Oct 3rd 2017

The Dangers of Demographic Denial

by Adair Turner

 

Adair Turner, Chairman of the Institute for New Economic Thinking and former Chairman of the UK Financial Services Authority, is Chair of the Energy Transitions Commission. 



LONDON – Across emerging economies, the benefits of a “demographic dividend” have become a familiar refrain. Politicians and business leaders alike – be it in India, Nigeria, Pakistan, or Tanzania – talk glowingly of how a fast-growing and youthful population will create huge investment opportunities and fuel rapid economic growth. But the reality is that in many emerging economies, rapid population growth poses a major threat to economic development, and technological progress will make that threat even more severe.

For starters, the term “demographic dividend” is being seriously misused. The term was originally used to describe a transition in which countries enjoyed both a one-off increase in the working age population and a significant fall in fertility. That combination produces a high ratio of workers to dependents – both retirees and children – making it easier for high savings to support sufficient investment to drive rapid growth in capital stock.

Rapidly falling fertility, meanwhile, ensures that the next generation inherits a large capital stock per capita: and small family size makes it easier to afford high private or public education spending per child, leading to rapid improvements in workforce skills. South Korea, China, and some other East Asian countries have benefited hugely from such a demographic dividend over the last 40 years.

But without a rapid fall in fertility rates, there is no dividend. If fertility remains high, a low ratio of retirees to workers is offset by a high child dependency ratio, making it difficult to support high education spending per child. And if each new cohort of workers is much larger than the one before, growth in per capita capital stock – whether in infrastructure or plant and equipment – is held back. Rapidly growing working-age populations also make it impossible to create jobs fast enough to prevent widespread underemployment.

This is the bind in which much of Sub-Saharan Africa is still stuck. With moderate GDP growth rates (averaging 4.6% over the last decade) offset by 2.7% annual population growth, per capita income has been growing at less than 2% per year, versus the 7% rate which China achieves. At this rate of progress, Africa will not attain today’s advanced-economy living standards until the mid-2100s.

Pakistan faces a slightly less severe – but still significant – challenge. India’s demography varies by region: while fertility rates are now at or below two in economically dynamic states such as Maharashtra and Gujarat, the big northern states of Bihar and Uttar Pradesh are still facing severe demographic headwinds.

It has been obvious for decades that high fertility can hold back per capita growth. And now the costs of denying that possibility are about to rise, especially for developing countries. There are only a few historic examples of successful catch-up from poverty to advanced-economy productivity and living standards, and in all cases – Japan in the 1950s-1980s, South Korea in the 1960s-1990s, China for the last four decades – rapid growth of export-oriented manufacture has played a central role. Technological progress now threatens that route to prosperity.

Information technology will eventually enable us to automate the vast majority of current jobs. Despite great uncertainty about how long the transition will take, recent studies make clear that jobs involving predictable physical activity are the most vulnerable in the short term. Manufacturing involving hard material handling – think automobile production – is already highly automated and will become more so. But once innovators succeed in creating effective “sewbots” capable of manipulating soft material, many existing jobs in clothing and textile manufacture will also be threatened.

As that happens, manufacturing may return to advanced economies, but with few jobs. Adidas’s “Speedfactory” in Ansbach Germany will soon produce 500,000 shoes per year with only 160 workers. A recent International Labor Organization report estimates that 60-90% of existing low-paid jobs in textiles and clothing in several Asian countries might be automated away.

But the biggest challenges will lie not in Southeast Asia, but in parts of India, in Pakistan, and above all in Africa. India must create 10-12 million new jobs per year simply to keep pace with the working-age population, and far more to absorb the huge numbers of already-underemployed workers. But some of the plans are unrealistic: a recent report challenges official talk of ten million new jobs in apparel manufacture, suggesting that three million is a more likely scenario.

As for Africa, the UN’s mid-point projection puts the population aged 20-65 at 1.3 billion in 2050 and 2.5 billion by 2100, up from 540 million today. These young people will inhabit a world where only a tiny fraction will ever find work in export-oriented manufacturing. China’s population of 25-to-64-year-olds, by contrast, faces a possible fall from 930 million to 730 million, driving up real wages and creating powerful incentives for high investment in automation. In a world of radical possibilities for displacing human labor, too many workers will be a far bigger problem than too few.


There are no easy answers to the problems many emerging economies now face. Job creation must be maximized in sectors less vulnerable to near-term automation: construction and tourism jobs may be more sustainable than manufacturing. Policies to enable voluntary fertility decline, through female education and easy access to contraception should be high priorities; Iran, where the fertility rate fell from 6.5 in the 1980s to below two by 2005, shows what is possible even in supposedly traditional religious societies.

But the first step toward solving any problem is to acknowledge it. Most current talk about demographic dividends is a dangerous exercise in denial. It is time to face reality.


Adair Turner is Chairman of the Institute for New Economic Thinking and former Chairman of the UK Financial Services Authority. The paperback edition of his book Between Debt and the Devil has now been published, with a new Afterword assessing the latest economic developments and their political consequences.

Copyright: Project Syndicate, 2017.
www.project-syndicate.org
Accompanying this commentary is a chart, which you can download here.

 


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