This is not a headline that grabs your attention. When you mention demography, many people will get turned off or just assume it’s another light sociology paper. So I am not writing this for popularity but rather, out of pure interest.
On the Cash Chronicles IG page today, I shared a vignette about fertility and growth. My interest in this topic goes back to a college course I took. The funny thing about elective classes in college is sometimes they leave you with a more lasting impression than the classes that you thought would “matter” so much to your career. One of the elective courses that left an impression on me was a population economics. Although the name of the course was bland, the questions it tackled were interesting. Why do emerging or “poor” countries have such different birth rates? Why, when countries get rich, do couples seemingly not want to have kids anymore? What effect does the changing size of a population have on economic growth and due to these changes, what will the future world economy look like?
Like many things we read in the press, many journalists dance around the answers to these questions, not because they want to hide something but because they don’t want their opinion gathered from facts to sound like an authority on the matter. It’s good to be objective and neutral, but sometimes it leaves readers wondering what the consensus is on a particular topic. In this post, I will share the conclusions I gathered that made logical sense to me in terms of fertility and economic output and where I see the the global economy heading because of those conclusions.
The Basics
On a daily basis, we don’t really think about it, especially if you were already born into a rich world economy. Emerging world mothers have many more kids, one of the reasons for that is that for the type of lifestyle they are expected to live, there is not much investment in a child needed. Take for example an agrarian society. More children for a couple will initially be a burden, but in a few years it will also mean more hands on the farm. Having more children can help you earn more from your farm in terms of output until they are adults. In some ways, it makes economic sense to have more children in the long run in this situation.
In contrast, in a country that is developing, jobs which pay more than being on the farm require basic skills such as reading and writing. This requires more education. More education is empowering, especially for women. If you can read, you can also easily find out how other women live, read about contraception and pregnancy prevention (if your government allows that). You may also read about a place where you want to go, where having a child will prevent you from going there. These factors combine to show that in countries where women are more educated, birth rates are also lower.
Source: Our World in Data
In addition, when child mortality is high, you can have say, 5 children, but there is a high likelihood that one or some of them may die. For this reason, there is an incentive to have even more children to make sure that there are some that survive to adulthood and can potentially take care of their elders as they age. For this reason, as the child mortality rate increases, so does the average number of children women have. With the widespread adoption of modern medicine in a rapidly developing economy, child mortality rates tend to fall and subsequently, so does the birth rate.
Source: Our World in Data
So we have the factors of declining child mortality as well as education contributing to lower birth rates. Education in this sense being synonymous with investment: it’s much less expensive to not educate and use an extra pair of hands on the farm versus send a child to school for 10 years. Investment raises the cost of having children if they are in a richer economy. Investment will be required in the form of education for them to function, and in many rich economies, a basic level of education up to the age of 14 or 15 is required by law. This feedback effect likely produces the phenomenon of birth rates falling with income as can be seen below.
Source: Our World in Data
The Effect on Growth
Simply having less kids does not mean that an economy will grow and stock markets will follow suit up. Rather, both for developing and developed economies, the ratio of the working age population to other groups is key.
Researchers have theorized that a quickly growing working age population may push growth up but have not been able to capture any strong correlation. Again, it makes intuitive sense, as life expectancies increase and women have less children, a developing country experiences a “demographic dividend.” This is where the proportion of the working age population, those 15-65, grows relative to both young and old people. This means there are more people to work and produce and less people to take care of (the very young and old). Although trends in demography are easy to observe, their affect on asset markets is not.
An exception to this was a paper in 2004 about the MY ratio. The MY ratio is the ratio of people 40-49 to the population of those 20-29 in an economy. The researchers observed that as the ratio grew, so did the P/E ratio of the stock market. The long term trend of this for the US can be seen below.
Source: Brookings
According to the predicted MY ratio, the US should see an upward trend in the P/E ratio until 2030, where it will then fall. These are long term trends affected by demographics like having children so can be predicted based on the number of births in a certain year or set of years.
It would seem that a larger proportion of experienced, productive workers, like those in the 40-49 range can help propel an economy and its stock market. When the opposite happens and the proportion of those retired increases dramatically as it has in Japan, it could be a drag on growth. Is this the future that the rich world is looking at? If so, an alternative is to invest in emerging markets but demographics there are in flux as well.
Has China Hit It’s Peak?
That leads us to China. In a recent post I discussed how the long term secular decline in rich world interest rates will naturally push investors to take on more risk in emerging markets. The most important market still classified as “emerging” is China, despite the fact that it is the largest or second largest (depending on how you measure) economy in the world.
The ideal for many investors, business people and policy makers in the US was that as China grew richer, it would open its domestic market to foreign business and investors. Assuming that happens (and that’s a big if) can the rich world look towards China to help propel growth for the rest of us along?
Based on what I have explained above, if you are looking at demography, it would seem that hope may be dashed. In late 2017, author Salvatore Babones wrote an article published in Forbes which claimed that due to demography, China May have already hit its peak.
This was based primarily on the fact that due to the one child policy and the shrinking of the population, if the current trends continue, China could have less than a billion people by 2100 and maybe only a bit more than half of it’s current working age population at that time.
Source: Forbes
China’s leaders are aware of this which may have been one of the motivating factors to scrapping the one child policy in 2015. The question is, will getting rid of the one child policy change the trend of demographics above?
Conclusion
As counterintuitive to the current narrative as it is, there are a few countries that will continue to grow their population and have dynamic rich or developing economies. Those are the US, India and some smaller rich countries that have more liberal immigration policies like the UK. The current narrative is that China will dominate the economic future of the world, demography however, tells a different story.
What do you think? Are we in for a period of secular sluggish growth worldwide? Will emerging economies be able to perk up and push forward for the rest of us? Let me hear your thoughts in the comments section.
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