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Demographics isn't destiny--but it sure can give you a hint on where to put your long-term money
03/01/2011 8:30 am EST
We in the developed world have been focused on the problems of aging societies. That’s understandable if you live in countries such as Japan, Italy, or Germany where 20% or more of the population is 65 or older. From that point of view, the big global challenge is how these economies will deal with a rapidly expanding number of old people.
In the developing world, on the other hand, the problem highlighted by the protests and upheaval in Egypt or Libya is too much youth: too many young people with too few jobs ruled by members of their grandfathers’ generation. We’re watching the consequences of that now in the streets of Tripoli and Cairo.
Young populations are also opportunity, though. They’re the promise of reform and new beginnings and faster economic growth because of something called the demographic dividend.
In reality the global economy isn’t defined by one or the other of these conditions—too much age or too much youth. The world that we invest in is a mix of the two.
Here’s how the world looks from Japan or Italy or many of the world’s other developed economies.
Current populations are relatively old. The median age in France is 39.7 years, according to the CAI World Factbook. In Italy the median age is 43.7. In Germany 44.3. In Japan 44.6.
And these societies are getting older faster. Currently 22.2% of Japan’s population is 65 or older. By 2055 Japanese 65 or older at projected to account for 40% of the total.
And the other side of the demographic coin? Here’s how the world looks from Brazil or India or Saudi Arabia or Iraq.
In the developing world there’s young and astoundingly young.
The median age in Brazil is 28.9, a decade less than in France and 15 years less than in Italy. In Indonesia the median age is 27.9. In Tunisia 29.7.
And those are the old countries in the developing world. The real youngsters include Libya at 24.2, Egypt at 24, and Saudi Arabia at 24.9. The median age in Iraq is a shocking 20.6.
Just for reference the median age for the global population is 28.4.
Economists, most of whom live in the aging developed world, have extensively studied the consequences of aging populations on economic growth. The Organization for Economic Cooperation and Development (OECD), the think tank for the world’s developed economies, estimates, for example, that aging populations in the European Union will produce labor shortages that will cut GPD growth by 0.4 percentage points annually from 2000 to 2025. After that the cost of aging will climb to an annual 0.9 percentage points off GDP growth. In Japan aging will result in a 0.7 percentage point decrease in GDP growth through 2025 and a 0.9 percentage point annual growth penalty after that.
Those decreases in GDP growth are even larger than they seem. Remember that these aren’t economies recording annual 3% growth in most years. Germany, by no means Europe’s laggard, has averaged just 0.9% growth over the last ten years.
What do we know about the consequences for economic growth of a young population?
Well, we know—and this isn’t rocket science—that increases in the potential labor force, the number of people aged 15-65, lead to increases in economic growth rates. For example, one of reasons that the U.S. economy outgrew the Japanese economy from 1990-2007 is that the U.S. 15 to 65-year-old population increased by 23% while Japan had a decrease of 4%. During this period Japan’s real GDP grew by 26% and that in of the United States by 63%. The magnitude of the difference may be surprisingly large but the difference itself isn’t surprising.
We also know that the structure of a population matters a lot. It’s not just the median age of a population that counts but the ratio between dependents--a category that includes the very young (children 14 or younger) and the old (65 or older)—the working age population.
The lower the dependency ratio—the number of dependents divided by the size of the working age population—the higher economic growth will be—all else being equal. This extra boost to growth is called the demographic dividend and it’s one reason that China has grown so fast in recent decades and one reason that it might see slowing growth in the decades ahead. (For more on that see my post http://jubakpicks.com/2011/02/24/so-why-are-there-so-many-vacant-jobs-in-chinas-exporting-heartland/ )
Countries with strikingly similar median ages can have very different dependency ratios. In Brazil with a median age of 28.9, for example, 26.7% of the population is aged 0-14 and just 6.4% is over 65 for a total of 33.1%. Tunisia has a higher median age at 29.7, but with a 0-14 population of 22.7% and an over 65 population of 7.2%, its dependents total 29.9%. Iraq with its astonishing median age of 20.6 has a huge population from 0-14 of 38.8%. Add in the tiny 3% of Iraqis over 65 and dependents equal 41.8% of the population, higher than in either Brazil or Tunisia.
This all matters because economists think that an economy gets its maximum demographic dividend at the point when its dependency ratio peaks and then begins to drop—and then proceeds to collect that dividend (all things being equal) for somewhere between 40 and 10 years. (The experts don’t agree on how long it lasts and as Ted Fishman, author of Shock of Gray, told me over breakfast a few days ago, some experts think that the global economy has sped up sufficiently so that countries now don’t get the 40 years of demographic dividends that Japan got beginning in the 1950s.)
One of the reasons that some economists are now predicting that growth in India is about to out accelerate growth in China is that China has seen its biggest demographic dividends—beginning when its dependency ratio peaked around 1968—and that India’s dependency ratio is about to peak. From that point, while China is adding dependents (at the 65 plus end of the scale) and seeing new workers enter the workforce at a slower rate, India will just start to reap the benefits of a very small population over 65 (just 5.2% now) and a swelling workforce as India’s large cohort of 0-14 year olds (30.5% of the population now) enters the labor market. According to the United Nations India will account for 26% of the entire global supply of new workers over the next ten years.
India’s dependency ratio will go from 55.6% in 2010 to 47.2% by 2025, the United Nations estimates. China, on the other hand will see its dependency ratio climb from 39.1% in 2010 to 45.8% in 2025. Somewhere around 2013-2015, some economists calculate, India will start to grow faster than China thanks to its improving dependency ratio and China’s increasing population of 65 and older.
And here I need to encourage you to remember the phrase “all things being equal.” All things of course never are equal. For a country to collect its full demographic dividend it has to put enough money into education to turn a large number of those new workers into moderately production workers. Here China has a huge advantage over India. The literacy rate in China is 91.6%, according to the CIA World Factbook and only 61% in India. On this measure India lags Egypt with its 71.4% literacy rate. Only 12% of Indians go on to higher education and while the Indian Institutes of Technology have a world class reputation, they provide only 7,000 places for student’s each year.
And to get the full benefit of a demographic dividend its economy has to be organized so that the available profits from a growing workforce—profits that are hitting a peak due to the relatively smaller number of children and oldsters—get reinvested in the economy. A country such as Libya or Egypt where a substantial part of any profit is siphoned off for the benefit of a relatively small ruling clique or family will show only modest benefits from any demographic dividend.
Looking for countries that might be about to reap a demographic dividend and that have the institutions in place to exploit that opportunity represents one way to look for the next China and the next India. Three countries look promising on this basis: Indonesia with a median age of 27.9, a combined youngster/oldster population of 34.1%, and a literacy rate of 90.4%; Turkey with a median age of 28.1, a combined youngster/oldster population of 33.3%, and literacy rate of 87.4%; and Columbia with a median age of 27.6, a combined younger/oldster population of 33.5%, and a literacy rate of 90.4%.
One final thought on demographics: the United States is a true anomaly among developed economies. The median age of 36.8 is not that much greater than China at 35.2 and significantly younger than Italy at 43.7, Germany at 44.3, Japan at 44.6 or France at 39.7. With only 12.8% of the population 65 or older, the country is aging less quickly than Japan (22.2%), France (16.4%), Italy (20.2%) or Germany (20.3%) The cause, demographic research says, is the relatively large influx of immigrants into the United States in comparison to other countries. These immigrants tend to be younger and to have more children than the native-born population. That demographic edge may not seem like much as the country struggles with the global problem of how to pay for aging—and the particularly U.S. problem of a run-away debt load—but in the decades ahead every little bit of help is going to be welcome indeed.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. For a full list of the stocks in the fund as of the end of January see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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