Global Aging and the Crisis of the 2020s

January 31, 2011

I recently read a posting from John Mauldin on his InvestorInsight.com newsletter on entitled Global Aging and Crisis of the 2020s.  In his newsletter, Mauldin often shares the insights of other authors on subjects that may affect his reader’s investing decisions.

The article in Mauldin’s newsletter was co-authored by Neil Howe and Richard Jackson from their work with the Center for Strategic and International Studies on the Global Aging Initiative. Howe and Jackson are also the authors of “The Graying of the Great Powers” and other commentary on the impact that demographics will have on our future. You can see that paper HERE.

The article by Howe and Jackson describe how demographic trends have played a decisive role in many of the great invasions, political upheavals, migrations, and environmental catastrophes of history. They note another startling trend that will surface in the 2020s as global aging begins to have a profound effect on economic growth, living standards, and the shape of the world order.

The following are some of the important concepts taken from the full article:

  • The developed world has been aging for decades, due to falling birthrates and rising life expectancy and the 2020s, this aging will get an extra kick as large postwar baby boom generations move fully into retirement.
  • According to the United Nations Population, the median ages of Western Europe and Japan, which were 34 and 33 respectively as recently as 1980, will soar to 47 and 52 by 2030, assuming no increase in fertility.
  • In Italy, Spain, and Japan, more than half of all adults will be older than the official retirement age—and there will be more people in their 70s than in their 20s.
  • By 2030, working-age population will be stagnant or contracting in nearly all developed countries, the only major exception being the United States.
  • In a growing number of nations, total population will begin a gathering decline as well. Unless immigration or birthrates surge, Japan and some European nations are on track to lose nearly one-half of their total current populations by the end of the century.
  • Rising pension and health care costs will place intense pressure on government budgets, potentially crowding out spending on other priorities, including national defense and foreign assistance. Economic performance may suffer as workforces gray and rates of savings and investment decline.
  • China will face a massive age wave that could slow economic growth and precipitate political crisis. Russia will be in the midst of the steepest and most protracted population implosion of any major power since the plague-ridden Middle Ages.
  • Many other developing countries, especially in the Muslim world, will experience a sudden new resurgence of youth whose aspirations they are unlikely to be able to meet.
  • The developed world is destined to see its geopolitical stature diminish with one important exception to the trend … the United States.
  • Simple arithmetic. By the 2020s and 2030s, the working-age population of Japan and many European countries will be contracting by between 0.5 and 1.5 percent per year. Even at full employment, growth in real GDP could stagnate or decline, since the number of workers may be falling faster than productivity is rising.
  • A graying workforce means less entrepreneurialism since new business start-ups in high-income countries are heavily tilted toward the young. Of all “new entrepreneurs” 40 percent are under age 35 and 69 percent under age 45. Only 9 percent were 55 or older.
  • Savings rates in the developed world will decline as a larger share of the population moves into the retirement years. As a result, either businesses will starve for investment funds or the developed economies’ dependence on capital from higher-saving emerging markets will grow. The penalty will be lower output or higher debt service costs and the loss of political leverage, which history teaches is always ceded to creditor nations.
  • The developed countries will have to transfer a rising share of society’s economic resources from working-age adults to nonworking elders. Graying means paying—more for pensions, more for health care, more for nursing homes for the frail elderly.
  • By the 2020s, political conflict over deep benefit cuts is unavoidable. On one side will be young adults who face stagnant or declining after-tax earnings. On the other side will be retirees, who are often wholly dependent on pay-as-you-go public plans.
  • With the size of domestic markets fixed or shrinking in many countries, businesses and unions may lobby for anticompetitive changes in the economy. Governments we impose cartels (tariff barriers and other anticompetitive policies) to protect market share that tend to shut the door on free trade and free markets.
  • Psychologically, older societies are likely to become more conservative in outlook and possibly more risk-averse in electoral and leadership behavior. Elder-dominated electorates may tend to lock in current public spending commitments at the expense of new priorities and shun decisive confrontations in favor of ad hoc settlements. Smaller families may be less willing to risk scarce youth in war.
  • The rapid growth in ethnic and religious minority populations, due to ongoing immigration and higher-than-average minority fertility, could strain civic cohesion. With the demand for low-wage labor rising, immigration (at its current rate) is on track by 2030 to double the percentage of Muslims in France and triple it in Germany. Some large European cities, including Amsterdam, Marseille, Birmingham, and Cologne, may be majority Muslim.
  • Over the next few decades, the outlook in the United States will increasingly diverge from that in the rest of the developed world. Aside from Israel and Iceland, the United States is the only developed nation where fertility is at or above the replacement rate of 2.1 average lifetime births per woman. By 2030, its median age, now 37, will rise to only 39. Its working-age population, according to both US Census Bureau and UN projections, will also continue to grow through the 2020s and beyond, both because of its higher fertility rate and because of substantial net immigration, which America assimilates better than most other developed countries.
  • Most of the developing world is also progressing through the so-called demographic transition—the shift from high mortality and high fertility to low mortality and low fertility that inevitably accompanies development and modernization. Since 1975, the average fertility rate in the developing world has dropped from 5.1 to 2.7 children per woman, the rate of population growth has decelerated from 2.2 to 1.3 percent per year, and the median age has risen from 21 to 28.
  • In many of the poorest and least stable countries (especially in sub-Saharan Africa), the demographic transition has failed to gain traction, leaving countries burdened with large youth bulges. By contrast, in many of the most rapidly modernizing countries (especially in East Asia), the population shift from young and growing to old and stagnant or declining is occurring at a breathtaking pace—far more rapidly than it did in any of today’s developed countries.
  • The demographic transition can trigger a rise in extremism. Religious and cultural revitalization movements may seek to reaffirm traditional identities that are threatened by modernization and try to fill the void left when development uproots communities and fragments extended families.
  • International terrorism, among the developing countries, is positively correlated with income, education, and urbanization. States that sponsor terrorism are rarely among the youngest and poorest countries; nor do the terrorists themselves usually originate in the youngest and poorest countries. Indeed, they are often disaffected members of the middle class in middle-income countries that are midway through the demographic transition.
  • China may be the first country to grow old before it grows rich. For the past quarter-century, China has been peacefully rising, due in part to a one-child-per-couple policy that has lowered dependency burdens and allowed both parents to work and contribute to China’s boom. By the 2020s, however, the huge Red Guard generation, which was born before the country’s fertility decline, will move into retirement, heavily taxing the resources of their children and the state.
  • By 2030 China will be an older country than the United States which may weaken the two pillars of the current regime’s legitimacy: rapidly rising GDP and social stability. China could careen toward social collapse—or, in reaction, toward an authoritarian clampdown.
  • By the 2020s, Russia, along with the rest of Eastern Europe, will be in the midst of an extended population decline as steep as or steeper than any in the developed world. The Russian fertility rate has plunged far beneath the replacement level even as life expectancy has collapsed amid a widening health crisis. Russian men today can expect to live to 60—16 years less than American men and marginally less than their Red Army grandfathers at the end of World War II. By 2050, Russia is due to fall to 16th place in world population rankings, down from 4th place in 1950 (or third place, if we include all the territories of the former Soviet Union).
  • Sub-Saharan Africa, which is burdened by the world’s highest fertility rates and is also ravaged by AIDS, will still be racked by large youth bulges as will certain Muslim-majority countries, including Afghanistan, the Palestinian territories, Somalia, Sudan, and Yemen.
  • These echo booms will be especially large in Pakistan and Iran. In Pakistan, the decade-over-decade percentage growth in the number of people in the volatile 15- to 24-year-old age bracket is projected to drop from 32 percent in the 2000s to just 10 percent in the 2010s, but then leap upward again to 19 percent in the 2020s.
  • In Iran, the swing in the size of the youth bulge population is projected to be even larger: minus 33 percent in the 2010s and plus 23 percent in the 2020s. These echo booms will be occurring in countries whose social fabric is already strained by rapid development.
  • During the era of the Industrial Revolution, the population in the developed world grew faster than the rest of the world’s population, peaking at 25 percent of the world total in 1930. Since then, its share has declined. By 2010, it stood at just 13 percent, and it is projected to decline still further, to 10 percent by 2050.
  • The collective GDP of the developed countries will also decline as a share of the world total. The Group of 7 industrialized nations’ share of the Group of 20 leading economies’ total GDP will fall from 72 percent in 2009 to 40 percent in 2050.
  • The United States is only one large country in the developed world that does not face a future of stunning relative demographic and economic decline. Due to its relatively high fertility rate and substantial net immigration, the U.S. current global population share will remain virtually unchanged in the coming decades. The US share of total G-20 GDP will drop significantly, from 34 percent in 2009 to 24 percent in 2050. The combined share of Canada, France, Germany, Italy, Japan, and the United Kingdom, however, will plunge from 38 percent to 16 percent.
  • According to information published by the United Nations, in 1950, six of the top twelve populations were developed countries. In 2000, only three were. By 2050, only one developed country will remain—the United States, still in third place.
  • The conclusion of the authors; “… population trends point inexorably toward a more dominant US role in a world that will need America more, not less.”

Full Article

Posted by Scott R. Lodde

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