Demographics and Slowing Growth

The next decade is likely to be one of extraordinary change for the developing world with unpredictable outcomes. Countries will struggle to adapt to massive technological change as robotics and artificial intelligence transform supply chains as dictated by spatial economics, while the international policy framework is made uncertain by anti-globalization forces in a multi-polar world. All of this will happen as ageing populations weigh on GDP growth.  

 A new order is being driven by these trends. While over the past two decades success for emerging markets was largely secured by those committed to export-led industrialization, the winners of the future are likely to be different.

  On the more predictable side, demographics point to slower growth and dampened consumer demand in all of the developed world and in many key emerging markets. Much of the developing world, including China, Russia, Brazil, Taiwan and Korea will experience declining work-forces and ageing populations. In a world of lower growth and declining demand, those countries with attractive demographics – enjoying the so-called “demographic-dividend” of an increase in the working population relative to children and retirees – will be few. Of the important emerging markets for investors, India, Indonesia and Mexico stand out as the few  still receiving benefits from demographics. Compare the two charts below, which show the extremes of India and Japan. In Japan, the ratio of active workers supporting dependents (children and retirees) has increased from high single-digits in the 1950-1980 period to a current level of 2.1 (2015) and is expected to fall to 1.7 in 2030. On the other hand, in India there are currently over 10 workers per dependent and this will fall only to 7.4 in 1930.

 

Japan, dependency ratio

 

India, dependency ratio

 

The chart below from the U.S. Federal Reserve’s research department (Fed Paper) shows an estimate of the effect of the ageing population on U.S. GDP growth. According to the Fed’s model, the ageing of the U.S. population has stripped 1.25% from potential GDP growth since 1980. By 2030, real potential annual GDP growth could fall to below 0.5%.

 

 By 2010, Russia, China, Korea, Argentina and most of Eastern Europe had joined the developed world and passed the point of transition from a “demographic dividend” to a “demographic tax.” By 2020, Brazil and Chile will have joined this group, and by 2030, Mexico, Colombia, Malaysia, Thailand, Vietnam and Indonesia will also have graduated, leaving only India and the Philippines and most of Africa in the “demographic dividend” camp. The table below shows estimates made by  Research Affiliates, based on United Nations population predictions . The table shows the increase in the dependency ratio by country between 2015 and 2030 and the potential negative effect on per capita GDP growth. Of course, this effect may be neutralized by unexpected changes in the working population resulting from immigration, delayed retirement and other factors, and the impact on growth could theoretically be entirely compensated by technology-induced productivity increases.

 

 

With the end of the demographic dividend some countries are up for a serious reckoning. Unfortunately, relatively few emerging markets were successful in exploiting the bonanza years to prepare for the future. Instead of investing in public infrastructure and education, which could sustain higher growth in the future, resources were captured by special interests and squandered on consumption. At one end of the spectrum, Latin American countries, with the exception of Chile, lost any capacity to invest in public goods, while blandishing privileges on chronies and influential narrow interests. At the other extreme, China has had remarkable success in setting a foundation for future growth by directing scarce resources to basic infrastructure and leading-edge industrial development.

 Can any of those countries still enjoying the tail-wind of demographics      (e.g., India, Philippines, Indonesia, South Africa, Nigeria) follow China’s path? Investors are hopeful that India is moving in the right direction, with Prime Minister Modi as a strong visionary leader. However, India has not yet found a way to urbanize with job creation in a way that allows it to accumulate capital and direct it to investment in in public goods, and the politicians seem more inclined to commit scarce resources to hand-outs for constituents than to investing in the future.

Fed Watch:

India Watch:

China Watch:

China Technology Watch:

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