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Saturday, August 26, 2006

The Magic Called Demographics

Adam Smith’s invisible hand seems to be working in the most visible way.
Malcolm Gladwell explains the global implications to countries and corporations owing to demographics. As he sees it, the US private pension system is now in crisis. General Motors, the country’s largest automaker, is between forty and fifty billion dollars behind in the money it needs to fulfill its health-care and pension promises. The key to understanding the pension business is something called the “dependency ratio” and these are best understood in the context of countries. In the past two decades, Ireland has gone from being one of the most economically backward countries in Western Europe to being one of the strongest: its growth rate has been roughly double that of the rest of Europe, courtesy largely of the dependency ratio submits Mr.Gladwell. This relation between the number of people who aren’t of working age and the number of people who are is captured in the dependency ratio. Ireland came free of the enormous social cost of supporting and educating and caring for a large dependent population over a period of time. It was like a family of four in which, all of a sudden, the elder child is old enough to take care of her little brother and the mother can rejoin the workforce. Overnight, that family doubles its number of breadwinners and becomes much better off. About a third of the East Asian economic miracle may be attributed to demographics. Dependency ratios may also help answer the much-debated question of whether India or China has a brighter economic future. Right now, China is in the midst of a “sweet spot.” In the nineteen-sixties, China brought down its birth rate dramatically; those children are now grown up and in the workforce, and there is no similarly sized class of dependents behind them. India, on the other hand, reduced its birth rate much more slowly and has yet to hit the sweet spot. Its best years are ahead.
The logic of dependency ratios, of course, works equally powerfully in reverse. If your economy benefits by having a big bulge of working-age people, then your economy will have a harder time of it when that bulge generation retires, and there are relatively few workers to take their place. For China, the next few decades will be more difficult. Thirty per cent of the Chinese population will be over sixty by 2050. That’s four hundred and thirty-two million people.” Demographers sometimes say that China is in a race to get rich before it gets old. Economists have long paid attention to population growth, making the argument that the number of people in a country is either a good thing (spurring innovation) or a bad thing (depleting scarce resources). But an analysis of dependency ratios tells us that what’s critical is not just the growth of a population but its structure. Major parts of Europe, Japan and singapore all are worried about the impact that demographics could potentially unleash on those nations. This demographic logic also applies to companies, since any employer that offers pensions and benefits to its employees has to deal with the consequences of its nonworker-to-worker ratio, just as a country does.

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