The Middle East: Young, Growing, and Profitable
03/01/2011 5:30 am EST
As events in Egypt and Libya show, countries with a young population may face unrest, but they also benefit from faster economic growth. And that can mean more opportunity for investors.
The uprisings in Tunisia, Egypt, Bahrain, Libya—four and counting—put the other side of the global demographic coin on global display.
We in the developed world have been focused on the problems of aging societies. That's understandable if you live in a country 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 population of old people.
In the developing world, in contrast, the problem is too much youth—too many young people with too few jobs who are 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 an opportunity, though. They're the promise of reform, 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.
A World—And a Generation—Apart
Here's how the world looks from Japan, Italy and many other of the world's developed economies:
- Current populations are relatively old. The median age in France is 39.7, according to the CIA World Factbook. In Italy, the median age is 43.7; in Germany, it's 44.3; in Japan, it's 44.6.
- These societies are getting older faster. Currently, 22.2% of Japan's population is 65 or older. By 2055, those 65 or older in Japan are projected to account for 40% of the total population.
And the other side of the demographic coin? In the developing world, there's young and astoundingly young. Here's how the world looks from Brazil, India, Saudi Arabia, Iraq and other such nations:
- The median age in Brazil is 28.9, a decade younger than France and 15 years less than in Italy. In Indonesia, the median age is 27.9; in Tunisia, it's 29.7.
- And those are the old countries in the developing world. The real youngsters include Saudi Arabia at 24.9, Libya at 24.2, Egypt at 24. The median age in Iraq is a shocking 20.6.
Just for reference, the median age for the global population is 28.4.|pagebreak|
As the World Shrivels, So Does GDP
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 that aging populations in the European Union will produce labor shortages that will cut GDP 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-point annual growth penalty after that.
Those decreases in GDP growth are 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 to 65) lead to increases in economic growth rates. For example, one of the reasons that the US economy outgrew Japan's from 1990 to 2007 is that the US 15-to-65-year-old population increased by 23%, while Japan saw a decrease of 4%.
During this period, Japan's real GDP grew by 26%, while that of the United States increased by 63%. The magnitude of the difference may be surprisingly large, but the difference itself isn't surprising.
But Youth Isn't Always a Positive
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)—and 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 the demographic dividend, and it's one reason why China has grown so fast in recent decades and why it might see slowing growth in the decades ahead. (For more on this topic see the Feb. 24 post on my website.
Countries with strikingly similar median ages can have very different dependency ratios. In Brazil, with a median age of 28.9, 26.7% of the population is aged 0-14 and just 6.4% is over 65, for a total dependency ratio 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 is 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 comprise 41.8% of the population, more than either Brazil or Tunisia.
This 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. It then proceeds to collect that dividend (all things being equal) for somewhere between ten and 40 years.
(The experts don't agree on how long the dividend lasts, though—and as Ted Fishman, the author of Shock of Gray, told me over breakfast a few days ago, some experts think the global economy has sped up sufficiently so that countries no longer get the 40 years of demographic dividends that Japan got beginning in the 1950s.)
NEXT: India The Next Dragon?|pagebreak|
India May Soon Surpass China
One of the reasons some economists are predicting that growth in India is about to accelerate past growth in China is that the latter has already 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, China will be adding dependents at the 65-and-up end of the scale, and seeing new workers enter the workforce at a slower rate. Meanwhile, India will 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) enter 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, are never 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 productive ones. In this, China has a huge advantage over India.
The literacy rate in China is 91.6%, according to the CIA World Factbook, compared to only 61% in India. On this measure, India lags even Egypt, with its 71.4% literacy rate.
Only 12% of Indians go on to higher education. While the Indian Institutes of Technology have a world-class reputation, they provide only 7,000 places for students each year in a nation of more than a billion residents.
Education Is Key
To get the full benefit of a demographic dividend, a country's 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 have the institutions in place to exploit that opportunity, represents one way to look for the next China or 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%.
- Colombia, 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 older 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 with 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 problem of a runaway debt load—but in the decades ahead, every little bit of help is going to be welcome.
At the time of publication, Jim Jubak did not own or control shares of any company mentioned in this column in his personal portfolio. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. Find a full list of the stocks in the fund as of the end of January here.