Economic consequences of population decline

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Population decline has many potential effects on individual and national economy. The single best gauge of economic success is growth in GDP per capita, not GDP. [1] [2] GDP per capita is an approximate indicator of average living standards, for individual prosperity. [3] Therefore, whether population decline has a positive or negative economic impact on a country's citizens depends on the rate of growth of GDP per capita, or alternatively, GDP growth relative to the rate of decline in the population. [1]

Contents

Introduction

The simplest expression for the size of a country's economy is

GDP = total population × GDP/person [4]

GDP/person is also known as GDP per capita or per capita GDP. This term is a simple definition of economic productivity as well as individual standard of living.

The real change in total GDP is defined as the change in population plus the real change in GDP/capita. [4] The table below shows that historically, for every major region of the world, both of these have been positive. This explains the enormous economic growth around the world brought on by the industrial revolution. However, the two columns on the right also show that, for every region, population growth in the future will decline and, in some regions, go negative. The table also shows that two major economies, Japan and Germany, may face the same conditions.

Average annual growth rates (%) of population, per capita GDP, and GDP for various time periods
1820–2010 [4] 2015–202045–50
PopGDP/capGDPPop [5] Pop [6]
Western Europe0.61.42.00.4−0.2
Eastern Europe0.61.21.8−0.1−0.4
Former USSR0.91.12.0nana
Western offshoots*1.81.63.5
Northern America0.80.2
Latin America & the Caribbean1.81.33.00.90.2
Asia0.91.32.20.90.2
Africa1.40.82.12.71.6
World1.01.32.31.10.5
Germany0.3−0.3
Japan−0.3−0.7

* Western offshoots are USA, Canada, Australia, and New Zealand

Because

GDP = total population × GDP/person,

as populations grow more slowly, assuming no changes in growth of GDP/person, GDP will also grow more slowly.

If per capita GDP increase is less than the decrease in total population

The equation above shows that if the decline in total population is not matched by an equal or greater increase in productivity (GDP/capita), and if that condition continues from one calendar quarter to the next, it follows that a country would experience a decline in GDP, known as an economic recession. If these conditions become permanent, the country could find itself in a permanent recession

The possible impacts of a declining population that leads to permanent recession are:

  1. Decline in basic services and infrastructure. If the GDP of a community declines, there is less demand for basic services such as hotels, restaurants and shops. The employment in these sectors then suffers. [7] A falling GDP also implies a falling tax base that would support basic infrastructure such as police, fire and electricity. The government may be forced to abandon some of this infrastructure, like bus and railroad lines, and combine school districts, hospitals and even townships in order to maintain some level of economies of scale. [8]
  2. Rise in dependency ratio. Dependency ratio is the ratio of those not in the labor force (the dependent part ages 0 to 14 and 65+) and those in the labor force (the productive part ages 15 to 64). It is used to measure the pressure on the productive population. Population decline caused by sub-replacement fertility rates means that every generation will be smaller than the one before it. Combined with longer life spans the result can be an increase in the dependency ratio which can put increased economic pressure on the work force. With the exception of Africa, dependency ratios are forecast to increase everywhere in the world by the end of the 21st century.
  3. Crisis in end of life care for the elderly. A falling population caused by sub-replacement fertility and/or longer life spans means that the growing size of the retired population relative to the size of the labor force, known as population ageing, may cause a crisis in end of life care for the elderly because of insufficient caregivers for them. [9]
  4. Difficulties in funding entitlement programs. Population decline can impact the funding for programs for retirees if the ratio of working age population to the retired population declines. For example, in Japan, there were 5.8 workers for every retiree in 1990 vs 2.3 in 2017 and a projected 1.4 in 2050. [10] Also, according to new research (2019) China's main state pension fund will run out of money by 2035 as the available workforce shrinks due to effects of that country's one-child policy. [11] With the exception of Africa, this trend prevails, to a greater or lesser extent, everywhere else in the world.
  5. Decline in military strength. Big countries, with large populations, assuming technology and other things being equal, tend to have greater military power than small countries with small populations. In addition to lowering working age population, population decline will also lower the military age population, and therefore military power. [8]
  6. Decline in innovation. A falling population also lowers the rate of innovation, since change tends to come from younger workers and entrepreneurs. [10]
  7. Strain on mental health. Population decline may harm a population's mental health (or morale) if it causes permanent recession and a concomitant decline in basic services and infrastructure. [12]
  8. Deflation. A recent (2014) study found substantial deflationary pressures from Japan's ageing population. [13]
  9. Unemployment. A Slovenian study from 2015 found that population ageing leads to higher rates of unemployment and less entrepreneurial activity. [14]

If GDP per capita increase is greater than population decrease

The single best gauge of economic success is growth in GDP per person, not total GDP. [1] GDP per person, also known as GDP per capita is a simple definition of individual economic productivity as well as a rough proxy for average living standards, for individual prosperity. [3]

If a nation can focus on increasing the productivity of its citizens, that improvement in economic output will help increase its GDP. It will also increase the average standard of living of its people because higher economic output per person usually produces higher household incomes. [15] [16] By increasing its GDP per capita, a country can therefore increase its average living standard even though its population growth is low or even negative, and if it can increase GDP per capita faster than its population is declining, it can also increase its total GDP.

Consider for example Japan. As the table below shows, even though Japan's population declined 2.0% during the period 2012-2022, its per capita GDP, a rough approximation of the overall productivity of the Japanese people, rose by about 7.5%, a much greater increase than the 2.0% decrease in its population. As a result its GDP still grew by 4.7%, and the increase in GDP per capita produced a higher standard of living for the Japanese people. [15] [16]

20122022% chg
Population (millions) [17] 127.6125.1-2.0
GDP/Capita (thousands 2015 US$) [18] 33.536.07.5
GDP (trillions 2015 US$) [19] 4.34.54.7

The UN projects that Japan's population decline will accelerate to about −0.7% per year in the 2040–2045 time period. [20] This means that for Japan's GDP to grow during that period, per capita GDP growth must be greater than 0.7% per year.

One analysis of data for forty countries shows that while low fertility will indeed challenge government programs and very low fertility undermines living standards, moderately low fertility and population decline favor the broader material standard of living. [21]

Related Research Articles

<span class="mw-page-title-main">Economic growth</span> Measure of increase in market value of goods

Economic growth can be defined as the increase or improvement in the inflation-adjusted market value of the goods and services produced by an economy in a financial year. Statisticians conventionally measure such growth as the percent rate of increase in the real and nominal gross domestic product (GDP).

In demography, demographic transition is a phenomenon and theory which refers to the historical shift from high birth rates and high death rates in societies with minimal technology, education and economic development, to low birth rates and low death rates in societies with advanced technology, education and economic development, as well as the stages between these two scenarios. In economic growth, the demographic transition has swept the world over the past two centuries, and the unprecedented population growth of the post-Malthusian period was reversed, reducing birth rates and population growth significantly in all regions of the world, and enabling economies to translate more of the gains of factor accumulation and technological progress into per capita income growth. The demographic transition strengthens economic growth process by three changes: (i) reduced dilution of capital and land stock, (ii) increased investment in human capital, and (iii) increased size of the labor force relative to the total population and changed age population distribution. Although this shift has occurred in many industrialized countries, the theory and model are frequently imprecise when applied to individual countries due to specific social, political and economic factors affecting particular populations.

The economies of Canada and the United States are similar because both are developed countries. While both countries feature in the top ten economies in the world in 2022, the U.S. is the largest economy in the world, with US$24.8 trillion, with Canada ranking ninth at US$2.2 trillion.

<span class="mw-page-title-main">Birth rate</span> Total number of live births per 1,000 divided by time period

Birth rate, also known as natality, is the total number of live human births per 1,000 population for a given period divided by the length of the period in years. The number of live births is normally taken from a universal registration system for births; population counts from a census, and estimation through specialized demographic techniques. The birth rate is used to calculate population growth. The estimated average population may be taken as the mid-year population.

<span class="mw-page-title-main">Dependency ratio</span> Age-population ratio of those in the labor force to those not in the labor force

The dependency ratio is an age-population ratio of those typically not in the labor force and those typically in the labor force. It is used to measure the pressure on the productive population.

<span class="mw-page-title-main">Total fertility rate</span> Number of children a woman is expected to have barring select circumstances

The Total Fertility Rate (TFR) of a population is the average number of children that are born to a woman over her lifetime if:

  1. they were to experience the exact current age-specific fertility rates (ASFRs) through their lifetime
  2. and they were to live from birth until the end of their reproductive life.
<span class="mw-page-title-main">Sub-replacement fertility</span> Total fertility rate that (if sustained) leads to each new generation being less populous

Sub-replacement fertility is a total fertility rate (TFR) that leads to each new generation being less populous than the older, previous one in a given area. The United Nations Population Division defines sub-replacement fertility as any rate below approximately 2.1 children born per woman of childbearing age, but the threshold can be as high as 3.4 in some developing countries because of higher mortality rates. Taken globally, the total fertility rate at replacement was 2.33 children per woman in 2003. This can be "translated" as 2 children per woman to replace the parents, plus a "third of a child" to make up for the higher probability of males born and mortality prior to the end of a person's fertile life. In 2020, the average global fertility rate was around 2.4 children born per woman.

Population decline, also known as depopulation, is a reduction in a human population size. Throughout history, Earth's total human population has continued to grow; however, current projections suggest that this long-term trend of steady population growth may be coming to an end.

<span class="mw-page-title-main">Population ageing</span> Increasing median age in a population

Population ageing is an increasing median age in a population because of declining fertility rates and rising life expectancy. Most countries have rising life expectancy and an ageing population, trends that emerged first in developed countries but are now seen in virtually all developing countries. That is the case for every country in the world except the 18 countries designated as "demographic outliers" by the United Nations. The aged population is currently at its highest level in human history. The UN predicts the rate of population ageing in the 21st century will exceed that of the previous century. The number of people aged 60 years and over has tripled since 1950 and reached 600 million in 2000 and surpassed 700 million in 2006. It is projected that the combined senior and geriatric population will reach 2.1 billion by 2050. Countries vary significantly in terms of the degree and pace of ageing, and the UN expects populations that began ageing later will have less time to adapt to its implications.

<span class="mw-page-title-main">Population pyramid</span> Graphical illustration showing distribution of age groups in a population

A population pyramid or "age-sex pyramid" is a graphical illustration of the distribution of a population by age groups and sex; it typically takes the shape of a pyramid when the population is growing. Males are usually shown on the left and females on the right, and they may be measured in absolute numbers or as a percentage of the total population. The pyramid can be used to visualize the age of a particular population. It is also used in ecology to determine the overall age distribution of a population; an indication of the reproductive capabilities and likelihood of the continuation of a species. Number of people per unit area of land is called population density.

<span class="mw-page-title-main">Net migration rate</span> Difference between the number of immigrants and emigrants divided by population

The net migration rate is the difference between the number of immigrants and the number of emigrants divided by the population. When the number of immigrants is larger than the number of emigrants, a positive net migration rate occurs. A positive net migration rate indicates that there are more people entering than leaving an area. When more emigrate from a country, the result is a negative net migration rate, meaning that more people are leaving than entering the area. When there is an equal number of immigrants and emigrants, the net migration rate is balanced.

<span class="mw-page-title-main">Development geography</span>

Development geography is a branch of geography which refers to the standard of living and its quality of life of its human inhabitants. In this context, development is a process of change that affects peoples' lives. It may involve an improvement in the quality of life as perceived by the people undergoing change. However, development is not always a positive process. Gunder Frank commented on the global economic forces that lead to the development of underdevelopment. This is covered in his dependency theory.

Demographic dividend, as defined by the United Nations Population Fund (UNFPA), is "the economic growth potential that can result from shifts in a population’s age structure, mainly when the share of the working-age population is larger than the non-working-age share of the population ". In other words, it is “a boost in economic productivity that occurs when there are growing numbers of people in the workforce relative to the number of dependents”. UNFPA stated that “a country with both increasing numbers of young people and declining fertility has the potential to reap a demographic dividend."

<span class="mw-page-title-main">Income and fertility</span>

Income and fertility is the association between monetary gain on one hand, and the tendency to produce offspring on the other. There is generally an inverse correlation between income and the total fertility rate within and between nations. The higher the degree of education and GDP per capita of a human population, subpopulation or social stratum, the fewer children are born in any developed country. In a 1974 United Nations population conference in Bucharest, Karan Singh, a former minister of population in India, illustrated this trend by stating "Development is the best contraceptive." In 2015, this thesis was supported by Vogl, T.S., who concluded that increasing the cumulative educational attainment of a generation of parents was by far the most important predictor of the inverse correlation between income and fertility based on a sample of 48 developing countries.

<span class="mw-page-title-main">Ageing of Europe</span> Overview of ageing in Europe

The ageing of Europe, also known as the greying of Europe, is a demographic phenomenon in Europe characterised by a decrease in fertility, a decrease in mortality rate, and a higher life expectancy among European populations. Low birth rates and higher life expectancy contribute to the transformation of Europe's population pyramid shape. The most significant change is the transition towards a much older population structure, resulting in a decrease in the proportion of the working age while the number of the retired population increases. The total number of the older population is projected to increase greatly within the coming decades, with rising proportions of the post-war baby-boom generations reaching retirement. This will cause a high burden on the working age population as they provide for the increasing number of the older population.

<span class="mw-page-title-main">Global recession</span> Recession that affects many countries around the world

A global recession is recession that affects many countries around the world—that is, a period of global economic slowdown or declining economic output.

<span class="mw-page-title-main">Lost Decades</span> Period of economic stagnation in Japan

The Lost Decades is a lengthy period of economic stagnation in Japan precipitated by the asset price bubble's collapse beginning in 1990. The singular term Lost Decade originally referred to the 1990s, but the 2000s and the 2010s have been included by commentators as the phenomenon continued.

<span class="mw-page-title-main">Demographics of the world</span> Global human population statistics

Earth has a human population of over 8 billion as of 2024, with an overall population density of 50 people per km2. Nearly 60% of the world's population lives in Asia, with almost 2.8 billion in the countries of China and India combined. The percentage shares of China, India and rest of South Asia of the world population have remained at similar levels for the last few thousand years of recorded history. The world's literacy rate has increased dramatically in the last 40 years, from 66.7% in 1979 to 86.3% today. Lower literacy levels are mostly attributable to poverty. Lower literacy rates are found mostly in South Asia and Sub-Saharan Africa.

<span class="mw-page-title-main">Aging of China</span> Rapidly aging population in China

China's population is aging faster than almost all other countries in modern history. In 2050, the proportion of Chinese over retirement age will become 39 percent of the total population according to projections. China is rapidly aging at an earlier stage of its development than other countries. Current demographic trends could hinder economic growth and create challenging social issues in China.

<span class="mw-page-title-main">Aging of South Korea</span> Overview of aging in South Korea

In South Korea, aging refers to an increase in the proportion of senior citizens to the total population. The term "senior citizens" include those aged 65 or older. According to Article 3 no.1 of the Framework Act on Low Birthrate of an Aging Society, the term "aging population" refers to the increasing proportion of elderly people in the entire population.

References

  1. 1 2 3 "Grossly Distorted Picture". The Economist. May 13, 2008.
  2. ↑ "Solving the paradox". The Economist. September 23, 2000.
  3. 1 2 Roser, Max (2019). "Economic Growth". Our World in Data.
  4. 1 2 3 Peterson, E. Wesley (October 11, 2017). "The Role of Population in Economic Growth". SAGE Open. 7 (4): 215824401773609. doi: 10.1177/2158244017736094 .
  5. ↑ "World Population Prospects 2022, Standard Projections, Compact File, Estimates tab, Total Population as of 1 January (thousands) column". United Nations Department of Economic and Social Affairs, Population Division. 2022.
  6. ↑ "World Population Prospects 2022, Standard Projections, Compact File, Variant tab, Total Population as of 1 January (thousands) column". United Nations Department of Economic and Social Affairs, Population Division. 2022.
  7. ↑ Wallace, P. J. (August 1972). "The Causes and Consequences of Rural Depopulation: Case Studies of Declining Communities" (PDF). US Department of Health Education and Welfare.
  8. 1 2 Coleman, David (January 25, 2011). "Who's afraid of population decline? A critical examination of its consequences". Population and Development Review. 37 (Suppl 1): 217–248. CiteSeerX   10.1.1.702.6098 . doi:10.1111/j.1728-4457.2011.00385.x. PMID   21280372.
  9. ↑ Kim, Tammy (February 9, 2018). "Americans Will Struggle to Grow Old at Home". Bloomberg Businessweek.
  10. 1 2 Kotkin, Joel (February 1, 2017). "Death Spiral Demographics: The Countries Shrinking The Fastest". Forbes.
  11. ↑ Tang, Frank (April 12, 2019). "China's state pension fund to run dry by 2035 as workforce shrinks due to effects of one-child policy, says study". South China Morning Post.
  12. ↑ Zivkin, K. (2011). "Economic downturns and population mental health: research findings, gaps, challenges and priorities". Psychological Medicine. 41 (7): 1343–1348. doi:10.1017/S003329171000173X. PMC   3846090 . PMID   20836907.
  13. ↑ Anderson, Derek (August 4, 2014). "Is Japan's Population Aging Deflationary?". International Monetary Fund.
  14. ↑ "Impact of Population Ageing on Unemployment and Entrepreneurial Activity: the Case of Slovenia" . Retrieved 23 December 2020.
  15. 1 2 "Solving the paradox". The Economist. Sep 23, 2000.
  16. 1 2 "How well does GDP per capita really measure our well-being?". Business Council of Alberta. Mar 4, 2020.
  17. ↑ "Japan Overview: select Population, Total". The World Bank.
  18. ↑ "Japan Overview: select GDP/capita (constant 2015 US$)". The World Bank.
  19. ↑ "Japan Overview: select GDP (constant 2015 US$)". The World Bank.
  20. ↑ "World Population Prospects 2022, Standard Projections, Compact File, Variant tab, Population growth rate column". United Nations Department of Economic and Social Affairs, Population Division.
  21. ↑ "Is Low Fertility Really a Problem?". National Transfer Accounts. 2014.
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