Democracy, Demography and Economic Growth

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A piece in the Age yesterday speculated on possible reforms to India’s civil service, which might yet propel India to higher economic growth. Relatedly, the Economist in late September argued that India’s demographic “advantage” and democracy would propel it past China. China’s one child policy will mean a rapidly ageing population compared with India, and at least at the moment it looks like India’s democratic advantage will remain.  But I am very skeptical. Civil service reform is easier said than done. I hope it occurs, but that is far from certain. Interestingly, the ABC had a fascinating program this week about the slums of Mumbai – one particular slum supposedly has 85% employment and a host of microindustries – and importantly operates outside the bureaucracy, meaning  no taxes or regulation. Clearly India can grow with less bureaucracy, but whether that will occur or not remains to be seen. As for demography, human capital is more important than humans, and on this front India is falling way behind China. Literacy rates for women and in the countryside are appalling. The big problem for India is that a bigger population might support more low tech industry for uneducated workers, but to date India’s bureaucracy has not been able to translate a huge pool of labour into jobs (and I haven’t even mentioned the infrastructure impediments here). For a much more pessimistic view on India’s prospects relative to China, see the table below reproduced from a paper by Robert Fogel (Nobel prize winning economic historian) entitled “Capitalism and Democracy in 2040: Forecasts and Speculation”. Aside from the India China comarison, the other remarkable feature of the table is the decline of Europe. [DDET Read more.]

Table 2

 The Global Distribution of Gross Domestic Product (GDP) in 2040, by Grouping of Nations

Grouping Population (in millions) Percent of total GDP in billions of $ (PPP) Percent of total
United States 392 5 41,944 14
European Union (EU 15) 376 4 15,040 5
India 1,522 17 36,528 12
China 1,455 17 123,675 40
Japan 108 1 5,292 2
6 South East Asian Countries (SE6) 516 6 35,604 12
Subtotals 4,369 50 258,083 85
Rest of the World 4,332 50 49,774 16
World 8,701 100 307,857 101*

 Note: GDP in U.S. dollars of 2000.[/DDET]

14 Responses to "Democracy, Demography and Economic Growth"
  1. Those EU15 and Japan statistics just seem wrong. They’re predicting a 33% increase in US population with an almost quadrupling of the GDP. Meanwhile the EU population remains static and they experience 30 years of no economic growth? Wikipedia gives PPP GDP for the total EU as already being at over 14 billion and I’d place my money on the economies of the EU15 making up most of that.
     
    Same goes for Japan. Okay the population shrink seems inline with forecasts. But the table is also predicting basically zero economic growth for the next 30 years.
     
    What’s their explanation for their massive growth prediction for the US but assumption that EU and Japan aren’t going to grow at all? In fact they’re even suggesting that the Chinese GDP per capita is going to be about twice that of Japan and the EU by 2040.. Why is the average Chinese citizen going to be twice as productive as the average EU or Japanese citizen by 2040?

  2. I agree, some of those numbers look wrong.
    You could argue that low EU-15 per-capita GDP might be caused by a crippling dependency ratio, but how do you explain the Chinese per-capita number? It’s nearly twice as large as the EU, but China is facing a much steeper dependency ratio, especially if life expectancy keeps rising.
    Do the numbers assume that China will abandon its one-child policy?

  3. Growth rates in per capita GDP are 1.2% for Europe, 1.5% for Japan cf 2.8% for the US, 6% for India and 8% for China. I would argue that China might be too high, but think that sounds right for Europe. Here is Fogel’s explanation…
    One implication of the low fertility rate is that the population of the EU15 is aging rapidly. In the year 2000, the median age in Italy and Germany, for example, was about 40, which is a decade higher than in China and half a decade higher than in the U.S. By 2040, the median age in Italy and Germany is predicted to be about 50. This rapid aging of many EU15 countries means that their dependency ratios (the ratio of economically inactive to economically active persons) will soar. These demographic factors will, by themselves, significantly curtail the capacity for economic growth. However, political and cultural factors appear to be reinforcing the impediments to economic growth. These include limitations on the length of the work week and increasingly heavy taxes on businesses to support large social welfare programs (that are nevertheless facing bankruptcy) and are threatening to make EU15 firms uncompetitive in the global market.

  4. Okay I’m just a lay man so please correct me if/where I am wrong. Anyway here’s some quick calculations:
    EU15 is shown as having a PPP GDP per capita of 40,000. There are already countries in the EU (Netherlands .etc.) that exceed this. Germany and England are already pretty close. So the prediction would appear to be that the EU15 basically have close to zero growth for 30 years. That seems like quite a prediction to me.
    Japan ends up with a figure of 49,000 as their GDP per capita. Wikipedia gives the current figure as 33,478 which gives them 40% growth over the next 30 years. Why does Japan despite its shrinking population and unwelcoming stance on immigration .etc. experience 40% economic growth while the EU basically stands still?
    The US ends up with a figure of 107,000. Wikipedia gives the current US PPP GDP / capita figure as 46,381. Meaning they experience 130% economic growth over the next 30 years. Compared to near zero for the EU and 40% for Japan, this seems like quite a prediction.
    The biggest prediction though is China which is shown as having a GDP per capita of 85,000 by 2040! Which represents 1800% growth over the next 30 years with ultimately the average Chinese citizen being twice as productive as the average EU citizen and almost twice as productive as the average Japanese citizen.
    Again I’m a lay man but this all seems to go against two things I remember learning.
    1. Productivity increases are easy for developing nations. Technology transfer increases productivity and capital investments have high returns. However as their level of development increases the returns on capital investment decrease and the opportunities for technology transfer are exhausted.
    2. Developed nations tend to follow a similar path. Productivity increases depend on the development of new technology and increases in work productivity. Through trade new technologies spread equally. The opportunities for productivity increase are limited as there’s only so many unproductive jobs you can cut and only so much you can squeeze workers. (I seem to remember a lot of press in the US this year about workers there already being at their limits.) The consequence being that increases in GDP per capita happen mostly because of inflation and efficiency improvements through technology.
    (Again correct me if my view of things is naive.)

    These figures however seem to suggest that in the next 30 years the trend for developing nations to grow at a similar pace is going to disappear. Despite access to the same technologies US productivity will be twice that of Japan and almost 3 times that of Europe and even Chinese productivity will more be more than double that of Europe. Or in other words its going to buck the trend to settle in line with developed nations.

  5. Jarra: Well, Japan’s had basically zero economic growth for the last 20 years, so that doesn’t seem so outlandish.

  6. kme>
    Japan may have suffered a lost decade (or two) but there PPP GDP has certainly grown. A search around for a nice graph gives this:
    http://www.tradingeconomics.com/Economics/GDP-Per-Capita-PPP.aspx?Symbol=JPY
    While a search for PPP GDP / person in 1990 gives this:
    http://www.nationmaster.com/graph/eco_gdp_ppp_cur_int_percap-ppp-current-international-per-capita&id=OECD&date=1990
    Which offers a figure of about $20,000 per capita in 1990. Wikipedia gives the current figure as about 34,000. So that’s about a 70% increase over the last 20 years in PPP GDP per capita.
    Here’s an even nicer graph in Japanese for it: http://ecodb.net/country/JP/imf_gdp.html if you search on that page for the heading 購買力平価ベースのGDP it’ll take you to a nice graph of the historical changes since 1980.
    Anyway, the basic story from those graphs is the nominal GDP hasn’t shifted much in terms of yen and Japanese government policies to keep the yen deliberately low have been driving down the stats in USD until recently. However, deflation has significantly increased the buying power of the yen which is reflected in the PPP figures.
    Anyway basically even Japan in it’s lost two decades has experienced a 70% increase in PPP GDP, despite a rapidly aging population which I would have thought kind of backs up what I was originally saying about the statistics in the blog post.

  7. Jarra,
    You may be suffering information anxiety from all those web sources.

    I went to the OECD website and did a very brief sample of Japan’s GDP figures, including a comparison with other nations (involving 3 year averages). Japan is looking pretty anaemic compared to countries like India and China, or even Australia.

  8. DP>
    I don’t think I was feeling anxious 😉 Although you’re right on your point about the OECD would’ve been a better way to obtain the data, not that it took more than a couple of minutes of searching though.
    Anyway Japan sure is looking pretty anemic. That doesn’t change the fact that kme’s statement that the Japanese economy hasn’t grown for 20 years was incorrect. It’s grown by 70% in the last 20 years.  Which getting back to the original point, why is the EU15 predict to have basically no growth over the next 30 years? And why is Chinese productivity going to exceed that of the EU and Japan?

  9. Jarra,

    Some facts/figures are skated over but the main point of the blog was the nature of demography (and other factors) driving economic growth. For the case of the EU15, unless they reverse their current aging trend via immigration or increased birth rates they must alternately INCREASE their rate of productivity growth (education, relevant skills, technology) to compensate. If they cannot alter any of those factors suitably then their long-term growth rates will be low – but maybe not static.

    The issue with analysing “Europe” is that it is a collection of lively Northern economies, e.g. Holland, Scandinavia, being compared in the same pool as basket cases in the Mediterranean, e.g. Italy, Greece, along with relatively strong but declining powers in the middle, e.g. Germany and France. Their recession was deep so any growth figures post-GFC may appear flattering depending on where the comparison begins. (I believe this is true of Japan post-89 bust.) I suspect that declines will cancel out growth if one compares the aggregate numbers.

    I don’t know the specific factors driving Chinese productivity growth. If you re-read the blog the Chinese may hit their own demographic barriers due to the one child policy. In which case I presume it comes down to ditching that policy and relying on more effective use of capital and “productive” technology to drive their growth.

  10. DP>
    Thank you for your response. I think economics is incredibly interesting and important to know about. However, beyond some undergrad courses and a continued interest I’m no expert. So, I appreciate you taking the time to explain it.
    Personally I find it hard to believe that the current post-gfc trends are going to continue for the next 30 years. Not having read the paper (my work has nothing to do with economics so I don’t have access) though, I imagine the original table was put up with a large list of caveats. Like you say a prediction based on current demographic trends and growth rates.

  11. Lots of issues above, but I think the basic point from growth accounting is that in a simple sense you can break down growth into contributions from labour (both more people and better human capital), more capital and improvements in productivity. Fogel’s main point, which I agree with, is that the demographic challenges will be huge in Europe and Japan, and these countries are much further along in terms of human and physical capital than India or China. So they will grow slowly. India and China can grow physical capital per capita more quickly, the demographics are different, and they can grow human capital. What this means is that the world will be a very different place in 2040 to 2010.

  12. I am more optimistic about India than your article.

    It is quite clear that India’s growth is driven more by the private sector and less through any public sector initiatives. Any moves to relax the beauracracy can only improve the overall prospects of the economy and consequently the people.

    However, you note that bureaucracy has been unsuccesful in translating into jobs. However if you look at the successes so far, there are few examples driven by public sector initiatives. I think it is fair to say, entreprenuers are driving the growth inspite of public sector ineffciency.

    You also note the literacy rates in the countryside as in indicator for future economic growth. This is only one aspect that indicate the potential workforce. As to the suitability of the workforce, what about the number of college graduates, english speaking skills etc…

  13. Those figures for Europe, and probably for China too, are indeed obvious bullshit.  Jarra’s analysis is spot on – you should become an economist, Jarra.

    The giveaway here is Mark’s claim that European growth will be stopped by inflexible labour markets and over-generous social welfare.  Even if you believe these carry heavy economic costs (empiric support for which is actually amazingly thin) these are LEVEL, not growth, effects.  They could explain why Europe now has low living standards relative to the US, but not why those relative living standards would continue to fall. Fogel’s tables are ideologically driven nonsense.

    • …that was a quote from Fogel, not my claim. However, it is important to note that Japanese and European growth in the past 20 years have in fact been around Fogel’s forecasts (Japanese growth has been worse). France, Germany and Italy are 50% of Euro GDP, and it is hard to see those economies growing faster in future given demographics and the fiscal issues that Fogel doesn’t mention. I don’t see where the ideology comes in here. Europe is a good place to visit, but there economies are in a deep, long, malaise.

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