The Strategist

IMF: Demographic Catastrophe Undermines the World's Economy


03/11/2016 - 16:38



Mankind is shaken by the consequences of demographic change. The most significant of them are rapid population growth in some developing countries and changes in the proportion of adolescents and young people in other countries, as well as the increase in life expectancy and aging of the population all over the world. Above that, there is urbanization and international migration.



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All of them create intractable problems, compromising economic growth, fiscal sustainability, environmental quality, safety, and welfare of the population. Yet, none of them is insurmountable. To solve them, we need early decisive joint action of public and private sector developers.

These include reform of the pension policy, development of a global immigration policy, provision of contraceptives to many millions of women and further increase of levels of survival of children and treatment of chronic diseases.

The world's population is growing

At the beginning of 2016, the world population was 7.4 billion people, and it is projected to increase by another 83 million in the current year, which reflects the difference between the 140 million births and 57 million dead.

UNFPA (United Nations Population Fund) has made average projections built on the assumption that fertility dynamics will change in accordance with the trends and characteristics of past periods. According to them, the world's population will exceed 8 billion people in 2024, 9 billion people – in 2038, and 10 billion people - in 2056.

Ninety-nine percent of the projected population growth in the next four decades will come from countries classified as less developed - countries in Africa, Asia (except Japan), Latin America and the Caribbean, Melanesia, Micronesia and Polynesia.

Rapid population growth poses serious challenges. These include the need to cover the employment of large numbers of people and ensure that they have the human capital (quality of education, training and health), allowing carrying on productive activity.

To maintain higher employment, the world also need to create physical capital and infrastructure; otherwise suffering of millions of people, political, social and economic instability and conflicts will become more frequent.

Widening differences between countries can also be an obstacle to international cooperation, and halt and even nullify the process of globalization, which is able to bring a significant improvement in living standards around the world.

In addition, rapid population growth, as a rule, brings consequences for ecosystems and natural resources, endangering the food, energy and water security, leading to a reduction in the quality of local and global environment and deteriorating prospects for reducing harmful impacts and adaptation.

Where people live

Currently more than half the world's population lives in cities, compared with 30 percent in 1950. This share is projected to reach two-thirds by 2050.

Population in Africa is urbanized the least. Only 40 percent of people live in the local cities, which is twice less than in Latin America and the Caribbean - the most urbanized developing region.

It is predicted that 50 percent of Asia's population will live in cities in the next few years.

The experts also expect steady growth of world population until 2050 inclusive, especially in Africa and Asia. The population of other regions will grow slowly, if anything.

The number of megacities (cities with populations of more than 10 million people) has increased from 4 in 1975 to 29 currently. The metropolitan population of 471 million people makes 12 percent of the world's urban population and 6 percent of the total world population.

The United Nations has recently introduced the concept of "Metacity" - a city with 20 million or more inhabitants. Eight cities had the "meta" status in 2015. Tokyo tops the list with 38 million people living there - more than the population of Canada.

Delhi’s 26-million population (second in the list) is more than the population of Australia.

There is active discussion about the consequences of the population’s territorial distribution. Some focus on the economic benefits associated with the concentration of population in urban areas, such as large pools of labor and large-scale markets for goods and services.

Critics, on the other hand, argue about the impact that densely populated cities have on the soil, air and water resources. Urban residents’ disproportionate consumption of fossil fuels and the associated increase in greenhouse gas emissions lead to the fact that more than 1 billion people in the world live in extremely poor urban slums.

Population’s dynamics

Despite the rising numbers, population growth in recent years has begun to slow. Currently, world population growth is 1.08 percent per year, which means a doubling of the population every 64 year.

This increase is below the high of 2.06 per cent in 1965-1970, or doubling every 34 years.

The highest increase of 2.44 percent (doubling every 28 years) takes place in Africa. Europe on the other hand, make just 0.04 percent – this is the lowest growth (doubling period - 173 years).

The total increase in population declines, and is projected to keep the tendency in the world as a whole and in each geographic region in particular.

It is predicted that the world's overall population growth will drop by half in the period from today until 2050.

Mortality

The number of worldwide deaths per 1,000 people per year has steadily declined from 19.2 a year in 1950-1955 to 7.8 today.

This decrease is explained by factors such as creation and widespread use of vaccines and other achievements in medicine. Among them, for example, are introduction of antibiotics and oral rehydration; improving diet; public health measures, such as improving sanitation, increasing the safety of drinking water and the use of bed nets treated with insecticide; broader education (especially of mothers) and improvement of health system and other infrastructure.

This is relevant to an elongation of worldwide life expectancy by 24 year – from 47 years in 1950-1955 to 71 years at the present time.

Given that an average newborn lived out until about the age of 30 for most of human history, this lengthening is a truly remarkable human achievement, yet to express itself fully.

According to forecasts, the global life expectancy will increased to 78 years by 2050-2055 years. Life expectancy varies greatly depending on the region: from a minimum at 61 in Africa, up to a maximum of 80 years in North America.

It is predicted that this almost twenty years-gap will narrow in the coming years.


Fertility

Reduced fertility is another important aspect of the demographic situation in the world. In 1950, an average woman gave birth to 5 children; today it is 2.5 children.

Fertility rates vary widely by region, from 1.6 in Europe and 4.6 in Africa. The difference between countries is even more significant.

They constitute 7.6 in Niger, 6.4 in Somalia, 6.1 in Mali and Chad, 6.0 in Angola, but 1.2 in Singapore and 1.3 in Bosnia and Herzegovina, Moldova, Portugal, South Korea, Greece and Spain.

About half the world's population lives in countries where fertility rates are below the long-term replacement rate, equal to about 2.1 children per woman.

In developing countries, increasing child survival is one of the underlying drivers of lowering fertility. It is related to the realization that achievement of the desired family size requires less childbirths.

In addition, the desired fertility decreases with development of education and higher incomes.

Reduced fertility, in turn, contributes to child survival level due to improvement of maternal health, and possibility to allocate more family’s resources to each child.

Fertility is also being reduced due to access to contraceptives.

International migration

In addition to birth and death, another channel of the population size changes is movement of people across borders. Only 3.3 percent of the world's population, that is, 244 million people, do not live in countries where they were born.

Europe and North America account for 15 percent of the world's population. Nevertheless, these regions host more than half of international migrants in the world. Nearly 20 percent of them live in the US, followed by Germany and the Russian Federation, each of which accounts for 5 percent.

The largest numbers of immigrants came from India (16 million), Mexico (12 million), Russia (11 million) and China (10 million). International migrants are mostly working-age persons with equal distribution between men and women.

One of the largest inter-continental flows of mass migrations in modern history took place in 2015 (the exodus of more than 1 million Syrians in Europe). Yet, the world still face serious economic and institutional barriers to immigration, as well as rigid social and political resistance in many advanced economies.

At the same time, migration has a significant positive potential, not only for people who leave their country, but also for other people in the countries of origin and destination.

However, the realization of this potential depends on various factors, including measures to facilitate integration of migrants into the local economy.

Many countries left by migrants oppose migration since it deprives them of key personnel, such as doctors, engineers and teachers.

However, an important compensating factor are remittances: it is estimated that migrants sent 441 billion dollars to developing countries in 2015. This is three times more than the amount of official development assistance, and is about two-thirds of foreign direct investment in developing countries.

The remittances significantly alleviate poverty and contribute to socio-economic development resulting in accumulation of human and physical capital.

Age distribution

Probably the most important global demographic shift is a change in the population’s age structure.

There are three clearly projected changes: reduced rate of youth dependency (ratio of children under 15 years to economically active population aged 15 to 64 years); changes in the number of adolescents and young adults (aged 15-24); increase in the proportion of older people (aged 60 and older, or 65 years and older).

All these changes are associated with long-term trends in the number of births and deaths. For example, reduction in mortality in the initial phases of the demographic transition process disproportionately affected infants and children. This, in turn, led to the emergence of "baby boomers", existing before the reduced fertility.

As "baby-boomers" grow older, the age wave affects the population pyramid: from its founding (infants and children) to medium sections (15-24 years and 25-59 years) and peaks (60 years and older and 80 years and older).

Similar changes in the age structure are linked to the baby boom, similar to that happened in many countries after World War II.

Since needs and abilities of people vary greatly throughout the life cycle, effects of changing age structures can be significant.

Children consume a larger volume of production than they produce; they require many resources for food, clothing, housing, medical care and education and, as a rule, do not work.

Adults, on the other hand, usually contribute more than they consume - as labor activities and their savings, which contributes to the accumulation of capital.

The net contribution of older people tend to be somewhere in the middle. Upon reaching old age, people tend to work less and either save less or spend their savings to finance consumption in retirement.

Demographic dividend

Changes in the age structure can promote economic growth, creating possibility of the so-called demographic dividend - increase in per capita income due to a decrease in fertility. This reduces the burden of youth dependency, increases proportion of people employed and those who save money, and allows to reallocate resources from children education to building of plants, creation of infrastructure, investment in education and research and development activities.

The decline in fertility also tend to relieve women of child-bearing and child-rearing, further increasing the labor supply.

Similarly, savings rates generally grow with increase in survival of adults and in relation to the expected longer periods of retirement. Especially it is true in those countries where the labor activity of people over 60-65 years is constrained by policies and institutions.

The demographic dividend is an opportunity to ensure the rapid income growth and poverty reduction.

Policies and programs aimed at reducing infant and child mortality can serve as a catalyst for it. Income growth and poverty reduction can additionally be sped up by adoption of measures that reduce fertility, such as expansion of access to primary and reproductive health care, and girls' education.

However, the demographic dividend do not emerges automatically. Its preparation depends on the key aspects of economic and legal conditions, such as good governance, macroeconomic management, trade policy and infrastructure. Above that, there should be labor and financial market efficiency, as well as high level of public and private investment in health, education and training.

In recent decades, different countries, primarily the "East Asian Tigers" (Hong Kong SAR, Korea, Singapore and Taiwan Province of China) have been enjoining the demographic dividends. In the 1960s and 1970s, the countries dramatically reduced fertility and, taking advantage of the breathing room in the economy, reached astounding success through deliberate action in education and health policy, sustainable macro-economic management and prudent cooperation with the region and the world.

In these countries, more than 2 percentage points of the annual growth of per capita income (about one-third of the total annual growth) is oblinged to the decline in fertility and the related sharp increase in the share of the working-age population between 1965 and 2000.

Countries of sub-Saharan Africa are at the other end of the spectrum. From the development point of view, the situation there is much worse since they were unable to avoid the heavy burden of youth dependency and rapid population growth.

High dependency ratios typical for many African countries indicate that lower fertility can greatly encourage greater economic growth.

In South Asia, where fertility rates have declined significantly, the demographic dividend is a matter of a short-term perspective, and their production is heavily dependent on investment in human capital and job creation.

 




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