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The Population Premium

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By Peter G Hall
Vice-President and Chief Economist Export Development Canada

Seems we’re never happy. Back in the ‘70s, we were obsessed with ecology, Club of Rome doomsaying on non-renewable resources and the crisis that global overpopulation was driving us toward. These arguments resurfaced in the New Millennium growth-frenzy years as excessive pollution, spiking resource prices, increased economic engagement of vast populations and other issues, reviving seminal questions of sustainability. In the stagnant post-crisis years, concern has turned to the effects of aging and shrinking populations on growth. Funny, isn’t it, that one of the most predictable economic phenomena – population – should be key to a volatile policy and strategic debate.

What is plain at the moment is that the focus seems clearly on the slow-population-growth zones. Our current obsession with economic weakness has led to a dissection of the importance of population to economic growth – with good reason. As one of the three core pillars of long-term growth, it’s an essential economic element. It’s no surprise, then, that the economies analysts seem most worried about are those with a stagnant or declining labour force. In recent history, Japan was first past the post, as its population began declining in the early 1990s. Western Europe followed later in the decade, and in general, other OECD nations are on the same track. But it’s not just an industrialized ill. Russia’s population is also in decline, and China’s one-child policy tips its people-growth into the red, beginning this year.

If we are consistent, then it follows that the economies with large populations should be the most exciting near-term prospects. That may be a bit too much to expect, as the balance of concern is still tilted to stagnation. However, forward-thinkers are compiling a list of ‘next’ markets, and in general, they are the populous ones. India is being touted as the next China, and on population alone, it deserves the attention. Indonesia, a population of 257 million, is also up there in analysts’ minds. The list goes on: Nigeria is the most populous African nation by a long shot, and then there’s Bangladesh, Vietnam, Mexico, the Philippines and others with ready work forces to offer the world.

What separates today from the 1970s is globalization. Back then, populations were more geographically stranded, putting a strain on local resources for the more prosperous nations, and isolating vast populations in poorer nations from the bulk of economic activity. Today’s economy has redefined the frontier, with trans-border activity transforming potential growth and including virtually all who want to participate. Population-poor nations are looking to the populous and investing there to secure access to this precious resource. In fact, population-seeking foreign investment could be the greatest near- to-medium-term megatrend in the global economy.

Those inclined to worry about overpopulation and finite resources can relax for the moment, and maybe longer. Pre-crisis fretting about scarcity spiked resource prices, attracting huge investments which have unearthed such an abundance of new stuff that prices are plunging to unthinkable lows.

The population upheaval isn’t all positive, though; in financial markets, systems dependent on perpetually-rising populations are at risk. Pay-as-you go taxation, health-care and pension systems are needing to be ever-more creative at managing themselves. Ageing populations are also shifting the allocation of wealth to lower-risk assets, a threat both to the returns on those assets and the need for capital in higher-risk ventures.

Sustainability is also an issue, primarily in population-rich fast-growth zones. China is a modern example of rapid development where in the short run, environmental sustainability was sacrificed in favour of sustained growth. All underdeveloped economies with rapid growth potential face the same hurdles, with consequences that in most cases are not just local. And with many not expecting an imminent return to rapid growth, preparedness is likely lacking.

The bottom line? People are an economy’s greatest asset, and it seems that those with the greatest endowment will be able to cash in on their population premium when we cast off the shackles of yesterday and get on with the next growth cycle.


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