The Global Baby Bust

Phillip Longman

From Foreign Affairs, May/June 2004

Summary:  Most people think overpopulation is one of the worst dangers facing the globe. In fact, the opposite is true. As countries get richer, their populations age and their birthrates plummet. And this is not just a problem of rich countries: the developing world is also getting older fast. Falling birthrates might seem beneficial, but the economic and social price is too steep to pay. The right policies could help turn the tide, but only if enacted before it's too late.

Phillip Longman is Senior Fellow at the New America Foundation and author of the forthcoming The Empty Cradle (Basic Books, 2004), from which this article is adapted.

AGING AND THE PACE OF PROGRESS

Even if there are fewer workers available to support each retiree in the future, won't technology be able to make up the difference? Perhaps. But there is also plenty of evidence to suggest that population aging itself works to depress the rate of technological and organizational innovation. Cross-country comparisons imply, for example, that after the proportion of elders increases in a society beyond a certain point, the level of entrepreneurship and inventiveness begins to drop. In 2002, Babson College and the London School of Business released their latest index of entrepreneurial activity. It shows that there is a distinct correlation between countries with a high ratio of workers to retirees and those with a high degree of entrepreneurship. Conversely, in countries in which a large share of the population is retired, the amount of new business formation is low. So, for example, two of the most entrepreneurial countries today are India and China, where there are currently roughly five people of working age for every person of retirement age. Meanwhile, Japan and France are among the least entrepreneurial countries on earth and have among the lowest ratios of workers to retirees.

This correlation could be explained by many different factors. Both common sense and a vast literature in finance and psychology support the claim that as one approaches retirement age, one usually becomes more reluctant to take career or financial risks. It is not surprising, therefore, that aging countries such as Italy, France, and Japan are marked by exceptionally low rates of job turnover and by exceptionally conservative use of capital. Because prudence requires that older investors take fewer risks with their investments, it also stands to reason that as populations age, investor preference shifts toward safe bonds and bank deposits and away from speculative stocks and venture funds. As populations age further, ever-higher shares of citizens begin cashing out their investments and spending down their savings.

Also to be considered are the huge public deficits projected to be run by major industrialized countries over the next several decades. Because of the mounting costs of pensions and health care, government spending on research and development, as well as on education, will likely drop. Moreover, massive government borrowing could easily crowd out financial capital that would otherwise be available to the private sector for investment in new technology. The Center for Strategic and International Studies has recently calculated that the cost of public benefits to the elderly will consume a dramatically rising share of GDP in industrialized countries. In the United States, such benefits currently consume 9.4 percent of GDP. But if current trends continue, this figure will top 20 percent by 2040. And in countries such as France, Germany, Italy, Japan, and Spain, somewhere between a quarter and a third of all national output will be consumed by old-age pensions and health care programs before today's 30-year-olds reach retirement age.

Theoretically, a highly efficient, global financial market could lend financial resources from rich, old countries that are short on labor to young, poor countries that are short on capital, and make the whole world better off. But for this to happen, old countries would have to contain their deficits and invest their savings in places that are themselves either on the threshold of hyper-aging (China, India, Mexico) or highly destabilized by religious fanaticism, disease, and war (most of the Middle East, sub-Saharan Africa, Indonesia), or both. And who exactly would buy the products produced by these investments? Japan, South Korea, and other recently industrialized countries relied on massive exports to the United States and Europe to develop. But if the population of Europe and Japan drops, while the population of the United States ages considerably, where will the demand come from to support development in places such as the Middle East and sub-Saharan Africa?

Population aging is also likely to create huge legacy costs for employers. This is particularly true in the United States, where health and pension benefits are largely provided by the private sector. General Motors (GM) now has 2.5 retirees on its pension rolls for every active worker and an unfunded pension debt of $19.2 billion. Honoring its legacy costs to retirees now adds $1,800 to the cost of every vehicle GM makes, according to a 2003 estimate by Morgan Stanley. Just between 2001 and 2002, the U.S. government's projected short-term liability for bailing out failing private pension plans increased from $11 billion to $35 billion, with huge defaults expected from the steel and airline industries.

An aging work force may also be less able or inclined to take advantage of new technology. This trend seems to be part of the cause for Japan's declining rates of productivity growth in the 1990s. Before that decade, the aging of Japan's highly educated work force was a weak but positive force in increasing the nation's productivity, according to studies. Older workers learned by doing, developing specialized knowledge and craft skills and the famous company spirit that made Japan an unrivaled manufacturing power. But by the 1990s, the continued aging of Japan's work force became a cause of the country's declining competitiveness.

Population aging works against innovation in another way as well. As population growth dwindles, so does the need to increase the supply of just about everything, save health care. That means there is less incentive to find ways of making a gallon of gas go farther, or of increasing the capacity of existing infrastructure. Population growth is the mother of necessity. Without it, why bother to innovate? An aging society may have an urgent need to gain more output from each remaining worker, but without growing markets, individual firms have little incentive to learn how to do more with less -- and with a dwindling supply of human capital, they have fewer ideas to draw on.

IMPORTING HUMAN CAPITAL