Growth Prospects Are Receding Again: Working Age Populations Are Shrinking

If the global economy, and India, grow faster in the coming years, it will not be because of any demographic dividend. The demographic dividend is associated with a rising proportion of working age people (15-65 years) in a population, but demography has been moving in the wrong direction for nearly a decade, and this means growth will be sluggish too.

Ruchir Sharma, head of Emerging Markets Equity and Global Macro at Morgan Stanley Investment Management, has talked about this “New population bomb” in Foreign Affairs magazine (read here) and in The Times of India (read here). He says that “worldwide, growth in the working-age population has collapsed, from an annual average of about two percent before 2005 to an annual average post-war low of around one percent this year. This one percentage point drop in population growth is likely to take a roughly equal chunk out of potential economic growth, which means that the world needs to reset its expectations.”

In short, the world is not producing enough babies to get growth rates up to their post-World War II levels of 3.5 percent on an average. This could fall to 2.5 percent.

According to Sharma, even India – which could become the world’s most populous country in another 15 years – is not on the demographic escalator. In the next five years, India’s working age population will grow at around 1.5 percent, much below the two percent threshold at which countries can sustain growth rates of six percent or more.

As for China, Sharma is pessimistic. “Even six percent growth is no longer a reasonable target, since its working age population is not just growing slowly, it is shrinking.”

So if India still remains the fastest growing economy for a reasonable period of time, it will not be because we are doing well, but because China is doing worse, and headed downhill. Case for schadenfreude, not celebration.

The most depressing thought, though, is this: the two countries among 17 emerging market economies that breach the threshold level of two percent working population growth are Saudi Arabia and Nigeria. One is a fundamentalist Islamist state, and the other is racked by fundamentalist forces like Boko Haram. The wrong populations are growing, it seems.

Some other implications of the drop in working age populations the world over are thus worth drawing.

One, working years will lengthen for the developed world, and this will be the trend even in some of the developing countries, including China. People may no longer be able to afford retiring at 60 or even 65.

Two, the slowdown in working age population growth will spur more investment in labour-saving technologies in the west, which may percolate to the developing world and shrink the rate of jobs growth. This could be one reason why India too has not been able to create jobs as fast as the working age population has grown. Today, technology and capital are used in larger proportions to generate growth.

Three, with immigration becoming a sore point in many parts of the western world, this safety valve will start closing for labour exporters like India. We have to look to create more local sources of growth.

Four, a general global slowdown means that the Indian economy may not find supportive conditions for export growth, and this will prolong the time required for accelerating growth beyond seven percent for sustainable periods. Arun Jaitley should worry about whether even the current 7.6 percent rate will stay.

Five, if exports are going to face rough weather, India will have to consider the option of allowing the rupee to depreciate faster, though this may have the side-effect of importing inflation, especially on the oil front.

Six, social tensions will rise all over the world in a slow-growth phase. We are moving towards a more worrisome world, where violence may escalate.

Seven, when growth is slow, politicians will tend to tilt leftwards, since redistributive policies will appear more attractive. The far right also rises in such circumstances. Politics will be less of a gentleman’s place in future.

Eight, the world could see a shift towards mercantilist policies, and multilateralism could be replaced with mutually beneficial trade blocs with separate trading rules between them. The free trade world envisaged by the post-World War II institutions will be under attack.

We are entering uncharted territory. It is quite possible that a century of high-growth global economy is coming to a close.