It’s often assumed or asserted that population growth is critical to maintaining economic prosperity. Countries with shrinking populations are supposed to be headed towards economic malaise. Maybe not, according to an article in the March 13th edition of The Economist.
It turns out that over the past five years, at least, growth in per capita gross domestic product (GDP) has actually been higher in some ‘birth dearth’ countries than in some countries whose populations are still expanding:
WHICH economy has enjoyed the best economic performance over the past five years: America's or Japan's? Most people will pick America. The popular perception is that America's vibrant economy was sprinting ahead (albeit fuelled by credit and housing bubbles that have now painfully burst), whereas Japan crawled along at a snail's pace. And it is true that America's average annual real GDP growth of 2.9% was much faster than Japan's 2.1%. However, the single best gauge of economic performance is not growth in GDP, but GDP per person, which is a rough guide to average living standards. It tells a completely different story.
GDP growth figures flatter America's relative performance, because its population is rising much faster, by 1% a year, thanks to immigration and a higher birth rate. In contrast, the number of Japanese citizens has been shrinking since 2005. Once you take account of this, Japan's GDP per head increased at an annual rate of 2.1% in the five years to 2007, slightly faster than America's 1.9% and much better than Germany's 1.4%. In other words, contrary to the popular pessimism about Japan's economy, it has actually enjoyed the biggest gain in average income among the big three rich economies. Among all the G7 economies it ranks second only to Britain.
The article even looks at the track record of countries like Australia and Brazil, and finds that they trail both Japan and Russia (another ‘birth dearth’ country).
Australian politicians often boast that their economy has had one of the fastest growth rates among the major developed nations—an average of 3.3% over the past five years. But Australia has also had one of the biggest increases in population; its GDP per head has grown no faster than Japan's over this period. Likewise, Spain has been one of the euro area's star performers in terms of GDP growth, but over the past three years output per person has grown more slowly than in Germany, which like Japan, has a shrinking population.
Some emerging economies also look less impressive when growth is compared on a per-person basis. One of the supposedly booming BRIC countries, Brazil, has seen its GDP per head increase by only 2.3% per year since 2003, barely any faster than Japan's. Russia, by contrast, enjoyed annual average growth in GDP per head of 7.4% because the population is falling faster than in any other large country (by 0.5% a year).
The economic disparities observed by The Economist don’t quite prove that “birth dearth” countries fare better—in per capita GDP—than countries with growing populations. Many other factors—other than population growth rates--could explain why standards of living are rising faster in Japan and Russia than in countries like the U.S. and Australia. Russian living standards, for example, have benefited mightily from rising oil prices. In addition, past performance is no guarantee of future results. Japan and Russia may yet fall behind in per capita GDP. Still, it does call the conventional wisdom into question.
There may, or may not, be a “birth dearth” dividend, but the numbers cited by the article do suggest that declining populations are not necessarily doomed to economic stagnation, as many have suggested. More research please.
