Global greying and the great stagnation

A note from Morgan Stanley Research last week took an in-depth look at the implications of the global demographic changes over the next few decades. It’s a fascinating read. Duncan Weldon and Mike Bird have already covered the paper’s conclusion about inequality, which is essentially that proportionately fewer people of working age will raise the price of labour and offset the increase in inequality that Tomas Piketty predicts. I’ll leave that there for now because the note contains lots of other stuff which is worth a mention.

It starts with the demographic sweet spot, the point at which birth rates fall but the proportion of old people is yet to rise. Therefore, the proportion of old and young dependents falls while the proportion of the working age population rises, so the dependency ratio is at its lowest. The western economies went through this phase in the late twentieth century and many of the developing economies are going through it now. For more on this see Robert Arnott and Denis Chaves and my summary here.

Eventually, the falling birthrate that gave us the demographic dividend in the first place feeds through to leave us with an older population. Combine that with increasing life expectancy and you get a rapidly ageing demographic profile. That process has been underway for some time in the developed economies and will speed up in the emerging economies over the next three decades. Some of the upper middle-income countries are set to age at a fascinating rate. As countries get richer, their people live longer and their fertility rates fall. Therefore,  the proportion of the population of working age falls and the dependency ratios rise.

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There is, say the Morgan Stanley team,”unanimous agreement that demographic headwinds will likely slow growth down over the next two decades”. The demographic sweet spot gave the world higher levels of growth than it had ever seen. Now comes the hangover.

Might other factors offset the economic effects of the ageing population? Not entirely, says Morgan Stanley.

Greater workforce participation among the Over-65s will help but it is unlikely to happen quickly enough:

Participation of the over-65s in other advanced economies has picked up as well, suggesting a widespread response to the challenge of ageing, but there isn’t enough evidence that the participation is picking up fast enough to fully offset the overall trend of ageing.

Retirement ages have become culturally ingrained. People expect to retire at, say, 65 and don’t take kindly to the suggestion that the should work for longer. Generous pensions mean that many can still afford not to.

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What about immigration? Isn’t that going to save the ageing economies by bringing in a new wave of younger workers?


For all the fuss about immigration, there is simply too little of it to show any significant global economic impact at all on the kind of demographic changes we are discussing here. Much more would be needed, but this remains a politically charged issue, much like many of the other issues we discuss as part of the factors that could mitigate ageing flows.

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In any case, many of the emerging economies which are sending migrants to the developed ones will soon find their populations ageing at a faster rate. They will have fewer young people to export.

A few countries still have rising young populations though. Perhaps India and Sub-Saharan Africa will provide the new engine for global growth.

Again, unlikely say Morgan Stanley:

There won’t be another ‘China’ for a long time, if ever:

The starting point for these economies could also allow rapid growth for sure, but the ability of these economies to transform themselves into the next China is questionable. The rapid progress of China was in a no small measure possible because the US consumer played an important part in driving up demand for China to cater to. With overall growth in DM slowing, India, Africa and Latin America will provide a buffer for the global demographic headwinds, but will not be able to offset them fully, in our view.

In other words, much of China’s growth was due to demand from the developed economies. With growth slowing in these economies, another emerging economy will find it more difficult to expand at the same rate.

India may take China’s place but it will find things much more difficult:

India is the most promising candidate, but global demand through such a relocation of production will need to accelerate meaningfully: Perhaps the economy best suited to marry its generous demographics to an extensive inflow of capital is India. However, such a change is unlikely to occur over the next few years, and could only happen over the next decade with the help of significant tailwinds to the domestic and global economy, in our view.

Why? India’s economy is starting from an extremely low level of sophistication. This should allow rapid development, but it is presently in no shape to absorb a large flow of capital and put it to work in a short period of time. If India beats the odds and does transform itself into a manufacturing powerhouse, global demand will have to become much more supportive for such a transformation.

In any case, the rate population growth has slowed in India too. It’s only in sub-Saharan Africa where populations are still booming. The trouble is, says the report, “these economies do suffer from weaker human capital compared to India”.

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Although they may be the fastest growing parts of the world economy, say the Morgan Stanley team, neither India nor the African economies has either the administrative infrastructure or the human capital to offset the global slowdown in economic growth.

The overall conclusion:

The demographic headwinds that we describe in this note will likely prevail because the many offsets that one might think are available to directly reverse this powerful trend are themselves probably weaker than most imagine.

Global greying, then, will have a massive impact on the world economy and all the straws we have been clutching at won’t do much to mitigate its effects. The growth we thought was normal came about because of a demographic dividend that is now spent. We will now have to get used to a period of much lower growth just at the time when our economies have suffered long-term damage, public debt levels are high and the fiscal pressures of an ageing population put increasing pressure on state finances.

Of course, as Duncan says, there is one more straw to clutch at:

The factor that might change the above analysis is one on which Morgan Stanley describe themselves as “agnostic” – technological innovation. As they note, it is hard to predict and sometimes even harder to measure.

Demographics matter. And one look at the projections for the advanced economies is enough to make me ask if one of the great economic worries of the day is entirely placed.
Rather than fretting about the “robots taking all out jobs” (the worry that technology is destroying jobs quicker than we can adapt), it’s perhaps better to worry that “the robots aren’t taking our jobs fast enough”.

Or, as I put it a few months ago, Tech Yeah! is preferable to Tech Meh! At least if the robots take our jobs, the problem is then simply one of distributing the abundance. Without that leap in productivity, we are in for a long period of much lower economic growth than we have been used to over the past 60 years and there isn’t much we can do to stop it.

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2 Responses to Global greying and the great stagnation

  1. Pingback: Global greying and the great stagnation | Flip Chart Fairy Tales | sdbast

  2. Dave Timoney says:

    The reception for this paper (which I’ve not found a link to yet, so this all based on second-hand readings) obviously owes a lot to the “Piketty is history” message, which will please many. The focus on the capital/labour share of profits ignores Piketty’s more fundamental point about the legacy of patrimonial capitial – i.e. the ratio of the return on capital to the rate of growth. This is about capital accumulation, which is – by definition – a historic event. Claiming that this is no longer relevant massively misses the point.

    There are two obvious problems with the Morgan Stanley analysis. First, absent investment in state-delivered welfare in the developing world, an increase in the dependency ratio will encourage further precautionary saving, so the conclusion that interest rates may rise as savings are spent looks like wishful-thinking. This is only going to happen if (to choose one example) China creates an NHS and increases pensions. This in tun means higher taxes on the working-age population, offsetting any increase in the price of labour.

    Second, the fall in the working-age population is significant, but so too is its compositional calibre. It is a mistake to think that labour is fungible and that a falling supply of brain surgeons will drive up the wages of bin-men. The expansion of education in the developed world – which has run for 150 years and has arguably been accelerating over the last 50 years, with little sign of letting up (e.g. we’re now mandating education to 18) – is being repeated in the developing world.

    This will rapidly increase the population of labour capable of cognitive work (graduate under-employment today is a clear sign of this), so the downward pressure on wages may still persist even if robots don’t make inroads into whitecollar roles as quickly as expected. Meanwhile, we can be confident that automation will continue to reduce the demand for manual labour (or force down wages as an alternative), because that is a process that has been visibly occurring for decades now.

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