The Hindu Business Line : The looming demographic deficit crisis

The clock is ticking... Policy-makers can no longer overlook the profound impact of the changing demographics on economic, social, and political development.

CHANGE, at varying intensity in different time-frames, is a fundamental aspect of human population all over the world. Demography is the study of populations, their size, composition, spatial distribution, and the interconnected causes and consequences of those changes.

With increasing economic globalisation, innumerable social changes, and scientific and technological achievements, we have entered an era of unparalleled global demographic changes. In fact, the unfolding and unstoppable demographic forces that are gaining momentum will be a defining feature of the world economy throughout the 21st century.

Policy-makers can no longer overlook the profound impact of changing demographics on economic, social, and political development. The causes and consequences of demographic transitions must enter into our complex, dynamic public policy matrix. It is well-understood that demographic changes have myriads effects on societal and economic activities and vice-versa. For long, under the tunnel-vision of economic and social progress, we have ignored the fact that demography lies at the heart of our social and economic systems. The looming so-called demographic deficit crisis, with varying magnitude, in most countries and its serious consequences, should not come as a surprise at all.

With incredible foresight, Auguste Comte (1798-1857), a 19th century French mathematician and sociologist, said that "demography is destiny". David K. Foot, Professor of Economics at the University of Toronto, an acclaimed author of a recent book Boom, Bust and Echo, says with similar tone: "Demographic trends are essentially long-term. You can ignore them this year. You can ignore them next year. But if you ignore them over five years, they will get you in the end."

Demographic shifts explain two-thirds of everything that is happening in the areas of business, marketing, human resource, career planning, stock market, housing, education, recreation, and social and global trends, among other things, says Prof Foot.

According to recent OECD estimates, 40-60 per cent of public expenditure in developed countries is influenced by demographic developments. Government spending on old-age pensions in relation to gross domestic product will rise by an average of 40-50 per cent, and on healthcare by 50-60 per cent in the coming decades.

Given the expected shrinkage and ageing of labour force, change in saving and investment behaviour, lower economic growth rates, and increase in per capita government debt under population shrinkage, among other things, public finances of many countries would come increasing stresses and strains.

With a prolonged falling fertility rates and increasing life expectancy, most countries are experiencing phenomenal increases in the ageing of their populations, in the sense that an increasingly higher proportion of their populations is entering older age groups of 60 and above. Of course, this is without parallel in the history of humanity. Now, the fertility level is far below the replacement level of 2.1 in 64 countries. The combined populations of these low-fertility countries account for 45 per cent of the world's population. If this trend continues, half the population in today's developed countries is projected to be above age 60 in the late 21st century.

According to the United Nations population projections (medium variant), Japan and virtually all the countries of Europe are expected to decrease in population size over the next five decades. Comprehending the stark realities of the looming demographic crisis, and their consequences for the overall well-being of our societies is difficult.

One wonders whether ageing societies or long-life societies are sustainable in the in the long run. Most rich countries have been dealing with the problems of `birth dearth' and population ageing by resorting to immigration policy to mitigate some of the consequences of the so-called demographic deficit.

A report of the United Nations (2000) on Replacement Migration calculates the migrant intake required to hold the populations constant for countries experiencing a severe birth dearth. This is termed replacement migration. It refers to the international migration that would be needed to offset declines in the population size, working-age population, and the overall ageing of population. It was estimated that the replacement migration for most demographic deficit countries would require huge influxes of immigrants beyond the socially acceptable levels.

For example, according to UN calculations, just European countries alone would need 950,000 immigrants every year to maintain the size of their population constant, and more than 1.5 million to keep their working-age population constant. Of course, this will not make a dent in addressing the problem of ageing populations and increasing old-age dependency ratios. This shows the severity of the looming demographic crisis.

Since the mid-1990s, there has been a deepening concern of the threat that prolonged demographic deficit poses, particularly for the social security and health-care systems of the developed countries. One should be well aware that the so-called replacement migration is just a short-run panacea for some deep-seated systemic problems of long-life societies. The demographic clock is ticking. Can the replacement migration policy diffuse the demographic crisis, reduce unemployment and achieve full employment, prevent population ageing, forestall falling fertility rates and eliminate the demographic deficit? Would there be unintended social consequences of increasing the level of replacement migration beyond certain limit? These are some of the legitimate questions that require definitive answers.

In recent years, the economic implications of population ageing have come to the centre-stage of the high-level policy corridors of the world. For example, at the 2004 annual symposium of central bank leaders sponsored by the Federal Reserve Bank of Kansas City at Jackson Hole, Wyoming, the Federal Reserve Chairman, Mr Alan Greenspan, highlighted the unfolding demographic shift in the US, and underscored the decline of fertility as the main factor responsible for population ageing.

"Immigration is an antidote, but, to be effective, its size would have to be much larger than is envisaged in current projections," said Mr Greenspan. He observed that demographic ageing requires a new balance between workers and retirees. Many government programmes should be recalibrated, providing incentives for individuals to adjust to the inevitable consequences of ageing societies.

A report of the IMF published in September 2004, The Global Demographic Transition, also deals with the wider aspect of the consequences of population ageing and the policy responses to that unfolding process. The relative size of the working-age population in many developing countries will rise in the coming years before population ageing then begins.

"The policy response to demographic change in developing countries has received less attention, but is very important, particularly as these countries will become an increasingly significant source of global growth in the period ahead. The main priorities for developing countries are to put in place a policy framework that ensures that the potential benefits from the demographic dividend are maximised, while setting the groundwork for eventual population aging. Pension and health-care systems will need to be strengthened to ensure that they provide a safety net for the elderly that is both adequate and fiscally sustainable," the IMF report says.

It is well-understood that population ageing is a slow process, of course, with unstoppable momentum. It is a certainty. The number of people in the world more than 60 years of age is estimated to triple from 606 million to nearly two billion by 2050. Understandably, a vast majority of them will be in the developing countries, where adequate social safety-net has yet to be developed.

The window of opportunity still exists for the developing countries to revisit their market-led economic growth policies. From the perspective of maintaining sustainable and healthy societies, developing countries should give serious considerations in redirecting their policies toward achieving ecologically and socially sustainable, and equitable development goals, which would ensure healthy environment and adequate social programmes for people in a long-life society. Let us hope that we avoid marching toward joyless, long-life societies.

(The author is Emeritus Professor of Economics University of Prince Edward Island, Charlottetown, P.E.I., Canada. He can be reached at nagarajan@upe.ca)

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