INSIGHT: Sea-change in global populations will challenge business

04 October 2012 17:06  [Source: ICIS news]

Declining global birth rates pose challenges for businessBy Joe Kamalick

WASHINGTON (ICIS)--Demographics may play an increasingly crucial role in how companies make long-term plans and how governments cope with a coming sea-change in human population growth.

The world is on the verge of stunning adjustment as elderly people become a larger part of the global population, a shift that could have major impact on economies, business, taxation and trade, a leading demographer contends.

Richard Jackson, a senior fellow and programme director at the Center for Strategic and International Studies (CSIS), says that the aging of the world’s population and a decline in the proportion of working people “has profound implications for the economy and the business environment”.

He explained that in most nations of the world, people are living longer because of better health care, nutrition and general conditions, but that the real cause of the increasing proportion of elderly in the population is widespread declines in birth rates that began in the 1960s.

Among most developed nations, birth rates have fallen below the 2.0 or more births per woman necessary to maintain population levels. Jackson said that among the major developed nations, only the US and France have birth rates of 2.0 or better, but all other industrialised countries have fallen well below that replacement pace.

Similar declines in birth rates are being seen in developing nations as well, he said.

As a consequence, while the elderly used to make up about 3% or 4% of a nation’s population, that proportion of aging citizens has climbed to 15% in most countries and will be as high as 40% in some nations by 2050, he said.

The falling birth rate also means that many nations will see declines in their overall populations.

Perhaps the worst case will be Russia, said Jackson, where the nation's population is expected to shrink by 25% by 2050 and where the segment of working people will drop by 41%.

An equally catastrophic trend is emerging in China. While China’s overall population may continue to expand, its growth rate will slow, and there is a particular and critical gap in the Middle Kingdom’s population pattern.

Demographer Kenneth Gronbach says that China’s 34-year-old “one child” policy to reduce population growth has been “a demographic blunder” that soon will trigger a generational time bomb that could have broad destabilising effect on the nation’s economy, society and its government.

As a consequence of the one-child policy, Gronbach says, China’s 30-something men and women are confronted with a daunting task, because that age group, the 25- to 35-year-olds, is fully 75% less in number as a result of the one-child policy.

“The issue is that it will be the responsibility now of those 30 and under in China to do the heavy lifting – caring for the growing population of elderly and for the nation’s children,” he said. 

“The 30-somethings will have to do the majority of China’s production, consumption and tax paying, and when you have a 75% reduction in the group that is chiefly responsible for those activities, you’ve got a real problem,” he said.

Gronbach said that China is already beginning to feel a labour shortage that will only get worse as the much-diminished one-child generation moves into its principal productive years.

“In the next 10 to 15 years, I think China is going to have major production problems, and if the government continues to adjust the value of the yuan against the dollar, their exports will increase in price proportionately.”

“They will experience a labour shortage that will tighten their production capacity,” Gronbach said.

Although Russia and China are examples of major population shifts, even modest changes in population ages will have broad impact, according to Jackson.

The consequnces, said Jackson, can be summarised in a few words:  “Greying means paying.”

“The elderly need more services, more support, higher cost health care and pension payouts,” among other higher expenses, he said.  “By 2040, the cost of caring for the US elderly population will rise to 10% of the nation’s GDP – and that’s more than twice what we spend on defence.”

Those increasing costs will present most governments with a limited choice of options, all of them undesirable.

“Most nations do not have the fiscal flexibility and room to cover those rising costs,” he said.

To meet those higher costs, governments around the world will have to reduce spending in other parts of their national budgets, borrow more money, or raise taxes – all of which produce additional problems respectively in the loss of other government services, increasing national debts and a higher tax burden on the diminishing worker population.

If governments borrow in order to cover the costs of their aging populations, he said, that could lead to greater dependence on foreign capital. 

Taking on additional national debt will of course mean higher debt service costs, but Jackson noted that borrowing from other nations can have even more worrisome consequences.

“That sort of borrowing makes the debtor nation more vulnerable to the lender nation in terms of policy,” he said.

As populations age and shrink, he said, productivity also declines. “Productivity usually peaks in midlife, in the 40s and 50s, and then declines,” Jackson said. In addition, the most creative and innovative developments typically come early in life.

So as a given country’s population grows older and its birth rate declines, it will become increasingly less productive and its technical advances will diminish as well.

Jackson said that by 2040, some countries will see no growth at all year after year.

He noted that for the 200 years since the industrial revolution, businesses have continued to grow by making and selling more goods and services to growing populations, but that paradigm is about to change.

Among other things, the higher proportion of elderly along with declines in some nations’ populations will accelerate the existing shift from manufacturing to services, he said. “Not that the manufacturing industries will shrink, just that the services industries will grow to become a larger part of the overall economy,” he added.

Aging and declining populations will lead to excess capacity in most nations, he said, which in turn could trigger price wars within and among nations and protectionist trade policies.

“Aging societies with contracting domestic markets may generate political pressure to roll back globalisation” by restricting imports to protect weakening domestic producers, he said.

And as populations age, he said, they become increasingly risk averse. That suggests, Jackson said, that the elderly electorate – which soon will be one-third of US voters and more than half of the electorate in some nations – will lock in budget priorities favouring them at the expense of more future-oriented investments such as education.

He said the growing proportion of elderly and declining worker populations will mean long-term decline of the industrialised nations, except for the US, which still enjoys a relatively high birth rate.

“The negative impact of aging populations will be more profound in Japan and in Europe, he said, noting that “we [the US] have the youngest population among the OECD nations,” referring to the 34 member countries of the Organisation for Economic Co-operation and Development, chiefly the industrialised nations of the world.

“We are the only rich country with a growing population,” he said.

Brian Beaulieu, executive director at the Institute for Trend Research (ITR), says that aging and shrinking populations constitute a “mega-trend” that companies must confront if they are to survive.

“If you live and work in a country whose population is growing, you and your company win,” Beaulieu said recently. “If you’re doing business in a country, such as Japan, where population is declining, you lose.”

Paul Hodges studies key influences shaping the chemical industry in Chemicals and the Economy


By: Joe Kamalick
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