming old and opting for social programs, and the result is lower GDP growth and waning geopolitical power. This is what has been happening in Europe and Japan, and this is what will happen to the US if its TFR drops.

Edward said...

Hi Ramki830

"Are we all correct in making assumption that the population in developing nations will continue to grow such that world population peaks out at 9-10 billion by 2050?"

I think this is a very valid question. Clearly know one knows. The UN medium forcecast is currently around 9 billion in say 2075, but fertility is declining so rapidly in most of the devloping world that I think both Sterling and I would agree that global population is now likely to peak both earlier, and at a lower level.

"Will it have unexpected spinoffs by way of increasing women's choice and voice in the process of births? Will it increase awareness of merits of delayed and avoided births to the underdeveloped nations?"

I absolutely agree. I am sure you are along the right lines here. Most of the studies point in this direcetion.

Edward said...

"There is only one real demographic dividend."

Yes, I think that is right. And even this isn't inevitable, it depends on policy too.

"The first one results in greater worker to dependant ratios, greater economic efficiency, and higher GDP per capita."

Yep, I think it's also associated with an increase in life expectancy. This happend in North and Western Europe in the 19th century and it has been happening elsewhere since.

Basically you need to look at life expectancy at, say, age 20. When this goes up from 45 to 65, you could call this the demographic transition. A lot more output for the same input.

"The second demographic dividend is fool's gold. It is the result of the workers becoming old and opting for social programs, and the result is lower GDP growth and waning geopolitical power."

Yep. Well this isn't really a demographic dividend. I call this the 'demographic penalty', it's the downside that follows the upside.

This is when life expectancy at age 20 rises from 65 to 85, here there are only on-costs, in an economic sense, of course.

Edward said...

"Take the quantum effect for example (quality/quantity trade off) which leads to below-replacement fertility as a function of changes in life course parameters ... that is cultural evolution selecting for people with low propensity to reproduce ... no?"

Yes, I agree, and since those with less education normally end up emulating those with more (and not vice versa) then it is hard to see how this can reverse.

Of course Sterling has a point, if things continued like that in finite time we would become extinct, so it is very hard to say how this will go very long term. But I think we really have enough on our plate getting through from here to 2020.

ramki830 said...

Edward and Others,

I think that the mean age of first time motherhood for women in Europe/N.America is around 27-30 in developed nations, while it is likely to be in the 17-22 range in many 3rd world nations. It is a fair possibility that in comming decades, the mean age of first time motherhood in 3rd world jumps to 30 and above...
Also 3rd world offers greater competition at workplace/markets , poorer living conditions and weaker infrastructure relative to developed nations. Can we not say that the educated among the poorer nations have more reasons to delay motherhood than the richer nations? And a one time jump in mean age of motherhood (by say 7-10 years, spread out over a 15 year time span) could have lot of consequences .....

Edward said...

Ramki:

"It is a fair possibility that in comming decades, the mean age of first time motherhood in 3rd world jumps to 30 and above..."

Yes, I think you are getting the idea. We are trying to fathom out how all this works. I have informally put together 10 theses, which are just a work in progress, but they may give you some idea how all this fits together:

http://www.edwardhugh.net/homeostasis.html

ramki830 said...

Edward,

Your website (www.edwardhugh.net)was extremely interesting.. Clearly not only we have displacement effect leading to much lower TFRs, but also we may not have ended this "displacement effect". (It appears to me that the mean age at first childbirth will further go up in Europe). And eventually we can see the 3rd world catching up on this. I believe that none of the Governments (and the state funded healthcare/pension/benefit schemes) are preparing for this kind of demographic change. That is the biggest mistake being done...

Edward said...

"Your website (www.edwardhugh.net)was extremely interesting.. "

Thanks, so stick around and enjoy the debates.

S.M. Stirling said...

"Are we all correct in making assumption that the population in developing nations will continue to grow such that world population peaks out at 9-10 billion by 2050?"

-- no. More than 50% of the world already has below-replacement TFR's and it will be 75% by the end of this decade.

It's very unlikely the world population will ever reach 8 billion and more probably will top out around 7-7.5 billion, in the 2040-2050 period.

Then it will start to fall and will be back down to the 3-5 billion range by 2100.

(I'd bet on 3, myself.)

That's the UN's "low" projection, essentially, and it assumes that present trends will continue -- including a continuation of the _acceleration_ of trends.

The UN's "high" and "medium" projections have been consistently wrong; they're always too high.

Mostly because they contain unrealistic assumptions -- that TFR's will stop falling at replacement level, or that low ones will rise again.

ramki830 said...

I feel that s.m.stirling is indeed right ; it is a gross miscalculation in assuming that TFRs would settle at replacement levels and everything remains constant..

So we may never cross the highs of 9-10 billion in population projected by UN in 2030-2050 period.

However there could be one more factor that can influence population decline in comming decades and that would be the increase in longevity (assisted by any breakthroughs in medical technology). Any such breakthrough in increasing mean life expectancy by say to 110-120 (from present 75-85 levels) can severely depress death rates (for a considerable timespan) and prevent any population degrowth.

Of course, there could be enough reasons to be sceptical about such breakthroughs ; even if living upto 120 and 130 becomes a theoretically possible, economic factors could prevent the adoption of such "life expectancy" enhancing techniques.

Edward said...

ramki

"Of course, there could be enough reasons to be sceptical about such breakthroughs ; even if living upto 120 and 130 becomes a theoretically possible, economic factors could prevent the adoption of such "life expectancy" enhancing techniques."

Of course you are right. This is the great hope. This is what, for eg James Vaupel, is banking on. At present there is a very big debate about all this. Here is a useful file introducing the topic. I used to hope Vaupel was right. Now I can't really agree with him, and am more at the Olshansky/Fries end of the scale.

In fact I spent the whole summer studying molecular biology, comparative genomics, calorie restriction in model organisms, and evolutionary theories of ageing.

Basically we are built on a basis of eukaryotid cells, and these have the specificity that they have incorporated mitochondria (which Lynn Margulis was the first to discover).

Basically as organisms we run on a fuel of amino acids - which are used to generate proteins - and this whole mechanism is subject to problems of oxidation. So ageing is a kind of arms race between cellular rejuvenation (which ultimately leads to cancer) and cellular apoptosis and senesenence (which ultimately produces the diseases of ageing - coronary problems, altzheimer etc).

There is no easy fix here. If there had been evolution would have found it. What has happened is that the economic growth associated with the demographic transition has meant that we have been living better and began to express a longer-living phenotype. But in the developed world we now have made these gains (we may have taken just as much juice from the lemon as we can get). Indeed we now have a third - metabolic syndrome - phenotype around. This is associated with diabetes, obesity and a shorter-living phenotype. Olshansky has been working on this, and has quarrelled fiercly with Vaupel for his pains.

So while we may be able to use medical 'quick-fixes' to still get a little extra lifespan, it is not clear that these won't simply increase the dependency ages without giving any real productive economic benefit.

One key data point: the longest living human was a French woman who lived to around 120, and this was back in the 19th century. To be confident that life expectancy in the true sense really was moving upwards you would need to see this envelope being steadily pushed out by the isolated 'limit' cases.

Keep watching, since in the coming weeks I will be posting on all this at more length.

Incidentally, prb have a new piece on India. Also I will be doing a piece in the next few days on the India Economy Blog about obesity and diabetes in India, this problem is going to be big in the developing world, and India's diet presents particular problems.