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Ageing Populations And Fitting Two Billion Into One Billion

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By John Richardson on 01-May-2015


By John Richardson

THE above chart is of absolutely critical importance for anybody who is serious about estimating both the strength and nature of future global demand growth for chemicals.

If you are not a serious analysts then, sure, ignore demographics and cling on to a few vacuous slogans such as the “rise of the Asian middle classe” and “increased urbanisation”.  This will lead you to come up with very comforting, very assuring, estimates of future growth levels.  But this is the road to eventual financial ruin for any chemicals company.

Putting it into words, the above chart shows that there are now more people over 65 in the world than aged under-five.  In 1950, by comparison, there were three times as many under-fives.

Today’s post will look at one aspect of this incredibly complex story: How ageing of populations the West will effect income growth – i.e. the “rise of the middle classes” in East Asia, in particular (this doesn’t, of course, include the Indian subcontinent. I will look at this region in future posts).

We need to first of all take a step back and think about why some countries in East Asia have so far enjoyed such roaring economic success.

As John Lee, an adjunct professor at the Australian National University points out in this excellent article:

  • Since the Second World War, the rapidly developing East Asian economies—Japan, South Korea, Taiwan, Singapore, Malaysia, Thailand and, most recently, China—have all relied upon a very similar export-manufacturing model. This has involved making exported products for consumers in advanced economies cheaper, faster and in more reliable ways that has been possible in other countries and regions.
  • The size of consumption markets explains the scale of this dependence. Consumption in the US and the EU each total around $11.5 trillion a year. This compares with about $10 trillion for East Asia alone, which comprises mainly of China at $3.4 trillion and Japan and $3 trillion.
  • Asian markets are not only smaller than the West, but are also much more protected. And much of the consumption in low –and middle-income countries in Asia, including China, involves non-tradable, low quality goods that are of little value to exporters.
  • To further emphasise just how important export markets are for Asian economies, GDP growth in East Asia, excluding China, fell to just 0.6% at the height of the Global Financial Crisis, which, of course, brought Western economies to a virtual standstill. Even China’s GDP plummeted momentarily to 0% in 2008-2009.
  • And here are some more statistics worth contemplating: Two-thirds to three-quarters of all trade within East Asia is “processing trade” – e.g. assembling I-Phones – with roughly 70% of manufactured end-products destined for consumers in advanced economies.

Of all the East Asian countries, only Japan, South Korea, Singapore and Taiwan have achieved “middle-income status” since the 1950s, thanks mainly to exports to the West, argues Lee.

So what are the chances of this economic miracle being repeated elsewhere in the region? Even if you don’t take into account demographics, Lee argues that the numbers don’t add up because the populations of the above countries total around 250 million.

“Now, countries with a combined population of almost two billion people are seeking to replicate the success of countries such as Japan and South Korea in achieving high-income status (per capita GDP of around $15,000),”  he writes (i.e., escaping the middle-income trap).

And how many affluent consumers are there globally? Around one billion, with most of these people living in the West, estimates Lee.

Two billion, even in the best of possible worlds, simply cannot fit into one billion.

But all the evidence tells us that as people get older, they spend less money because they have to worry about how they are going to live on their pensions. And by the time you have reached for 50s and 60s, you have anyway already bought most of the things you need.

This is why the US and EU economies are still struggling, despite enormous monetary stimulus since 2009.

And this is why these economies will continue to flounder, until or unless politicians realise that monetary stimulus isn’t going to solve the problem.

Instead, you need to fund research and development into new products and services that don’t even exist yet that will serve ageing populations.

You also need to raise retirement ages, bring more women into workforces and tackle income inequality in countries such as the US.

And so, as I said, until or unless politicians and business leaders in the West get their act together, there is simply no way that the US and the EU can afford to buy the goods that would allow the rest of East Asia to reach middle-income status.

If China, as I suspect, also becomes much more self-reliant in chemicals and polymers because of its economic reforms, chemicals companies everywhere will need to tear-up their old strategies and start again.

The essential point here is that China is one country that does recognise the importance of demographics in shaping demand, as demographics are the driving force behind many of its economic reforms.