Related topics: emerging markets, China, India, Europe, Jim Jubak
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 highlighted by the protests and upheaval in Egypt and Libya 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.
The aging developed world
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 in 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.
Consequences for GDP
Economists, most of whom live in the aging developed world, have extensively studied the consequences of aging populations on economic growth. The Organisation 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 gross domestic product 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.
Jim Jubak
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 10 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 U.S. economy outgrew Japan's from 1990 to 2007 is that the U.S. 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.
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 total of dependents is 29.9%. Iraq, with its astonishing median age of 20.6, has a huge population aged 0-14 of 38.8%. Add in the tiny 3% of Iraqis over 65 and dependents comprise 41.8% of the population, higher than in 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 40 and 10 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 that countries now don't get the 40 years of demographic dividends that Japan got beginning in the 1950s.)
One of the reasons some economists are now 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.
