March / April 2016 Volume 95 Number 2

The Demographics of Stagnation Why People Matter for Economic Growth Ruchir Sharma

The contents oo Foreign Affairs are copyrighted ©2016 Council on Foreign Relations, Inc. All rights reserved. Reproduction and distribution oo this material is permitted only with the express written consent oo Foreign Affairs. Visit www.foreignaffairs.com/permissions for more information. savings in money and time generated The Demographics by new technologies, from superfast Internet connections to artificial of Stagnation intelligence. But it is hard to deny that the growth in the size of the labor force—which is driven mainly by Why People Matter for increases in the number of working- Economic Growth age people, those between the ages of 15 and 64—has slowed across the Ruchir Sharma world. Between 1960 and 2005, the global labor force grew at an average of 1.8 n every single region of the world, percent per year, but since 2005, the rate economic growth has failed to return has downshifted to just 1.1 percent, and Ito the rate it averaged before the it will likely slip further in the coming Great Recession. Economists have come decades as fertility rates continue to up with a variety of theories for why decline in most parts of the world. The HOW TO SURVIVE SLOW GROWTH this recovery has been the weakest in labor force is still growing rapidly in postwar history, including high indebt- Nigeria, the Philippines, and a few other edness, growing income inequality, and countries. But it is growing very slowly excess caution induced by the original in the United States—at 0.5 percent per debt crisis. Although each explanation year over the past decade, compared has some merit, experts have largely with 1.7 percent from 1960 to 2005—and overlooked what may be the most impor- is already shrinking in some countries, tant factor: the global slowdown in the such as China and Germany. growth of the labor force. The implications for the world One way to calculate the world’s economy are clear: a one-percentage- potential growth rate is to add the rate point decline in the population growth at which the labor force is expanding to rate will eventually reduce the economic the rate at which productivity is rising. growth rate by roughly a percentage Since 1960, gains in both factors have point. A collapse in the growth rate contributed equally to potential economic of the working-age population was growth. And in the last decade, the gains already under way before the financial in both appear to have leveled off. The crisis, and the trend explains a good difference between these two drivers, chunk of the persistently disappoint- however, is that there is a debate about ing recovery since. Governments can whether the decline in productivity offer incentives to boost fertility rates growth is real. Productivity measure- and lure more adults into the work ments have arguably failed to capture force—and many already are—but these half measures can only partially RUCHIR SHARMA is Head of Emerging offset the larger forces at work. Ulti- Markets and Global Macro at Morgan Stanley mately, then, the world should brace Investment Management and the author of the forthcoming book The Rise and Fall of Nations: itself for slower growth and fewer Forces of Change in the Post-Crisis World. economic standouts.

18 foreign affairs The Demographics of Stagnation

THE POPULATION PLATEAU may seem small, but if the population According to un forecasts, the world’s growth rate had stayed at two percent population will rise from 7.3 billion since 1990, there would be 1.4 billion today to 9.7 billion by 2050. Alarmists more people today, and shrinking work of all stripes have seized on the predic- forces would not pose such a threat to tion: neo-Malthusians fear that agricul- economic growth. tural productivity won’t be able to keep This demographic shift is the de- up with all those extra mouths to feed, layed result of slow-moving changes in neo-Luddites worry that the advent of death and fertility rates over the last the robotic age will leave this exploding half century. On one side of the ledger, population largely unemployed, and advances in medicine and nutrition anti-immigrant forces in the West raise have extended the average human’s life the specter of a rising tide of what one span from 50 years in 1960 to 69 years British cabinet minister called “desper- today, with more progress sure to come. ate migrants marauding around.” Already, the majority of global population But all these fears are misplaced. growth is a consequence of the expand- Although 2.4 billion sounds like a lot ing share of people over 50, and the of people to add to the planet by 2050, fastest-growing segment of the popula- the figure in fact takes into account a tion is, by far, people older than 80. dramatic slowdown in the population On the other side of the ledger is the growth rate—a decline driven largely global baby bust. Since 1960, the average by the thinning ranks of working-age number of births per woman worldwide people. Slower population growth reduces has fallen from 4.9 to 2.5. In part, this the pressure on the food supply, as does drop-off in the fertility rate owes to the aging of the population, because rising prosperity and educational elderly people consume up to a third levels among women, many of whom fewer calories than young people. But decided to pursue careers and have such demographic decline is nonethe- fewer children—or not have children less toxic for the economy. The primary at all. But the decline has mostly been threat most countries now face, in fact, the result of aggressive birth-control is not too many people but too few policies adopted in the developing young workers. world in the 1970s. China introduced For much of the postwar era, global its one-child policy in the late 1970s, population grew at nearly two percent and the fertility rate fell from 3.6 in per year, which meant that the world 1978 to 1.5 today. In India, where the economy could also expect to grow at a government went so far as to embark baseline rate of close to two percent a on a forced sterilization campaign in year—and a couple of percentage points the late 1970s, the fertility rate plum- more than that when output per worker meted, from 5.9 in 1960 to 2.5 in 2015. was also growing. Around 1990, how- Today, more and more countries are ever, population growth fell off a cliff. nearing the replacement fertility rate of Since then, the rate has halved, to just 2.1, below which the population starts around one percent. The difference to shrink. Already, nearly half of all the between one percent and two percent people on earth live in one of the 83

March/April 2016 19 Ruchir Sharma countries—including Brazil, China, away: a world with fewer fast-growing Germany, Iran, Japan, Russia, and the working-age populations will experience United States—where the fertility fewer economic miracles. rate is below that level. To be sure, economic booms don’t always require population booms: in a PEOPLE POWER quarter of the cases, the countries did Because it takes 15 to 25 years for babies manage long stretches of strong economic to mature into working-age adults, the growth without reaching the threshold of economic impact of falling fertility two percent population growth. Several rates is only starting to become visible. of these countries were already relatively To get a better handle on how demo- wealthy, such as Chile and Ireland in the graphics will limit national economies 1990s, when some combination of reform in the future, I looked at population and new investment increased productiv- trends in the 56 cases since 1960 in ity and compensated for weak population which a country sustained economic growth. Others were witnessing a return growth of at least six percent for a to economic calm during a period of decade or more. On average, the working- reconstruction, as Japan, Portugal, and age population grew at 2.7 percent Spain were in the 1960s and as Russia during these booms, suggesting that was a decade after the fall of the Soviet explosions in the number of workers Union, with an added boost from high deserve a great deal of the credit for oil prices in the last case. Today, no economic miracles. This connection has country can expect a similar boost, not played out in dozens of cases, from Brazil when commodity prices are falling and in the 1960s and 1970s to Malaysia in political unrest is rising. the 1960s through the 1990s. Still, the probability of an economic As for how fast the working-age boom is much lower in the absence of population needs to grow to raise the strong population growth, and even in likelihood of an economic boom, two many parts of the developing world, percent per year turns out to be a good population growth is slowing or reversing. benchmark. In three-quarters of the 56 Over the next five years, the working- cases, the working-age population grew age population growth rate will likely faster than that average during the dip below the two percent threshold in duration of the economic boom. As all the major emerging economies. In that suggests, a country is unlikely to Brazil, India, Indonesia, and Mexico, experience a decadelong boom if its it is expected to fall to 1.5 percent or working-age population is growing less. And in China, Poland, Russia, and slower than two percent annually. Yet Thailand, the working-age population most of the world now fits into that is expected to shrink. category. As recently as the 1980s, 17 The decline in China is perhaps of the 20 largest emerging economies most worrying, as the country has long had working-age population growth served as an engine of global economic rates above two percent. In this decade, growth. In 2015, the growth rate of its by contrast, only two countries do, working-age population dipped below Nigeria and Saudi Arabia. The take- zero for the first time in at least half a

20 foreign affairs The Demographics of Stagnation

Gone gray: a nursing home in Hanover, Germany, January 2013 century. At the same time, thanks to 1960s and Belarus and Georgia between the huge strides in health care that 2000 and 2010. China has made, the elderly’s share of This disappointing record suggests the population is growing much faster that China’s economy will almost cer- there than in industrial countries such tainly not grow at six percent in the as France or the United States. This coming years. In fact, although China’s rapid aging adds to the list of reasons, official numbers still put the growth including an unprecedented debt binge, rate at around seven percent, indepen- to doubt that China can keep up its dent estimates show that it has already rapid economic expansion. fallen below six percent. The implica- Indeed, countries with shrinking tions for economies elsewhere are dire: working-age populations have found it in the last five years, China accounted nearly impossible to produce strong for about a third of global economic economic growth. Going back to 1960, growth, a contribution around twice there are 698 decadelong periods for that of the United States. JOANNA /NOTTEBROCK LAIF / REDUX which data on a country’s population Fortunately, in a few other populous growth and gdp growth are available. countries, the working-age populations In 38 of these cases, the working-age are still expanding at a rate near or population shrank. The average gdp above two percent a year. This group growth rate in these countries was a includes Bangladesh, Kenya, Nigeria, measly 1.5 percent. Only three of them and the Philippines. Demographers managed to sustain gdp growth rates expect these populations to keep grow- of six percent or higher, and all three ing rapidly for the next decade. But were small countries bouncing back even these countries have their work from political turmoil: Portugal in the cut out for them. They must avoid

March/April 2016 21 Ruchir Sharma falling for the fallacy of the demographic entering the work force. For 30 years, dividend: the idea that population the working-age population in the growth automatically translates into an United States has grown much faster economic boom. than those of its major industrial rivals: The truth is that most of the time, it twice as fast as those populations in doesn’t. More than 60 percent of those France and the United Kingdom, five 698 cases I looked at had working-age times as fast as that in Germany, and ten population growth rates above two times as fast as that in Japan. No wonder percent, but only a quarter of those the U.S. economy has also grown faster. population booms led to average growth As in much of the developing world, rates of six percent or higher in the population forecasts for the developed same decade. Today, then, even Nigeria world are discouraging. Looking at the can’t assume that its booming working- leading developed economies over the age population—projected to grow at next five years, the number of working- three percent a year between 2015 and age people is expected to remain static 2020—will automatically translate into in France, shrink a little in Spain, and a booming economy. Leaders still need contract at the rapid pace of 0.4 percent to create the conditions necessary to a year or more in Germany, Italy, and attract investment and generate jobs. Japan. The forecast for the United States To see what happens when leaders looks less bleak, with a positive working- fail to capitalize on a potential demo- age population growth rate of 0.2 per- graphic dividend, consider the Arab cent, about the same as in Canada and world. Its working-age population grew the United Kingdom. The best news for by an average annual rate of more than advanced economies is confined to the three percent between 1985 and 2005— smaller ones: in Australia and Singapore, nearly twice as fast as the rate in the the working-age populations are still rest of the world. But the region never growing at a reasonably fast clip of close experienced an economic boom. At the to one percent. But these countries are beginning of this decade, many Arab too small to compensate for weaker countries suffered from cripplingly high growth in other rich nations. youth unemployment rates: around 30 percent in Egypt, Iraq, Saudi Arabia, ACCEPTING THE INEVITABLE and Tunisia, the last being where the Governments have already started trying chaos of the Arab Spring began. to fight the population slowdown, begin- It’s not just in the developing world ning with strategies to attack falling where economic growth depends on a fertility rates. According to the un, rising number of workers. In recent the share of developing countries with decades, the United States has earned active population-control policies, after a reputation as the most dynamic of rising sharply in the 1970s and 1980s, the advanced economies, far more has leveled off at about 60 percent since innovative than Europe, far less hide- the mid-1990s. Lately, some of the biggest bound than Japan. But much of its recent developing countries have reversed success can be traced to something more course—most notably, China, which mundane: the increase in young people ended its one-child policy last year.

22 foreign affairs Ruchir Sharma

At the same time, the share of devel- rise by a cumulative 12 percent over the to be viewed as bogeymen, and the oped countries that have implemented next 15 years. The group found that the Malthusian nightmare that humanity so-called baby bonuses and other policies biggest gains would accrue to countries won’t be able to feed itself should fade. to boost fertility rates has risen, from in which female participation has tradi- Similarly, neo-Luddite warnings about about 30 percent in 1996 to 70 percent tionally been low, including Italy, Japan, robots stealing human jobs could also today. In places where the fertility rate and South Korea. Japan already seems to prove beside the point. The automation is falling below the replacement level of have gotten the message. Since coming revolution is in its early stages, but it is 2.1, a growing number of governments to power in 2012, Prime Minister Shinzo possible that the robots will arrive just are subsidizing motherhood in an effort Abe has acknowledged the role that in time to ease the threat posed by to encourage women to have more than women could play in fixing the coun- depopulation. As the ranks of working- two children. In some countries, such try’s aging problem, and he has made age humans thin, smart machines could as Chile and France, the subsidies grow “Womenomics”—a set of policies aimed do the labor they once did. Regardless, even more generous with the third, at getting firms to hire more women— it’s hard to see how the world economy fourth, and fifth child. But several of the a centerpiece of his plan to revive the can find enough new workers to grow countries that pioneered these programs, economy. as fast in the future as it has in the including Canada in 1988 and Australia Yet none of these strategies can recent past.∂ in the last decade, found that they had a bring enough adults into the work force limited impact and later pared them back. to compensate fully for the decline in The second set of strategies is aimed the working-age population. Attracting at bringing more adults into the labor immigrants, for example, has proved force, including the elderly, foreigners, impractical on a large scale. One reason and women. In 2007, Germany increased Germany accepted nearly one million the retirement age from 65 to 67. Most refugees in 2015 was that its leaders other European countries have since recognized the economic need for new followed suit, and some have started blood in an aging society, but even the indexing their retirement ages to rising authors of that controversial policy have life expectancy. In the same vein, before admitted that the country cannot accept anti-immigrant movements started taking that many newcomers on a regular off in Europe and the United States in basis. (To counter the projected decline 2015, the competition to attract foreign in its working-age population through workers had been heating up. According 2030, Germany would have to accept to the un, in 2010, just ten countries roughly 1.5 million immigrants every had announced plans to increase the size year.) Besides, the contest to attract of their populations through immigra- immigrant labor, particularly skilled tion; by 2013, 22 had. labor, is a zero-sum game among Then there are the ongoing efforts to countries and so does not represent a lift the female labor-force participation viable strategy on a global level. The rate, which flatlined at around 57 percent most governments can do is muffle worldwide after 1990, before slipping to the impact of depopulation; they can’t 55 percent this decade. According to the defuse it. Organization for Economic Cooperation In a world with fewer young people, and Development, if its member states economic growth will be harder to come eliminated the gender gap in labor-force by. But at least the alarmists’ fears may participation, they would see their gdps subside. Immigrants will be less likely

24 foreign affairs 23 Ruchir Sharma Ruchir Sharma rise by a cumulative 12 percent over the tocountries—including be viewed as bogeymen, Brazil, and China, the away:advice, includinga world advice with as fewerto tax consequences, fast-growing before making any investment decision. next 15 years. The group found that the MalthusianGermany, Iran, nightmare Japan, Russia,that humanity and the working-ageInvesting involves populations risks including will the experience possible loss biggest gains would accrue to countries won’tUnited be States—where able to feed itself the should fertility fade. fewerof principal. economic miracles. Investments in foreign markets entail special risks such in which female participation has tradi- Similarly,rate is below neo-Luddite that level. warnings about as currency,To be political,sure, economic economic, market booms and liquidity don’t risks. tionally been low, including Italy, Japan, robots stealing human jobs could also alwaysThe risks require of investing population in emerging booms: market countries in a are greater than the risks generally associated with and South Korea. Japan already seems to provePEOPLE beside POWER the point. The automation quarterinvestments of inthe foreign cases, developed the countries countries. did have gotten the message. Since coming revolutionBecause it takesis in its15 earlyto 25 stages,years for but babies it is managePast performance long stretches is no guarantee of strong of future economic results. Data sources for the information provided in the article to power in 2012, Prime Minister Shinzo possibleto mature that into the working-age robots will arriveadults, just the growthare as follows: without United reaching Nations, The the Conference threshold Board of Abe has acknowledged the role that ineconomic time to impactease the of threat falling posed fertility by twoand Haverpercent Analytics. population growth. Several This communication is not a product of Morgan Stanley’s women could play in fixing the coun- depopulation.rates is only starting As the toranks become of working- visible. ofResearch these Department countries and were should already not be regardedrelatively as a try’s aging problem, and he has made ageTo get humans a better thin, handle smart on machines how demo could- wealthy,research recommendation. such as Chile The and information Ireland contained in the herein has not been prepared in accordance with legal “Womenomics”—a set of policies aimed dographics the labor will they limit once national did. Regardless,economies 1990s,requirements when designed some to combination promote the independence of reform of investment research and is not subject to any prohibition on at getting firms to hire more women— it’sin the hard future, to see I howlooked the at world population economy anddealing new ahead investment of the dissemination increased of investment productiv research.- a centerpiece of his plan to revive the cantrends find in enoughthe 56 casesnew sinceworkers 1960 to ingrow ityThis and communication compensated is only for intended weak forpopulation and will be only distributed to persons resident in jurisdictions economy. aswhich fast ain country the future sustained as it has economic in the growth.where such Others distribution were or witnessing availability would a return not be Yet none of these strategies can recentgrowth past. of at∂ least six percent for a tocontrary economic to local calm laws or during regulations. a period of EMEA: bring enough adults into the work force decade or more. On average, the working- reconstruction,Issued and approved as Japan,in the United Portugal, Kingdom and by to compensate fully for the decline in Thisage material population is for Professional grew at 2.7 Clients percent only, except SpainMorgan wereStanley in Investment the 1960s Management and as Russia Limited, 25 in the U.S. where the material may be redistributed or Cabot Square, Canary Wharf, London E14 4QA, authorized the working-age population. Attracting usedduring with thethese general booms, public. suggesting that wasand regulateda decade by afterthe Financial the fall Conduct of the Authority, Soviet for distribution to Professional Clients only and must not immigrants, for example, has proved Theexplosions views and opinionsin the arenumber those of of the workers author as of Union,be relied uponwith or an acted added upon byboost Retail from Clients high (each as the date of publication and are subject to change at any defined in the UK Financial Conduct Authority’s rules). impractical on a large scale. One reason timedeserve due to a market great or deal economic of the conditions credit and for may oil prices in the last case. Today, no Germany accepted nearly one million noteconomic necessarily miracles. come to pass. This Furthermore, connection the views has countryU.S.: can expect a similar boost, not will not be updated or otherwise revised to reflect NOT FDIC INSURED | OFFER NO BANK GUARANTEE | refugees in 2015 was that its leaders informationplayed out that in subsequentlydozens of cases,becomes from available Brazil or whenMAY LOSE commodity VALUE | NOT prices INSURED are BY falling ANY FEDERAL and circumstances existing, or changes occurring, after the GOVERNMENT AGENCY | NOT A DEPOSIT recognized the economic need for new datein the of publication. 1960s and The 1970sviews expressed to Malaysia do not reflect in politicalHong Kong: unrest is rising. blood in an aging society, but even the thethe opinions 1960s of through all portfolio the managers 1990s. at Morgan Stanley ThisStill, document the hasprobability been issued by of Morgan an economic Stanley Asia Investment Management (MSIM) or the views of the firm Limited for use in Hong Kong and shall only be made authors of that controversial policy have as a whole,As for and how may notfast be reflectedthe working-age in all the strategies boomavailable is to much “professional lower investors” in the as absencedefined under of the admitted that the country cannot accept andpopulation products that needs the Firm to offers. grow to raise the strongSecurities population and Futures Ordinance growth, of Hong and Kong even (Cap in 571). Forecasts and/or estimates provided herein are subject to The contents of this document have not been reviewed that many newcomers on a regular changelikelihood and may of not an actually economic come to pass.boom, Information two manynor approved parts byof any the regulatory developing authority world, including regarding expected market returns and market outlooks the Securities and Futures Commission in Hong Kong. basis. (To counter the projected decline ispercent based on perthe research,year turns analysis out and to opinions be a good of the populationAccordingly, save growth where anis exemptionslowing isor available reversing. under in its working-age population through authors.benchmark. These conclusions In three-quarters are speculative of inthe nature, 56 Overthe relevant the next law, thisfive document years, shallthe notworking- be issued, may not come to pass and are not intended to predict circulated, distributed, directed at, or made available 2030, Germany would have to accept thecases, future the performance working-age of any specificpopulation Morgan Stanleygrew ageto, the population public in Hong growth Kong. rate will likely roughly 1.5 million immigrants every Investmentfaster than Management that average product. during the dipSingapore: below the two percent threshold in Certain information herein is based on data obtained from This document may not be circulated or distributed, year.) Besides, the contest to attract thirdduration party sources of the believed economic to be reliable. boom. However, As we allwhether the majordirectly oremerging indirectly, toeconomies. persons in Singapore In have not verified this information, and we make no repre- other than to (i) an accredited investor (ii) an expert immigrant labor, particularly skilled sentationsthat suggests, whatsoever a ascountry to its accuracy is unlikely or completeness. to Brazil,investor orIndia, (iii) an Indonesia, institutional investor and Mexico, as defined in labor, is a zero-sum game among Allexperience information provideda decadelong has been boomprepared if solely its for itSection is expected 4A of the toSecurities fall to and 1.5 Futures percent Act, Chapter or information purposes and does not constitute an offer or 289 of Singapore (“SFA”); or (iv) otherwise pursuant countries and so does not represent a aworking-age recommendation topopulation buy or sell any isparticular growing security or less.to, and And in accordance in China, with Poland,the conditions Russia, of, any andother viable strategy on a global level. The toslower adopt any than specific two investment percent strategy. annually. The information Yet Thailand,applicable provision the working-age of the SFA. population herein has not been based on a consideration of any Australia: most governments can do is muffle individualmost of investor the world circumstances now fitsand is intonot investment that isThis expected publication to shrink.is disseminated in Australia by advice, nor should it be construed in any way as tax, Morgan Stanley Investment Management (Australia) the impact of depopulation; they can’t accounting,category. legal As recentlyor regulatory as advice.the 1980s, To that 17 end, PtyThe Limited decline ACN: 122040037, in China AFSL is perhapsNo. 314182, which investors should seek independent legal and financial accept responsibility for its contents. This publication, and defuse it. of the 20 largest emerging economies mostany access worrying, to it, is intended as the only country for “wholesale has long clients” In a world with fewer young people, had working-age population growth servedwithin the as meaning an engine of the Australianof global Corporations economic Act. Morgan Stanley Investment Management is the asset economic growth will be harder to come rates above two percent. In this decade, growth.management In division 2015, ofthe Morgan growth Stanley. rate of its by. But at least the alarmists’ fears may by contrast, only two countries do, working-ageAll information containedpopulation herein dipped is proprietary below and is subside. Immigrants will be less likely Nigeria and Saudi Arabia. The take- zeroprotected for underthe first copyright time law. in at least half a

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