12 September 2019

The Economic Impact of Falling Birth Rates

Just a few decades ago, the biggest demographic threat to the world was considered to be its soaring population. Visions of a Malthusian future in which the world’s population would rise to the point where the planet’s resources would no longer be enough to meet the needs of this expanding populace were scary enough as it took less and less time for the world to add yet another billion people to its total population.  However, for much of the world, the demographic situation has changed dramatically in recent decades as birth rates have fallen much faster than anyone predicted, leading to a much greater-than-expected slowdown in population growth in most regions. Furthermore, while extremely low birth rates have largely been associated with countries in East Asia and Europe, the fact is that birth rates have been falling significantly in nearly all parts of the world.  In fact, very high birth rates can now only be found in the poorest countries of Africa, the Middle East and Central Asia, and even in these countries, the birth rate has trended downwards in recent years. 

In the 1950s and 1960s, the global birth rate hovered near 5.0 (five children per woman) well above the replacement rate of 2.1.  As a result, the world’s population doubled from 2.5 billion in 1950 to 5.0 billion in 1987, a span of just 37 years.  However, the global birth rate began to fall sharply in the early 1970s due to the spread of birth control measures and to China’s one-child policy.  In fact, between 1966 and 1993, the global birth rate fell from five children per woman to just three, a decline of 40%.  Since then, the global birth rate has continued to trend downwards, albeit at a slower pace and today, the global birth rate sits at just 2.4 children per woman (a decline of 20% since 1993), not much above the replacement rate.  

If we look at the world’s developed economies, the demographic situation today is quite startling.  In fact, most of the world’s lowest birth rates are found in developed economies.  For example, the lowest birth rates in the world are now found in wealthier East Asian economies such as South Korea (a birth rate of 1.1), Hong Kong (1.1), Singapore (1.2) and Japan (1.4).  European birth rates are also extremely low, with countries such as Italy (1.3), Spain (1.3), Poland (1.4) and Germany (1.6) needing ever more immigration in order to stabilize their rapidly-declining working-age populations.  Even in the wealthy New World economies, birth rates have trended downwards in recent years, with the US’ current birth rate of 1.8 being near its all-time low from the mid-1970s. 

What is also very interesting is the fact that birth rates have also fallen sharply in many of the world’s leading emerging markets.  Of course, China has had a low birth rate since the one-child policy was introduced in the 1970s, and today its birth rate stands at just 1.6 and shows no signs of increasing, even after the lifting of the one-child policy a couple of years ago.  Meanwhile, emerging markets in Central and East Europe have some of the lowest birth rates in the world, while most Latin American countries also have birth rates that are now below the replacement level.  India, which will soon overtake China as the world’s most populous country, has also seen its birth rate fall dramatically this century and it could fall to below the replacement level within a decade.  Only the poorest emerging markets in Africa, the Middle East and Central Asia continue to have extremely high birth rates, and there are increasing signs that these regions’ birth rates are also likely to fall sharply in the coming years.

These dramatic changes in global birth rates, some of which began in the 1970s, but others which have only truly developed in the past two decades, are leading to major adjustments to global population forecasts.  Once, it was believed that the world’s population would continue to increase at a very fast rate, with another billion people being added to the planet every 12 years or so.  However, while the world’s population is forecast to reach eight billion by the year 2023 (just 12 years after its reached seven billion), the pace of global population growth will continue to slow.  Now, current projections from the United Nations call for the global population to reach nine billion in 2037 and, maybe, ten billion in 2055.  These are far lower population projections than the UN and others had predicted at the turn of the century and reflect the impact that falling birth rates are having on the overall global population. Furthermore, many regions, including East Asia, Europe and Latin America, are forecast to see their populations begin to decline in the coming decades unless there is a major increase in immigration into these regions from those few remaining regions where the birth rate will remain substantially above the replacement rate.

There are some startling examples of how much these falling birth rates are impacting the demographic futures of individual countries.  Here are just a few: 

  • Japan’s population is forecast to decline from 129 million people ten years ago to just 90 million in 2070. Meanwhile, its working-age population peaked at 80 million at the end of the 1990s, but will fall to just 49 million in 2050.
  • China’s population growth is slowing rapidly and the country’s population is now forecast to peak at less than 1.5 billion sometime in the next decade.  Also, China’s working-age population is forecast to decline by 27% over the next 40 years.
  • Bulgaria’s population peaked at near nine million in the 1980s, but today stands at less than seven million. In 40 years, Bulgaria’s population is forecast to fall to less than five million.

What is evident is that, today, a larger share of the world’s population lives in developed economies than will do so in the coming decades.  In fact, many of the world’s most-populous countries in the future will come from the least-developed group of countries, a dangerous proposition for future stability.

The impact of these falling birth rates and shifting population centers on the global economy is impossible to overstate.  Quite simply, the world’s changing demographic situation is posing one of the greatest challenges over faced by the global economy.  Here are just a handful of the economic challenges that this poses: 

  • Less workers: As birth rates fall, working-age populations eventually fall as well.  This leads to labor shortages in countries where the working-age populations are in decline, something that is already evident in major economies such as Japan and Germany.  This slows growth in many key industries and reduces a country’s economic competitiveness.
  • Less consumers: Lower birth rates and falling working-age populations also mean that there are fewer consumers. This reduces the opportunities to generate growth on the domestic market, leaving those countries with low birth rates more exposed to external shocks.  This has already played a key role in the economic struggles in Europe and parts of Latin America over the past decade.
  • Older populations: Falling birth rates, coupled with rising life expectances, also mean that the average age of a country’s population continues to rise.  Unless older segments of the population are allowed and able to be economically-productive, they are burdens on the economy.  With shrinking working-age populations, these burdens become unsustainable, a key threat to many of leading economies.
  • Wealthy markets in decline: Most of the world’s lowest birth rates today are found in what are generally wealthier countries.  In these countries, this is leading to a greater concentration of wealth in the hands of small segments of their populations as opportunities for growth become more concentrated.  Meanwhile, export opportunities for poorer economies are reduced as growth in rich markets slows.
  • The push for automation: As labor shortages worsen and the pool of labor shrinks, the need for automation will rise accordingly.  Already, many industrial and service sectors are investing heavily in automation, anticipating this need.  In fact, as population growth continues to slow, productivity will have to increase enough to offset the impact of slower population growth in order to maintain economic growth.

Many countries are pushing back against what is perceived to be their inevitable demographic decline, either out of concern for their economic futures or due to the impact that falling population levels will have on their geopolitical position in their region or the world at-large.  For example, some countries are offering tax breaks for women that have over a certain number of children, while others are providing for free child care so that parents can both work and have children.  Despite these efforts, there continues to be a clear trends towards people having less and less children.  In many areas of the world, more people are choosing not to have children at all, while those that do typically are having less children than their parents or grandparents.  This shows that, no matter what governments attempt, influencing demographic change is extremely difficult.  Instead, governments should be preparing for the changes brought by populations that are growing slower and becoming much older.  Those that are able to prepare will be best-placed to deal with this century’s new demographic reality.