Demographics as
subject remained at the periphery of academic research until 1980 but has
gained prominence as a field thereafter. Observers of the human condition have
remarked upon the subject in the early 20th century. Wicksell in 1914
(notorious year) and the mighty Keynes in 1937 have both espoused strong views
on the decline of fertility and its effects.
I was briefly
introduced to the concept as part of the CFA curriculum but more robustly by
Goldman Sachs’s epochal report on BRICS. Since then untold reams of paper have
been offered to the deity of demographic dividend by the Indian broking
Industry. Every investment banker on the subcontinent has used its divine
prophecy to justify Everest eclipsing valuations. With a skill that would make
a practicing psychologist blush, the smarter amongst these used it to subtly
induce a mortal fear of being “left out”. Remember, no fear is greater than the
fear of being left out of a juicy deal, in the mind of the brilliant investment
manager, managing other people's money.
So intoxicating
were the results of this new medicine that hard nosed businessmen and risk
loving investment managers were equally mesmerised. Had the party lasted a
little longer, there was a real danger of the government including Applied
Demographics in the list of psychotropic substances and amending the Narcotic
Drugs and Psychotropic Substances Act (1985) suitably. No doubt a great ruckus would
have ensued if the proposal were put up for a vote in Parliament, since the
people's representatives were equally drunk on it. Thankfully, since that did
not come to pass, God alone (beyond CAG’s domain) knows, what it would have
“cost” to get the hallucinogen out of the list.
In my ramblings
(of a serious nature), I will attempt to look at the various aspects of
demographics as they impact the developed markets and as usual end with the
Indian perspective, which feels like a polar opposite only at the surface. I
will begin with the myth of demographic dividend before making comparisons in
the modern era.
The Myth of Young and Ageing Nations
It is not
the first time in the history, that many nations are facing the prospect of a
declining population. The population of Europe was 70 mn in 1340. The Great
Famine and Black Death brought it down to 37 mn in 1350. It took 200 years for
the population to climb back to 1340 levels.
The idea
that larger populations provide a basis for larger markets and by extension
larger economies is intuitive and perhaps therefore correlated to economic
power, wealth and military might by observers.
Anybody
could point out that Europe's gilded age was marked by globe spanning empires
of at least 3 European nations and an
era of high growth in population and wealth. However a keen historian would
point out that the period between 1700 and 1900 was a period where European
population grew from 100 mn to 400 mn and was the period that overlapped with
the Agricultural Revolution and the Industrial Revolution. Arguably the two
revolutions had a more profound impact on wealth and society than mankind's
affinity for procreation.
India a
historically wealthy nation also experienced wealth without population growth.
W. H. Moreland, a noted historian pegs India's population at around 100 mn in 1600
A.D. Another historian Kingsley Davis estimates India's population at between
100 to 140 mn in 300 B.C. Two millenia of no growth in population coinciding
with India's most prosperous era.
If
population were the most important factor, China and India would be far larger
than they are today. A snapshot of the top 10 economies in the world shows that
smaller populations can build and sustain much larger economies. The 2012
statistics from World Bank provide ample evidence
Ranking
|
Country
|
GDP
(USD tn)
|
Population
(mn)
|
1
|
United States
|
15.7
|
314
|
2
|
China
|
8.4
|
1,351
|
3
|
Japan
|
6.0
|
128
|
4
|
Germany
|
3.4
|
82
|
5
|
France
|
2.6
|
66
|
6
|
United Kingdom
|
2.4
|
63
|
7
|
Brazil
|
2.3
|
199
|
8
|
Russian Federation
|
2.0
|
144
|
9
|
Italy
|
2.0
|
61
|
10
|
India
|
1.8
|
1,237
|
My simple
argument here is that technological innovations have greater impact on economic
growth than naturally synchronised procreation. It was perhaps the inability to
participate in the industrial and agricultural revolutions that impoverished a
once wealthy Indian nation.
It is
easier to relate when one thinks about Microsoft's innovative products which
made it easier to use technology. Again, Facebook, Twitter and Linked in are
examples of technology driven innovations which revolutionised the way in which
people communicate. In the process they created new markets where none existed
or expanded existing markets in a manner that brought in hundreds of millions
of new users.
Europe
Based on
Eurostat forecasts, over 100 regions are expected to experience substantial
decline in population between 2008 and 2030. Most of these regions fall in East
European countries but some also lie in Germany, Spain, Italy and Greece. Four
regions in Germany, Chemnitz, Saxony-Anhalt, Dresden and Thuringia are
anticipated to see declines greater than 20% as are some regions in Bulgaria.
Opinion
regarding impact of population declines is divided. In fact there are pressure
groups in almost every European nation propagating population decline. Concerns
about over population run deep within some societies. In the 1950's it spurred
Dutch Prime Minister Drees to exhort his countrymen to immigrate. Al Gore's
documentary, An Inconvenient Truth, is based Hardin's Tragedy of the Commons
written in1968 which attributes the tragedy directly to over population. I will
jump directly to the article's unequivocal conclusion : “Freedom to breed will
bring ruin to us all”. Even until the late 90's over population was considered
to be the root cause of unemployment and housing shortages. Most countries have
learnt to live the pressures of rising population.
Public Goods
Over
population can lead to congestion in accessing public goods and services. The
most obvious congestion experience is traffic. Congestion poses similar
challenge to access health care, public transport, education, parking and
public housing.
On the
other hand, how would declining populations affect these very same public goods?
A declining tax base would make it difficult for governments to maintain the
same level and quality of public goods. An increase in tax rates would be
inevitable. In countries providing defined benefit pensions which are not
entirely funded (which is the case with most) the system would break down. Pay
as you go pensions are heavily reliant on increasing contributions from rising
populations to meet their obligations. Sounds like “rob Peter to pay Paul” is
now official.
If tax
rates cannot be raised then the level of service has to come down. The
government would have to calibrate its spending and eliminate some of the
public goods. Modern history provides little evidence to inspire trust in
government's ability to reduce public expenditure. In aspects such as law and
order and defence my sympathy lies with the government, simply because a slack
in law enforcement or defence due to under staffing and under budgeting would
degenerate into harrowing social and political problems.
Housing & Behavioural Paradoxes
For most
people, their houses remain a substantial part of their wealth. A declining
population may reduce demand for housing with negative connotations for house
prices as well as rental yields. Opinion on this aspect will be divided
depending on the group individuals belong to. If you are young and seeking to
purchase a house or a rent an apartment, you are likely to view this change
positively. Conversely owners would experience anxiety and face the prospect of
increasing property taxes to shoulder the burden created by a population
decline.
Another
paradox in public opinion relates to the location of population decline. The
NIMBY (Not in My Back Yard) syndrome is very dominant. People support
population decline at national and international levels but not in their neighbourhoods.
Capital Flows and Asset Prices
Erik Lueth
in his paper for the IMF argues that capital flows area result of business
cycle fluctuations, volatile fiscal policies, long term growth trends and
demographic change. Individual countries are at different stages of demographic
transition and therefore result in capital flows. Countries which are ahead in
the transition would experience slowing or negative labour growth and would
benefit from investing in countries at the early stages of demographic transition
and witness strong labour growth. The recipients would benefit from higher
output per worker.
He
concludes that demographic factors are no help in correcting global imbalances
that are observed today. He makes two other important observations
1.
The US will remain a capital importer while China
will remain an exporter of capital for over a decade.
2.
Counter intuitively, he concludes that asset price
melt downs may not happen assuming mobility of capital. Relocation of
production from fast ageing economies to slower ageing economies will improve
everybody’s welfare and asset prices may actually rise!
My
experience of listed markets tells me that asset owners will certainly feel
pain in the short term although Mr Leuth may stand correct over a longer term.
Non Materialistic Concerns
The
positive aspects of population decline, especially the materialistic ones are
fairly obvious, less congestion, lower cost of housing, better infrastructure
etc. Non materialistic benefits such as lower population pressure, better
environment and perhaps even less noise pollution would have many supporters in
today's world.
Immigration
Businesses
are also concerned by declining population as it impacts available labour.
Smaller regional enterprises may be unable to make up for loss of customers and
face termination.
In a
globalised world, economics provides an answer : mobility of labour. Theory
assumes that labour will move to find employment opportunities and thus regions
facing labour shortages will see an influx from regions experiencing surplus.
In the real world, economics is generally subservient to politics and has to co-exist.
Thus mobility of labour transforms into immigration. Most countries have
immigration policies which are focused on controlling influx. This is true
even for US which is a nation of immigrants.
Immigration
is a political issue and generally causes friction in labour markets. It evokes
strong reactions from local. Immigrants are rarely assimilated completely in
their new societies. Ethnic identities are more persistent and immigrants'
attachment to religion, cultural traditions, and language act as significant
barriers. That the economic benefits of immigration are unevenly spread add
fuel to the fire. Businesses benefit from cheaper labour while the less
educated local labour faces stiff competition for jobs and sees only negative
economic benefits.
Indian Outlook
Closer
home, we are faced with the problem of plenty (population wise).
India's
modern history is chequered with respect to population. It briefly flirted with
compulsory sterilisation and most of today's ministers and senior bureaucrats
were groomed in an era that looked at the country's fertility rates with dismay
and termed it the Population Bomb. I realised that policy makers had changed
their outlook upon hearing Mr Yashwant Sinha, then finance minister, refer to
the demographic dividend in his post budget interview some time in 2001 or
2002. He had previously made mortgage payments tax deductible to increase
disposable income for tax payers. The focus had shifted to a consumption led
economy.
India's
demographic dividend was a result of the sharp decline in fertility in the 80's
and 90's. Investors' optimism was based on its particularly fortuitous timing.
India's working age population was surging just as China's began to decline.
Indian
polity has no stomach for economic upheavals. It watches helplessly as GDP
growth rates have dwindled from 9% to 4.4% and estimated to slip further. An
official report on public finances in 2012 warns that slower growth combined
with a demographic bulge could result in political destabilisation. The new
Governor of RBI, Mr Raghuram Rajan has earlier stated that jobs are the top
priority.
Heading
into the last quarter of 2013, corrective action by the government is
conspicuous by its absence.
The size
of the problem is unprecedented. India will add an estimated 125 mn people to
the working age group of 15 to 65 over the next decade and another 103 mn in
the subsequent decade. Net new jobs created between 2004-05 and 2009-10 stood
at nil compared to 60 mn net new jobs in the previous 5 year period. China's
boom created 130 mn net jobs from 2002 to 2012.
The
quality aspect is equally daunting. A recent survey came up with astonishing
numbers and got cited by The Economist. It found that about half of the
engineers graduating from India's colleges are not fit for employment. Putting
the numbers in perspective is of little help. Consider this : Approximately100
K engineers graduate every year in the US. In China, the number is
approximately 500 K. In India, 1.4mn engineers graduate every year but over
half are unemployable. The result of such over supply is that Indian firms
employ an engineer to do an electrician's job at paltry salaries. This
oversupply remains across professions. Newly graduated dentists draw salaries of Rs 7000 (~ 112 USD) per
month in Mumbai. The city alone adds 300 to 400 new dentists every year.
Pressure to feed the population
Jobs are
important to pay for life's expenses. The first being food. Food production
seems destined to fall behind needs even with present populations, and
population growth multiplies the problems. For importers, the prospect is made
worse because food is not a single world market. When threatened with a
shortage, exporters typically stop the exports, as India has most recently done
with onions.
Jeremy
Grantham of GMO also writes about the food problem and believes that the food
crisis began some years ago. It will become dire as we move ahead. He estimates
the first catastrophes in Iran and Egypt based on the availability of water.
India has passed the Food Security Bill, which is bound to have repercussions
in the global food market. He also believes that a solution has been found to
meet the agrarian crisis in the form of no till farming.
Glimmer of Hope
The Centre
for Study of Developing Societies and Konrad Adenauer Stiftung, a German think
tank found that nearly twice as many of today’s 18 to 33 year olds say they are
interested in politics as did in 1996. 20 % of rural men and 22 % of college
educated young men say they participate in protests. If India's youth is
finally trying to shape its own future, there may be some hope, else double the
security guards and increase their pay.
Conclusion
The
demographic bulge is not a God given right upon a nation to prosper. Like any
other opportunity it comes with its own challenges which require foresight and
management. For India low growth can lead to a repeat of the 70's and 80's
where new job opportunities were few and educated unemployment was rampant. In
Bollywood, this socio economic problem was reflected in the rise of the “angry
young man”, the most successful protagonist of which is our living legend Mr
Amitabh Bacchan. Let's hope that mantle need not be passed on in this
generation.
The
economic benefits of a demographic surge are less certain but a political
change is more likely given the increased literacy, affluence and a widespread
awareness about the progress of other nations vis a vis our short comings, thanks
to a strong media.
