The coming population bust

This chart comes from a recent article in The Economist on the amazing decline in worldwide fertility rates. It reminded me of something I wrote over three years ago, summarizing what I thought were the high points in the 2005 book Fewer: How the New Demography of Depopulation Will Shape Our Future, by Ben Wattenberg. The theme of both is similar: fertility rates in virtually all countries in the world have fallen further and faster than anyone could have imagined just a few years ago. World population is no longer exploding, and will soon be shrinking. Here's my summary of the Wattenberg book:

We are only a decade or two away from a new era in human existence: global population will begin to decline.

Not too long ago world population was projected to surge from the current 6 billion to 14 billion or more by the end of this century, creating great strain on the world’s resources, and in part fueling the whole environmental movement. Now, the UN Population Division’s projections have been dramatically scaled back. One plausible scenario shows global population peaking around 2040 at 7.5 billion, then falling to 5.5 billion by 2100. Yet if recent trends in fertility rates continue, these numbers are too high, and global population could peak within a few decades. One long-term scenario projects world population shrinking to only 2.3 billion people by 2300!

The most significant change in global demographics in the past few decades has been a dramatic decline in fertility rates in almost every country on the planet. In order for population to remain constant over time, total fertility rates must be approximate 2.1. Every woman must on average have 2.1 children; one to replace herself, one to replace her partner, and a little extra to make up for women who don’t have children.

As recently as 1970, fertility rates in less-developed nations were about 6. They have subsequently collapsed, at a faster rate than anyone could have imagined. Total fertility rates in LDCs are now 2.75, and they are still falling. Fertility rates have fallen faster in LDCs than they ever fell in developed countries.

Fertility rates in Greater Europe have fallen from 1.8 in 1980 to 1.3 today, a level previously thought unimaginably low. Europe is already losing about 700,000 people per year, a figure that will grow to about 3 million per year or more by mid-century. By the year 2050, Europe will have lost about 100 million people; population will likely decline from today’s 730 million to 630 million or (probably) less. If fertility rates and immigration in Europe do not increase from current levels, European population could fall by 130 million by 2050. That’s equivalent to losing almost half the current population of the U.S. Italy has a fertility rate of 1.2, Germany 1.35, Russia 1.1, Spain 1.15, Switzerland 1.4.

Europe has about twice the population of the U.S., but only takes in about 376,000 immigrants per year, about one-third as much as the U.S. does. In order to keep its population from shrinking, Europe would have to “import” almost 2 million immigrants per year. If Europe wanted to maintain a constant dependency ratio (retired workers/active workers), annual immigration would need to be over 27 million! The majority of European immigrants are muslims, mostly Arabs. Given current political realities, a significant increase in immigration is extremely unlikely. Thus, significant population decline is virtually certain.

The inevitable population decline that developed countries will suffer will dramatically reduce the influence of “Western” civilization in the world. In 1950, the West represented about one-third of global population. By 2000 this had declined to 20%, due to the population explosion of LDCs. By 2050 the West will shrink to 14% or less. Europe’s share of world population was 22% in 1950, 12% in 2000, and will be 7% or less in 2050.

Good-bye Europe… One demographer estimates that for every 1,000 Europeans in the year 2000, there will be only 232 in the year 2100!

Russia is losing almost 1 million people per year and its fertility rate is only 1.1. Russia could lose 30% or more of its current population by 2050!

Japan’s population will begin to decline within a few years. Its fertility rate is only about 1.3. The number of people 15 years and older will likely stop rising in the next year or two, and it only increased 90,000 in the past year (0.08%). Japan’s workforce peaked in 1998. The number of people employed peaked in 1997 and has fallen by 215,000 since.

Fertility rates have probably already fallen below replacement level in countries such as Mexico, Brazil, and Iran. This was almost inconceivable just a decade ago. South Korea and Hong Kong are among the countries with the lowest fertility rates in the world: only 1.17 and 1.0, respectively.

The U.S. is the only developed country in the world that will continue to grow in coming decades; U.S. population will grow by about 100 million (one-third) by 2050. The fertility rate in the U.S. is about 2, and that is by far the highest fertility rate of any modern nation. U.S. population growth will be driven exclusively by immigration.

China’s population will grow about 13% between now and 2025, reaching 1.45 billion, but then it will begin to shrink. Its fertility rate is 1.8, despite its “one child” policy.

India will become the most populous country in the world by 2035, and its population will continue to grow, reaching a peak of about 1.5 billion by 2050. India’s fertility rate has plunged from 5.4 in the early 1970s to less than 3 today.

There are about 1 billion Muslims in the world. Fertility rates in Muslim countries have also collapsed. Muslim countries will begin to lose population around 2050. Muslims will continue to represent about one-sixth of the global population.

Government-sponsored retirement schemes are in trouble. The problem is a combination of increased life expectancy and a baby bust. Populations in all developed countries will be aging dramatically in coming years. The median age in the U.S. in 1950 was 30; by 2000 it was 35; in 2050 it will be 40 or more. The median age in Europe in 1950 was 29; in 2000 38; in 2050 it will be 48 or more. Japan will age even more dramatically: 22, 41, and 53.

The easiest solution to the problem of a population bust is more immigration. But the competition for immigrants, currently just 3% of global population, may intensify in the future, especially since fertility rates in those countries traditionally supplying most of the immigration for Europe and the U.S. are falling dramatically. Another solution is for people to retire at much older ages. (My view: this is probably the only feasible solution.)

When populations cease growing and start shrinking, economies become more like a zero-sum game. To increase your share of the wealth pie, someone else has to accept a smaller share. Construction doesn’t open new expanses of land to development, it mainly concentrates on replacing and improving existing structures. Productivity becomes the key to growth.

If real economic growth in Europe approaches zero (a shrinking labor force offset by positive productivity gains), must real yields on inflation-linked bonds also approach zero? (If real yields are not equal to or less than real growth, then inflation-linked bond returns will equal or exceed nominal growth, and that poses competition to equities, since earnings growth on average is limited by nominal GDP growth.)

Demographic trends are already influencing differential growth rates in the U.S., Japan, and Europe, and this will only intensify in coming years. If you were a member of an aging Japanese or European economy with minimal growth prospects, wouldn’t you prefer to invest your retirement funds in the biggest, most modern economy in the world, especially since it is virtually guaranteed to be the only one to grow significantly over the balance of your lifetime? Doesn’t this help explain why the U.S. has a persistent and growing current account deficit? By this same logic, capital inflows to India and China could be intense in coming years; it seems virtually certain that the world will have only three main economic engines in coming decades: the U.S., India, and China.