Monday, September 1, 2014
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The Shrinking North

PARIS – “Demography is destiny,” Auguste Comte is reported to have said. Today, his maxim appears to encapsulate the fate of a number of the world’s richest countries. Indeed, the United Nations Population Division’s recently released biennial World Population Prospects sheds new light on the debate – ongoing for over a decade – about the consequences of low fertility rates in many developed countries. And while the UN figures do not provide evidence that proves the grimmest forecasts of doomsayers, nor do they leave much room for optimism.

Demography allows for a much greater level of certainty than does economics. The women liable to give birth within a generation are already among us. Only if the fertility rate (the number of children per woman) is above the generational replacement level, namely 2.1, will there be a natural increase in population. But the fertility rate hit a low of around 1.3 at the turn of the century in Germany and Japan – and even lower in Italy, Russia, and South Korea.

The slight increase witnessed in subsequent years still keeps the fertility rate a long way from generational replacement. Moreover, the damage is already done, and the base of the age pyramid continues to be eroded, especially in countries, such as Russia and Japan, that have a low tolerance for immigration.

The demographic impact of low fertility rates is counterbalanced by a steady increase in life expectancy. Japan, the world leader in that respect, nevertheless reached its population peak in 2008, before the number began a slow decline in absolute terms. The main exception is Russia, where, aggravated by declining life expectancy, population shrinkage started as early as 1993: the country has lost six million people since, hitting an astounding 170 deaths per 100 births in 2001.

Not all European countries face such a dire situation. Ireland, France, and a host of countries from Northern and Western Europe can claim fertility rates close to generational replacement, which, together with net immigration, keeps their population growing. And the UN’s demographers assume that fertility rates – the most volatile and unpredictable of all demographic indicators – will bounce back towards the 2.1 children per woman mark in the coming decades.

But even if that happens, Europe’s population will peak in the early 2020’s, and then follow the path of Japan, Russia, Germany, and most East European countries, whose populations have started to decline. A massive wave of immigration would fill the gap, but that prospect meets strong political resistance in most countries concerned.

These trends also substantiate the French demographer Alfred Sauvy’s prediction that the twenty-first century would be “the century of demographic aging.” The two indicators that best measure this are the old-age dependency ratio – the population above age 65 related to the active-age population – and the median age, which divides the entire population in two halves.

The scale of the burden imposed on younger, economically active people is already visible. Japan’s dependency ratio is set to double, from 38% to 76%, between 2010 and 2050. The trend is even more precipitous in South Korea, where the ratio is predicted to soar from 17% to 66%. And the situation is hardly more appealing in Europe – above all, in Spain, Italy, and Germany – where the effective retirement age is often only slightly above 60 years, pushing the dependency ratio close to the 100% mark.

Fast-graying countries are also multiplying. For example, Germany’s median age, currently 44, is set to reach 49 in 2050, while Italy’s median age should rise from 43 to 50. The sharpest increase is expected to be in China, owing to its one-child policy, with the median age jumping from 35 to 49 by 2050. Among demographers, the jury is still out about whether Japan or South Korea will be first to hit the 52-years mark by mid-century.

The consequences of rapid aging are manifold: a shrinking workforce and a narrower pool for entrepreneurship, which undermines prospects for economic growth; a looming threat to the sustainability of “pay-as you go” public pensions systems; and increased health-care and other costs associated with an elderly population.

Politically, this translates into a preference for social-welfare spending over defense or investment expenditure, with the former liable to absorb 5-10% of GDP in developed countries. This, in turn, will lead to pressure to increase public debt and a need for foreign workers to fill vacant jobs, often at the low end of the employment ladder. No breakthrough should be expected to alter this dynamic, given political resistance in many countries to increasing the legal retirement age, as well as many firms’ reluctance to hire aged workers.

The only major developed country to remain structurally immune to these heavy trends is the United States, thanks to a fertility rate around the generational replacement level and annual net immigration of 2.7 million people – legal or not. By mid-century, the American median age will be 40 years – compared to 37 today – and the old-age dependency ratio will be below 40%.

Given the serious implications for countries’ economic growth and for global stability, the latest worldwide demographic data point to the need for wise management of the inescapable migratory flows from the South to the North. Now, perhaps more than in Comte’s time, demography does shape our destiny.

Read more from our "Europe's Immigration Dilemma" Focal Point.

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