Driving To Our Demographic Destiny

Demographics and government: neither can fully control the other. Soon that will have to change. When it comes to people, more isn’t always better. The economic growth levels of the last 30 years must be maintained to mitigate the blast of the “demographic bomb.”

Smoothing The Demographic Curve To A Healthy Economy

By Fernando Arce, Staff Writer
Designed By Ryan Trinidad

We tend to think that more is better. Why wouldn’t we? When we like something we want more of it. Our entire economy is based upon this philosophy. We demand something because we find that it’s useful to us; then manufacturing companies supply it.

Retailers stock their stores and market those products as enticingly as possible based on this relationship. More production and more consumption are good for manufacturers, consumers, and the economy.

The Gas

When it comes to people, more isn’t always better. Those familiar with Malthusian theories of resource depletion know this. Yet we continue to hear dire warnings about a depleting workforce and the need to step up population growth to avoid it. Although these claims aren’t entirely unfounded, seeing as how the workforce is indeed the juice that sustains an economy, this doesn’t translate into economic growth or well-being.

A country cannot prosper in the face of political, economic, and environmental catastrophes based solely on the size of its workforce. Economies are complex mechanisms that need much more than just working people; they are systems based on rules, policies and regulations, all of which have become increasingly interconnected across the globe.

Let’s think of an economy like an automobile and of the working force like the gasoline that we pump into it. Without it, we can’t drive anywhere. However, for the gasoline to be burned efficiently and get the most possible miles per gallon, the car must have a finely tuned engine.

Much the same way, an economy needs people to propel it forward and to benefit from its services. Like the car, the economy also has an engine that, if sharply tuned, will determine whether a country can prosper in the face of adversities, such as a depleting workforce brought about by changing demographics.

The Engine

Although the mantra of the capitalist economy is the lack of government intervention, it is impossible to envision a successful economy fully void of it. A quick jog down memory lane can refresh our memories.

The first economists considered the free market a self-ordering mechanism that also served as an impetus for growth as individuals pursued their private interests. While all investments were driven by the desire for profit, the market would subtly work behind the scenes to ensure the full utilization of society’s capital (things like full employment and balance between supply and demand), contributing therefore to what Adam Smith called the Public Good; any intervention from the government would have distorted this seemingly natural process. The government was seen as a mediator, at best, who would overtake responsibilities such as erecting public institutions and developing an infrastructure that would in turn facilitate the flow of commerce, but not influence it.

The success of their theories—and of capitalism—was magnified by the fact that society was breaking off from the feudal past. In this context, the benefits of liberalization of trade and the freedom of individuals to engage in this activity had been blown up, portraying any outside intervention as regressive and counterproductive.

But history proved otherwise.

When the Great Depression hit, the foundation of capitalism was shaken, and the feasibility of alternatives like communism and fascism loomed precariously over their heads. With more than one third of the labour force unemployed in the United States and increasingly negative profit margins, the government began to question whether the invisible hand that was thought to lift all boats to the same tide was not an anchor drowning them instead. It was around this time that John Maynard Keynes emerged, advocating a type of mixed economy where the public sector played a large role in the undertakings of the private sphere.

His analysis of macroeconomics essentially said that, left unattended and unregulated, microeconomic-level decisions would lead the economy into inevitable cyclical instability. In a way, Keynes played the devil’s advocate—and succeeded—as he persuaded governments to adopt policies that would assure “a stable process of reproduction and adequate levels of employment.”

Although Keynesian notions lost some of their influence during the 1960s and 1970s, they’ve re-emerged in the wake of the 2008 global economic crisis. We’ve seen government bail-outs, tax cuts for some, and lower interest rates for others. More literature has popped up everywhere advising governments to implement policies that would monitor the activities of lending banks more closely and even “require [them] to prick asset price bubbles” when necessary (a great example is George Cooper’s The Origin of Financial Crises). The evidence is abundant: Governments are important for the economy.

Backstage

When speaking of large populations we think of China and India almost instinctually, since they rank first and second in the world respectively. At first view, these massively populated countries have some of the highest ranking Gross Domestic Products ($8.748 trillion and $3.57 trillion USD respectively). This appears to imply some relation between their size and their economies.

Around the world, thoughts considering India’s important position as an emerging market continue to brew, and China’s status as the next possible superpower is an issue sitting on the tip of our tongues. But like spectators watching a play, we are oblivious to the ropes and pulleys behind the curtains making the stage come alive.

[pullquote]The evidence is abundant: Governments are important for the economy.[/pullquote]

From backstage, the magnitude of China’s and India’s GDPs, which rank third and fifth in the world, seem like mere props. By taking a look at the standard of living for both of these countries, we can see that, despite large annual GDPs, the average income per capita in these countries rank quite low: both of their respective Incomes Per Capita are lower than Ecuador’s, where the population ranks 66th and the GDP ranks 65th, eking out just over 100 million dollars in 2009—a minuscule fraction compared to China’s or India’s GDP.

The unemployment levels in China and India are both higher than in Canada, a country with a GDP just over 1 trillion dollars. To see it from yet a different point of view, Luxembourg’s population size ranks 170th in the world (with just over 400,000 people), its GDP was only about 40 billion dollars in 2009, yet the income per capita levels ranked third in the world, higher even than Canada’s (over $79,000 USD); their unemployment levels were also lower.

Large GDPs are general indicators of the magnitude of the economy, which to a degree are influenced by the population size. Asserting the quality of the economy, however, is a bit more intricate than that. Remember, the people are gasoline; to know their condition, we must examine the engine that moves them: the government.

Examining the Engine

By looking at factors that developed nations have in common, we can apply them in developing a framework for what a healthy economy’s demographics should look like. Although population size may affect the size of the work-force, there are other demographic data far more influential of the living standards of the people and of the economy. The level of social security that a country offers has a strong influence on its demographic make-up: things like education levels, employment security and healthcare strongly impact fertility and birth rates, which in the end affect the economy.

York University Professor of Public Policy and Administration Thomas Klassen sat down with me to briefly discuss how governments influence the standard of living indicators, and what factors are really important to the health of the economy.

According to him, economies are determined more efficiently by their demographics, of which population sizes play only a small role. The grand scale of China’s economy is partly due to the fact that there are “relatively few young and old people…and many between 20 and 60 who are working.”

In India, there is an opposite trend as the country is running rampant with a lot of small children. Where there are fewer children and elderly people, the workforce is immediately boosted alone by the number of women who’ll be able to seek work instead of caring for large families—that is without considering the amount of money saved on public pensions and healthcare.

Small families are now the norm since most people don’t own farms which need to be toiled by succeeding generations. But perhaps the most influential factor in the reduction of family sizes is the provision of social security by governments. Public spending and pension plans mean that parents don’t have to have many children to care for them in their autumn years.

Furthermore, public spending allows families access to more resources which can reduce the number of unwanted pregnancies. In many poor countries, the high costs of contraceptives and healthcare, for example, deter individuals from getting them, spiking the number of unwanted births and shaping the demographics of the country.

The accessibility to education is also very important to the make-up of a country’s demographics. Research shows that higher levels of education lead to lower levels of unwanted pregnancies. In India, where the literacy level reaches a mere 61% of the population, the Demographics and Health Surveys programme showed that in 2006 the actual fertility rate was 2.7 (now 2.65), while the wanted fertility rate was 1.9.

The accessibility to basic and higher education in India are long-term challenges linked to the fact that India’s government spending and taxation as shares of its GDP are, according to the CIA World Factbook, “among the lowest in the world.” In contrast, in a country with a literacy rate like Canada’s (99%), the actual fertility rate is 1.58. Educated people are better able to plan for their future and the future of their children, making sending two or perhaps even three children to university much more plausible than sending seven or eight.

Educated people also have higher standards of living. Professor Klassen asserts that “countries with high education levels tend to have people who are wealthier” and who therefore contribute to a healthier economy. Individuals that are educated not only find better-paying jobs, but tend to find partners with similar levels of education. As their household income increases they are able to plan for their future more effectively by, for example, opening a savings account, or by investing their money, contributing again to the general economy. By subsidizing education and implementing social securities such as RESPs, for instance, governments can help the cycle continue and contribute to the growth of the economy.

The demographics of a country are largely affected by the level of social security that it offers, which consequently plays a huge role in the health of an economy.

Demographics

Flickr - by BlatantWorld.com

Knowing the demographics of the country is one of the most powerful tools for policy makers. Once established that social security and government expenditures on public services are necessary to help increase the living standards of individuals, the next step is to figure out how to properly allocate these funds.

For example, referring to the Canadian “demographic time bomb,” Professor Klassen gave some examples of how a large baby boomer cohort is influencing government as well as private decisions.

“The TTC is putting elevators everywhere, in part because of an aging population. You probably don’t want to build a lot of schools right now, because there aren’t going to be a big group of children to attend schools in the next 20 years.…[And] you probably want to encourage people to stay at work (which is why they’ve taken away the mandatory retirement age).”

Determining what sectors of society need more public spending was one of the major contributions of the Mandatory Census, which was recently converted into a Voluntary Survey by the conservative government. The move has been criticized widely for many reasons, including its effect on public policy.

[pullquote]The economic growth levels of the last 30 years must be maintained to mitigate the blast of the “demographic bomb”[/pullquote]

“Some decisions could be skewered,” said Professor Klassen, adding that those most affected by it will be precisely those groups that depend the most on sound government policy. “It will be poor people…single parents who are too busy cooking and cleaning” after coming home from their jobs to fill out a 45-minute survey. The head of Statistics Canada agrees, suggesting that it will be aboriginals and new immigrants that will most likely not respond.

As healthcare costs rises because of over 70 million people going into retirement over a relatively small time period, taxes need to be collected accordingly and a proper account of all other groups in need is necessary so that resources that should go to them do. Moreover, tracking the mobility of people, including new immigrants, is imperative in the formulation of what Naomi Alboim, the vice-chair of the Policy Forum at the Queen’s University School of Policy Studies calls a “cohesive immigration framework” whose objective should be to integrate more newcomers into the economy.

The Toronto Region Immigrant Employment Council website reports that the number of temporary foreign workers has skyrocketed compared to the number of skilled labourers who settle permanently in Canada. The report also shows that there is massive underemployment and underpayment of newcomers who have post secondary education. A framework of sound policies overseeing this problem can only be made with full statistical data, and not with a 50% response rate, as Statistics Canada expects the Voluntary Census to be.

Conclusions: Smoothing the Curve

The size of a population by itself does not give us very much information about the economic prospects of a nation. Professor Klassen disagrees with arguments suggesting that in the face of population decline, economists struggle to maintain a growing economy. “Many [wealthy] countries today, like Japan, Germany, Italy, have populations that are declining,” he points out. The demographic composition of the country, on the other hand, together with efficient government planning, including sound economic policies and public spending on social securities, are much better indicators.

Flickr - by Sreejith K

Professor Klassen also stressed the fact that urbanization, education, and moving the economy toward higher value-added products will help improve the condition of people.

We’ve already seen how providing education can help reduce the number of unwanted pregnancies, helping to smooth the demographic curve. Research also shows that fertility rates begin dropping as income rises, to which education is a precursor. Typically, higher income per capita is a strong indicator of a healthy economy and healthy demographics.

Urbanization is also imperative for personal and national economic success and demographic stability. Both India and China have low levels of urbanization, with only 29% and 43% of the population living in urban areas respectively. In particular, India is a country where services are the major source of economic growth, “accounting for more than half of India’s input”; having more than half the population still working in agriculture is counterproductive. Canada and Luxembourg, both wealthy nations, have rates of 80% and 82% respectively.

Raising the standards of living should be among the first objectives of the government. A country like Ecuador, despite comparatively higher personal incomes than Chinese or Indians, may not be said to be economically healthy when more than 30% of its population is unemployed and services like employment insurance are nonexistent or at best exceedingly inefficient, inadequate and even promoters of informal labour markets. In India, it makes little difference that the GDP is the fifth highest in the world when over 25% of the population lives in squalor.

During the recent global financial crisis, millions of workers were laid off and thousands of companies closed their doors. Had governments worldwide not stepped in with bailouts to provide stability and increased security to the markets, we may have seen an even deeper hole in the financial markets.

Despite some high levels of unemployment in these countries https://www.pharmazea.de/arzneimittel/flibanserin, it is quite possible that these rates could have skyrocketed had the subprime debacle been allowed to continue without government intervention. This supports the argument that government intervention in the market actually can help regulate demographics, in this case, the unemployment rate.

The other piece of the puzzle imperative for the formulation of sound policies is the need to have a clear sketch of what the population’s demographic composition is. In the case of Canada, research has shown that to mitigate the effects of the baby-boomers retiring, the levels of economic development must be maintained (even with a smaller workforce).

“[Health and Welfare Canada’s] research indicate[s] that…income per person, and income per household…” are affected minimally by changes in the size of the population. The economic growth levels of the last 30 years must be maintained to mitigate the blast of the “demographic bomb” for at least, as calculations have it, another 50 years.

So what aspects of a country’s demographics can be used to determine whether or not it has a healthy economy? We looked at some key issues that helped promote higher standards or quality of living, and they all suggested that the size of a country’s population doesn’t have a strong correlation—positive or negative—with its economic well-being. Rather, a combination of high education, low fertility and low unemployment rates tends to be a strong indication that a country has the right demographics to also have a healthy and prosperous economy.

These demographic factors are able to be influenced by government policies, which for Canada increases the importance of having a mandatory census. A mandatory census is much more accurate and effective in determining government policy. With complete and accurate data, policy makers will be able to better determine how we can maintain economic growth levels with a shrinking work-force.