VOL. 11, NO. 7 • JULY 2016 DALLASFED

Economic Letter

Global Demographic Trends Shape Policy Environment

by Mark A. Wynne }

emographics will fundamen- Since then, global Demographics ABSTRACT: tally affect the environment has been more or less monotonic, despite are key determinants of what in which monetary policy is the disasters of famine, epidemic and is economically feasible at D made over the next decade. war. At the onset of sustained population both the global and national The global population is expected to growth at the beginning of the 19th cen- increase to 11.2 billion by the end of this tury, English economist Thomas Malthus levels. Demographics also century based on current trends, with first wrote about overpopulation. Few, have important implications essentially all of this growth occurring in if any, of the worst fears of Malthus— for monetary policy. Slower the so-called developing regions of the known for his work An Essay on the population and labor force world and none in the industrial regions Principle of Population—have come to (Europe, North America, Australia, New pass. Still, demographics are fundamen- growth in the coming decades Zealand and Japan). tally tied to long-run growth prospects will have a depressing effect The global population stood at 7.3 bil- and myriad other issues. on real interest rates. lion in 2015, roughly three times the 1950 population of 2.5 billion, according to Fertility and Income United estimates published last A long-standing regularity of demo- year. 1 The 17 percent of the population graphics is that as countries get richer, living in advanced economies in 2015 will birth rates decline. Chart 1 depicts the decline to a bit less than 12 percent, or relationship between fertility rates in vari- one-eighth, of global residents by 2099. ous countries in 2015 and overall stan- These same economies accounted for dards of living as measured by per capita just under one-third of the world popula- gross domestic product (GDP) in U.S. tion in 1950. dollars. The chart includes the “best fit” In short, and are where depiction to illustrate the negative rela- the demographic action will be over the tionship between income and fertility, as next 100 years. well as a reference line at a fertility rate of The phenomenon of sustained popu- 2.1—about the level needed for a popu- lation growth is a remarkably recent one. lation to reproduce itself in advanced The world’s population began growing in economies.2 a persistent manner after the Industrial A number of countries have fertility Revolution of the 18th century, sur- rates below the 2.1 replacement thresh- passing 1 billion around the turn of the old, including the United States. Even century. with fertility rates below replacement, a Economic Letter

that Italy’s population will peak at about Chart 60 million in 2016 before it, too, begins a Fertility Declines as Incomes Rise 1 steady decline. By comparison, the populations of Total fertility rate (children per woman) the United Kingdom and France are 8 Niger expected to grow through the end of the 7 21st century, with the UK overtaking

6 Angola Germany as Europe’s most populous by the middle of the century and 5 Replacement fertility rate for advanced economies France surpassing Germany by about 4 2060. Saudi Israel Arabia 3 World Another Tipping Point 2 U.S. As important as aggregate popula- tion developments are at the global and 1 Switzerland national levels, the composition of the Japan 0 population also matters for economic 0 30,000 60,000 90,000 GDP per capita (U.S. dollars, 2015) policy. These effects are particularly dra- matic in the aftermath of a transition to a NOTE: Countries with a population of fewer than 5 million are excluded. higher or lower fertility rate or birth rate. SOURCES: United Nations Population Information Network; International Monetary Fund’s World Economic Outlook; author’s calculations. Chart 2 shows the global working-age population—proxied by the population population can continue to grow for some lowing the collapse of the Soviet Union. age 15-64—as a share of the total world time due to , declining death Russia also experienced a surge in the population over the past 65 years and rates and population momentum. But if death rate that led to a big decline in life through the middle part of this century.4 sustained for an extended period, sub- expectancy, especially among males. The The proportion of working-age people replacement fertility rates almost always former Warsaw Pact countries of Eastern dramatically declined in the immediate translate into declining populations. Europe were similarly affected by these post- II period through the adverse demographics. late 1960s. This was primarily due to the Tipping Points Japan’s situation could have a greater postwar surge in births—the baby boom The total population in three regions impact than Russia’s on the global in the United States and other countries. of the world—Eastern Europe, Japan economy. The Japanese government Baby boomers began entering the and Western Europe—has already or confirmed in early 2016 what demogra- global in the mid-1960s, and will shortly pass the tipping point from phers had predicted—its population had labor became relatively abundant on a growth to decline. Eastern Europe, which declined for the first time since records global scale. That trend ended in 2012. for UN classification purposes includes began in the 1920s, falling by just under Since then, the number of potential Russia, began to experience slowing pop- 1 million between 2010 and 2015. workers has shrunk as a share of the ulation growth around the time of the The figures, based on the 2015 cen- global population and is projected to breakup of the Soviet Union. The region’s sus, confirmed UN projections released continue doing so until the middle of this population peaked at just under 311 mil- last year that had Japan’s population century and beyond. lion in 1992 before falling to just under peaking at 127.3 million in 2009, declin- The flip side of this decline is that 293 million as of 2015. ing to 126.6 million by 2015 and falling the (those age 15 and Among the world’s major advanced further to 83.4 million by the end of the under plus those 64 and older) is project- and developing economies, Russia was century. ed to rise globally. That is, each worker the first to pass a tipping point. The But Japan is not alone among will need to support a larger number UN estimates that Russia’s population advanced economies. The population of of dependents going forward, putting peaked at just over 148 million in 1994 Europe as a whole (including Russia) is potentially significant strains on the pub- before declining to 143.5 million last projected to peak at just under 740 mil- lic finances of many countries. year and projects that the count will fall lion in 2020. However, the demographic Just as some parts of the world seem further through the end of the century.3 destinies of the four largest Western to have reached peak population, so too The drop has been largely driven by a European economies are quite differ- have many countries or regions experi- decline in fertility rates from 2.1 in 1909 ent. UN estimates put Germany’s peak enced peak worker availability. The euro to a low of 1.2 in 2000. Fertility has since population at just over 82 million in area hit this peak in 1990, Japan in 1992, turned up but is below replacement and 1998. Since then, the trajectory has been the U.S. in 2008 and in 2011. is expected to remain so. downward, with the German population What is striking about the global phe- Some of the fertility decline was projected to shrink to about 62 million by nomenon of growing worker scarcity is offset by a big uptick in immigration fol- the end of this century. The UN estimates just how broad based it is. Every major

2 Economic Letter • Federal Reserve Bank of Dallas • July 2016 Economic Letter

Chart Tipping Point for Worker Population Share Possibly Reached 2 (Working-age population, 15–64, as a share of world total) Share 0.75 Global peak: 2012 (0.66) To the extent that the 0.70 positive relationship 0.65 between the growth 0.60 of the working-age 0.55 population and real

0.50 rates has held over 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

SOURCES: United Nations; Haver Analytics. the past 35 years, demographics will Chart Regions’ Working-Age Tipping Points Arrive 3 (Working-age population,15–64, as a share of total population) likely be a significant Share source of downward 0.70 pressure on global

0.65 interest rates for some time to come. 0.60

Africa Asia 0.55 Latin America Oceana North America Europe 0.50 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

SOURCES: United Nations; Haver Analytics. geographic region of the world but one preference rate (how impatient people will experience a declining working-age are) and the population growth rate. population relative to the total (Chart 3). Indeed, there seems to be a positive rela- Europe, North America and Oceania tionship between the global real interest have already hit the peak, Asia probably rate and the growth rate of the global reached its peak sometime in the past working-age population (Chart 4). year or two, and Latin America will peak Faster growth in the working-age before the end of this decade. Africa population is associated with higher is the only major region in which the real interest rates, while slower growth is working-age population is expected to associated with lower real rates. However, increase relative to the total. the relationship is not as strong as eco- nomic theory might predict. To the extent Monetary Policy Impact that the positive relationship between Basic economic theory tells us that the growth of the working-age popula- ultimately the real (inflation-adjusted) tion and real rates has held over the past interest rate is determined by the time 35 years, demographics will likely be a

Economic Letter • Federal Reserve Bank of Dallas • July 2016 3 Economic Letter

2 The number is higher in less-developed countries because Chart of higher mortality rates. If a significant number of women Global Real Interest Rates Rise with Labor Force Growth do not survive through the end of their childbearing years, 4 those who do survive need to have more children just to keep the population constant. The fertility rate is somewhat GDP-weighted global real interest rate (percent) different from the birth rate. While the birth rate (number 7 of births per thousand people) is a parameter of the entire population, the fertility rate is a parameter of the female 6 population of reproductive age (generally 15 to 49). 5 Fertility-rate estimates are subject to revision because they are based on projections of the number of children that a 4 woman of childbearing age would be likely to have during

3 her childbearing years based on current birth rates. 3 Note that Russian population estimates from the Russian 2 Federation’s Federal State Statistics Service, reported in the Haver Analytics database, show an increase of 2.6 million in 1 2014 that is not reflected in the UN estimates. 0 4 Arguably for many advanced countries, the age of entry 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 into the workforce is later than 15 and the age at retirement Working-age (15–64) population growth (percent) is later than 64. A roughly similar pattern, albeit less NOTE: Each dot represents for a given year, 1985–2015. dramatic, emerges if we define the working-age population SOURCES: National central banks and statistical organizations; International Monetary Fund; Haver Analytics; author’s calculations. as 25 to 64. 5 A number of studies have attempted to quantify the significant source of downward pressure graphics are important, though demo- impact of demographics on interest rates. In “Demograph- on global interest rates for some time to graphics also matter at the national level. ics and Real Interest Rates: Inspecting the Mechanism” 5 come. In some respects, the national level is (Federal Reserve Bank of San Francisco Working Paper where we should focus attention because no. 2016-05, April 23, 2016), Carlos Carvalho, Andrea National Economic Policies national economic policies and social Ferrero and Fernanda Nechio find that demographics can Demographics matter. They are key norms often impact the ultimate drivers account for a 150 basis-point reduction in the equilibrium determinants of what measures may be of demographic developments. interest rate in developed countries between 1990 and feasible at the global and national levels. 2014. In “Secular Drivers of the Global Real Interest Rate” But demographics by themselves do not Wynne is a vice president and associate (Bank of England Staff Working Paper no. 571, December define what can be done at a policy level. director of research for international eco- 2015), Lukasz Rachel and Thomas D. Smith argue that Other factors such as productivity, tax nomics in the Research Department and close to 1 percentage point of the 4.5 percentage-point rates and the regulatory environment mat- director of the and Mon- decline in the global neutral interest rate between 1980 ter as well—and in some ways, more so. etary Policy Institute at the Federal Reserve and 2015 can be attributed to demographics. Furthermore, key contributors to Bank of Dallas. demographic trends such as fertility rates, labor force participation rates and Notes even mortality rates are susceptible to 1 United Nations data are estimates are through 2010 and influence by public policy. Global demo- projections from 2011 through 2099.

DALLASFED Economic Letter Mine Yücel, Senior Vice President and Director of Research is published by the Federal Reserve Bank of Dallas. Jim Dolmas, Executive Editor The views expressed are those of the authors and Michael Weiss, Editor should not be attributed to the Federal Reserve Bank Kathy Thacker, Associate Editor of Dallas or the Federal Reserve System. Ellah Piña, Graphic Designer Articles may be reprinted on the condition that the source is credited and a copy is provided to the Research Department of the Federal Reserve Bank of Dallas. Economic Letter is available on the Dallas Fed website, www.dallasfed.org. Federal Reserve Bank of Dallas 2200 N. Pearl St., Dallas, TX 75201