The Economics of Demographics
One of the most important issues that's finally getting attention
What is Demography? The statistical study of human populations. It looks at the population size, age structure, and immigration. Demographics affect everything from economics to culture.
One of the most important statistics in demographics is total fertility rate (TFR). This stat tells us how many babies, on average, a woman would have in her lifetime if she had children at the same rate as other children in her age.
Everywhere around the world has dropping birthrates, even in sub-Saharan Africa, it’s just that the rates are different. Here’s a comparison between Jordan, Angola, and Singapore.
In China and the advanced world of North America, East Asia, Israel, Europe, are facing demographic changes: they have low fertility rates under the replacement rate of 2.1 kids per woman and prolonged life expectancy due to medical advances. The only advanced country that avoids this trend is Israel. The only way a country can escape the issue is through immigration, which East Asia is not as open about compared to the Western World.
Why are birth rates dropping? There’s no one answer, but a confluence of answers.
Quality over quantity tradeoff: With increasing wealth of a nation, longer education expectations, and higher living costs, parents tend to prioritize investing resources in a few children for success rather than spreading parental income across multiple kids.
Education of women & family planning: When women are educated and can choose their careers, they can choose if/when they want children
Access to contraception & birth control: These technologies give women reproductive freedom and control
Urbanization: As a country develops, kids are no longer free labor for the family farm but instead are massive expenses for food, education and healthcare in the family’s apartment unit
Economic development: In developing countries, there is a culture where kids are a parent’s retirement fund and healthcare taker. As a country develops, the government takes on both of those responsibilities, subconsciously reducing incentives to have large families.
Reducing religiosity & traditionalism: Religious & traditional people tend to view family as priority more than secular, urban people.
Ultimately, if your nation is comprised of mainly poor farmers, kids are free labor and old age insurance. But if your nation develops where your nation is comprised of apartment-dwelling adults who work in an office and your government & job provide retirement funds, then more kids become an economic burden. You have to really want kids to have them. This (and a slew of other factors) make Niger & Somalia have high birthrates, while South Korea & Singapore don’t. Instead of having four kids to help a subsistence farmer make yams in Guinea, in Hong Kong, your average parents would rather invest in tutoring and extracurriculars in one child.
Of course there are always exceptions, Israel has a relatively high birth rate (3 kids per women) despite being rich and urbanized. Meanwhile Brazil has a low birth rate despite not entirely being rich yet.
Stage 1 —Stagnating Population.
Pre industrial & medical revolution, most societies for millennia had high birth rates and high death rates (Birth of humanity in 300K BC to late 1700s/1800s AD) . The world population stagnated or grew slowly across Africa, the Americas, Europe, the Middle East, and Asia. Sometimes the populations would even decline if there were wars, famines, and plagues . The Bubonic plague killed a majority of the European population, mainly in western Europe. During this era, if a kid was born in the 1500s in the Edo Kingdom, Imperial Russia, or Saadi Morocco, your average peasant had 7 kids, 3 of them would die at an infant age, 2 more died due to war, violence, plagues, and/or famine, and only around 2 would reach adulthood. It took from the birth of humanity to early 1800s for the World population to reach 1B. Young people were common, and old people are rare. No country has this population structure anymore. To put in perspective, UK in 1800, which just started industrialization, had 329 deaths per 1000 births. Meanwhile, Burundi, the poorest nation on earth, has 38 deaths per 1000 births.
Stage 2 — The Poorest countries are in this stage: much higher birth rates compared to death rates. A baby boom.
Around the 1800 was the birth of the industrial revolution and global capitalism, initiated by Great Britain. Due to the technological developments in hygiene, sanitation and medication, deaths fell significantly. Also, people started to live longer as agriculture technologies improved and farm yields increased. This has impacted everywhere on earth including poor countries. Meanwhile, birth rates remained high at 5 to 7 kids per woman. This led to a population explosion: birth rates are high and death rates fell, aka a baby boom. The world population hit 2B by 1928. What took pre-industrialization hundreds of thousands of years to achieve 1B people, industrialization achieved the next billion in hundred years.
A large part of Sub-Saharan Africa, Afghanistan, and Yemen are at this stage.
The median age of countries in this stage are between 0-22. Because the populations are relatively young on average the country is full of potential. Children in these nations, if managed well, are being invested if their kids are going to school. The kids don’t produce anything because they are aren’t employed yet and consuming food. If the country is relatively stable, then the nation is preparing this population to be your large workforce. The country is providing basic necessities for its soon-to-be workforce. This is Ghana or Rwanda. If the country is unstable/has instability issues, then these kids are being child soldiers going to war like Central African Republic or Sudan or will be radicalized youth looking for belonging and joining terrorist organizations like Boko Haram or Ansar al-Sunna like Nigeria and Mozambique.
Nigeria is a country in this stage. Lot’s of young people, barely any old people.
Stage 3 — Birth rates slow down as well as death rates. The median age of the society is between age 20-40. The demographic dividend.
If you have a bunch of 20 to 40 year old’s, if your country is stable, and can employ these people, then you have a lot of productive members of society. These people either got a manufacturing, construction, or service jobs after high school or went to university and got a job at home or abroad with a work visa. These people make money from their jobs and spend it. They likely have kids, mortgages, a car, and maybe a credit card if the country’s financial system is developed enough. This group drives most of the consumption. If the country isn’t impoverished, the country will be receiving a massive economic boom fueled by consumption and will grow 5%+. The state taxes the increasing consumption/ income, then generates tax revenues which will drive government spending. At this demographic dividend of 20-40 year olds making the bulk of the population, and there isn’t a big ratio of children or pensioners so their retirement funds are stable. Middle income economies that have grown quickly with a median age in this group include China, Indonesia, Vietnam, and India. Economies that aren’t growing fast in this group involve Argentina and South Africa.
There are also some advanced economies still at the end of stage 3 (median age is near 40): America, Ireland, Australia, and New Zealand are examples.
Stage 4 — The stage of Japan, Taiwan, Canada, The EU, & South Korea
Age 40-60: At this age, the working people are generally thinking about retirement. At this age people are investing more of their income in old age pension accounts or retirement accounts and paying off their debts. These people are flushing money to retirement accounts and investment firms who are looking to invest their money to attract higher yield. This is leads to enormous amounts of investment. However, because there isn’t a large proportion of young people, the country either relies more on exports than domestic consumption to grow, depend on immigration for population growth, or they let their population decline. Well managed countries in this age group are is Japan, Italy, and Germany. Japan is remaking cities for their aging populace. Badly ran nations in this age group involve Russia. Part of the reason they invaded Ukraine is to maintain their Slavic European majority. Putin is stealing Ukrainian babies & kids.
Countries at this stage may already facing population decline. Russia & Ukraine’s population peaked in 1993, and Japan peaked in 2010. Italy peaked in 2014, Singapore peaked in 2019.
The country can also try providing cash benefits for people to have kids. Sweden, Singapore, Hungary, and Japan have all tried schemes to increase the birth rate.
Since 1987, Singapore has been promoting family formation and in 1995, Singapore has had more pro-natalist policies than any other country.
Firstly, Singapore provides financial incentives to have kids through the “Baby Bonus” cash payments which provides S$8000 for a first or second child and S$8000 for a third child or more.
Secondly, Singapore’s Working Mother’s Child Relief provides a tax deduction on a woman’s earned income to encourage moms to have kids and stay in the work force. 15% is deducted on first kid, 20% on 2nd kid, 25% on 3rd kid and any subsequent child, with a max cap at 100% of their earned income.
Thirdly, Singapore provides housing schemes and grants to help couples buy and finance their first home. Priority is given to married couples expecting a child and families with two or more kids. First time buyers can quality for a housing grant up to S$80,000 to help with their flat purchase.
Fourthly, Singapore helps with the costs of conception with assisted conception procedures, subsidies for pregnancy related healthcare expenses, and provides a national medical savings account for newborns that can be used for many expenses.
Despite all this, Singapore’s birth rate is 1.12, way below replacement level. These policies may stabilize the birthrate from going lower, but none of these schemes have brought the population back to replacement level at 2.1 children per woman.
Ultimately, even if you pushed up the fertility rate of Japan, it wouldn’t lead to a population boom simply because there isn’t enough of a cohort of women in child rearing age to grow the population without immigration. You would need to explode the female birth rate to 7 births per kid for the current cohort of Japanese women for decades. Not happening…
Stage 5 - Our World in Data Predicts that populations will rise again. But I don’t think so nor are these current trends. I think developed Asia and Europe will experience significant population decline (death rates exceed birth rates) and the trends demonstrate this.
At this stage, the median age is Age 60+: No country is here yet. But we will have a few by 2075.
We don’t even have an economic system that’s prepared for this because capitalism, socialism, and etc. all depend on more. At this stage, the average person is at the end of their working life and retired. They are drawing from their investment accounts, living off your government funded retirement account, and become a massive expenditure on the government or corporate healthcare plan (because old people get sick more or are dying). The average person is just consuming and you aren’t producing anything because you aren’t working anymore. But how will be enough money when there’s more retirees than workers? No country yet has a median age of 60 yet. The oldest country is Japan which has a median age of 49. In a decade or two, Europe and developed Asia will be in stage 5.
At this stage, unless birthrates go up massively or immigration is ramped up, advanced economies will face modest population decline.
This isn’t speculation it’s already happening since we know exactly how many children were born today and we know exactly how many 28 year old Americans, Germans, and Chinese will be 20 years from now…Because they are 8 years old today. We also are aware of how many people immigrate and emigrate to different countries. Canada and Europe are more prepared for this problem than developed Asia or Russia because they are more open to immigration.
Advanced economies have government funded old-age retirement scheme (called social security in America, pension insurance in Germany). These were made around the post WW2 era, back when their countries were young, populations were growing fast, and life expectancy was 54 (Japan) to 68 (US). This pension scheme worked and depended on a countless supply of young workers paying taxes that would be extracted from their paychecks and put into government retirement accounts for old people. The state didn’t pay much for the retirees since they died soon after they retired. This was very sustainable when there were more young people than old people in 1945. But now they will be unsustainable as there are decreasing numbers of young people and increasing numbers old retirees. Also, do we now expect people to have 10-15 years of retirement? French live until 82 and Japanese live until 85
In Germany, the median age is 46 and their biggest population demographics they have are 54-64 year olds. Unless Germany increases their rate of immigration, Germany will hit stage 5 in the mid 2030s. When that happens there won’t be enough young professionals to pay the pension plans for retirees. Luckily, Germany is acutely aware of this and is increasing immigration of skilled laborers to delay this.
There are solutions for this crisis and a combination of these must be done to solve it. I will list them all from most popular to least popular:
Increase taxes on the wealthy and corporations - through higher income taxes on the wealthy, a wealth tax, or higher corporate tax
Mass immigration of young skilled workers to take in more taxes (Some countries are banking that they’ll return to their home country before they get citizenship and have to pay for them as well).
Increase taxes on everyone, including the middle class - higher social security taxes, or higher VAT contribution to social security,
Cuts in pension benefits
Increasing the retirement age - what Macron is trying to do in France.
It is increasingly hard to get these reforms through since in many advanced economies, pensioners and soon to be pensioners are a large share of the electorate, and they will vote against any cuts, increases on retirement age, or increases on taxes on the wealthy (most wealthy people are older people due to the time for their money to compound). Democracy makes it hard to do these very necessary reforms. As a result, reforms are delayed. Can these countries manage? Will it be time for a massive boom in skilled work migration for Africa? Kenya is betting on this.
Sources:
https://www.worlddata.info/average-age.php
What happens in Stage 5 basically means that Western democracies will have to face its achillies heel: social instability. Historically, this meant the rise of autocrats (symbolically symbolized by Emperor Augustus) and the political polarization/radicalization of society (i.e. French Third Republic). However, social instability is more of an achillies heel to autocracies than they are to democracies, especially the more voting power you give to the masses.
Are there countries that could avoid the slide to stage 5 through a highly fertile religious subgroup? For example the Haredi in Israel and Amish/Mennonites/Mormons in US each year produce a higher share of births. Eventually they might be the majority.