Sunday, February 28, 2016

On the demographic limits to future economic growth

On Thursday the 21st in The Globe and Mail, journalist Konrad Yakabuski had an article published, "Fewer economic miracles in a world with fewer demographic explosions". Drawing particularly on Ruchir Sharma's March/April 2016 Foreign Affairs article "The Demographics of Stagnation".

Ruchir Sharma, the head of emerging markets and global macro at Morgan Stanley Investment Management, warns that policy-makers have been looking in all the wrong places to explain what has become the weakest global economic recovery in postwar history. The causes aren’t high public and private indebtedness, income inequality or overcautious investors, although those factors don’t help. The real problem is a dramatic slowdown in labour market growth rates around the world.

It seems counterintuitive to be worrying about labour market shortages when automation is rendering more and more jobs redundant and unemployment remains at near-record levels in most of Europe. Even the U.S. unemployment rate, which is at an eight-year low of 4.9 per cent, cannot mask the fact that the participation rate (the percentage of working-age Americans in the labour force) is at a four-decade low, leaving millions of potential workers idling on the sidelines.

But by exhaustively tracking population and gross domestic product growth over one-decade periods since 1960, Mr. Sharma comes to a several sobering conclusions. One is that “explosions in the number of workers deserve a great deal of credit for economic miracles.” Another, he writes in an article published this week in Foreign Affairs, is that “a world with fewer fast-growing working-age populations will experience fewer economic miracles.”

Between 1960 and 2005, the expansion of the labour force and rising productivity determined growth rates almost everywhere. During that 45-year period, the global labour force grew at an average annual rate of 1.8 per cent. Since 2005, the rate has slipped to 1.1 per cent and is expected to fall further in all but a few outlying nations (such as Nigeria) as the consequences of a decades-long decline in fertility rates leave even emerging economies facing dwindling influxes of new workers.

[. . .]

“Over the next five years, the working-age population growth rate will likely dip below the 2-per-cent threshold in all the major emerging economies,” Mr. Sharma says. “In Brazil, India, Indonesia and Mexico, it is expected to fall to 1.5 per cent or less. And in China, Poland, Russia and Thailand, the working-age population is expected to shrink.” The most worrying slowdown is China’s, with “dire” implications for the rest of the world. In the past five years, Mr. Sharma notes, China alone accounted for a third of global growth.

This is the sort of scenario that long-time readers of Demography Matters have been forewarned about for some time, thanks to the insights of dear comrade Edward Hugh. The 21st century will be a world, it seems, where human capital, in relative abundance or otherwise, will play a critical role in determining the futures of world economies. Individuals, groups, entire communities or countries relatively well-positioned might well be strong. I suspect that in the coming decades, people with the right skills will prosper. Other regions, though? I can easily see any number of major economies not adapting well. Can Germany, locomotive of the Eurozone, really outlast sustained low fertility? What of China? What of ... ? One can only hope that the robots will come on stream at the right time.

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