The Economist has an interesting article on declining populations. Clearly, there is a demographic problem (and I was really surprised by some of the numbers),
The shrinkage of Russia and eastern Europe is familiar, though not perhaps the scale of it: Russia’s population is expected to fall by 22% between 2005 and 2050, Ukraine’s by a staggering 43%. Now the phenomenon is creeping into the rich world: Japan (see article) has started to shrink and others, such as Italy and Germany, will soon follow. Even China’s population will be declining by the early 2030s, according to the UN, which projects that by 2050 populations will be lower than they are today in 50 countries.
but does that mean we shoud worry? The answer, according to the magazine, is “not necessarily.” The reasoning is simple – while some may think that lower populations mean lower GDP, the statement has little economic significance. What we learn in the most basic economics courses is that nominal values don’t matter – and this wisdom applies to GDP just as it does to any other economic variable.
…People should not mind, though. What matters for economic welfare is GDP per person.
The crucial question is therefore what the effect of demographic decline is on the growth of GDP per person. The bad news is that this looks likely to slow because working-age populations will decline more rapidly than overall populations. Yet this need not happen. Productivity growth may keep up growth in GDP per person: as labour becomes scarcer, and pressure to introduce new technologies to boost workers’ efficiency increases, so the productivity of labour may rise faster. Anyway, retirement ages can be lifted to increase the supply of labour even when the population is declining.
This is what I was thinking when I read that China is likely to surprass Britain and France to become the fourth largest economy in the world. While China’s nominal GDP will be higher, in terms of per capita GDP China is still far behind Britain and France (even if it is measured on a purchasing power parity basis).
Published Date: January 10, 2006