Economists have a rule of thumb for evaluating an emerging market: Look out the window during the cab ride from the airport to the hotel, and if you see cranes outnumbering skyscrapers on the skyline, the economy is set to boom. Now there’s a corollary for countries around the world: When you begin to notice a disproportionate number of gray-haired professionals, the economy may be set to falter.
The right demographic mix can supercharge economic growth. There’s a sweet spot in which the majority of a population is of workforce age, contributing to the economy through both consumption and production.
As a country’s population ages, though, and retirees aren’t fully replaced by younger workers, the proportion of people who consume more than they produce begins to rise. That trend can feed on itself; for instance, elderly people may draw younger relatives out of the labor force to provide care, making those would-be workers into so-called single-channel contributors, too.
In addition, retirees collecting benefits may begin to strain public-safety nets and start spending their savings, reducing the available capital for investment in the economy.
Several of the world’s largest economies face that demographic challenge. You’ve likely heard that Japan has the world’s most difficult such situation. BlackRock Chairman Larry Fink called the country’s demographics “terrible” in a January speech. The nation entered its demographic sweet spot in 1965 and exited it 30 years later, an event that coincided with Japan’s lost decade, when its nominal GDP declined. The effects are still being felt. Two decades ago, 13 percent of Japanese were age 65 or older. Now more than 25 percent fall into that group, and 40 percent will be there by 2050. Today in Japan, sales of diapers for adults outpace those for babies.
Even countries widely perceived to be on the rise aren’t immune. China, the largest contributor to global growth over the past decade, will soon find itself in a position similar to that of Japan. The country, which is still in the early stages of its age shift, entered its demographic sweet spot in 1990 and is set to exit in 2025. Its long-standing one-child policy—reformed to a two-child policy last year—has driven a rapid deterioration in demographics. Even allowing an additional child may prove too little, too late.
Attempts to boost birthrates haven’t yet succeeded in alleviating demographic challenges. Tax incentives in South Korea—with the second-lowest birthrate, after Japan—have delivered little.
One solution to demographic woes is immigration, the largest engine of United States population growth. Not only are immigrants generally younger than the US average, they tend to have more children. By 2065, more than one-third of the US population will be immigrants or born into immigrant families, according to estimates published last year by the Pew Research Center. Were it not for this trend, the US’s rapidly aging baby boomers would pose a demographic threat similar to Japan’s.
The benefits of immigration haven’t gone unnoticed. Germany, with the world’s second-oldest population—21 percent of citizens are 65 or older—was quick to announce it would accept at least 800,000 immigrants in 2015. That equates to about 1 percent of Germany’s population. Yet, there are also political risks: An already controversial decision was made more complex by the terrorist attack in Paris and domestic anti-immigration protests. And culturally, boosting immigration is a near- impossibility for places like Japan.
With demographic sweet spots closing across the developed world, extremely young populations in Africa and Southeast Asia should provide new drivers of global growth. India has only just entered its demographic sweet spot and will likely remain in it for nearly 40 years. India’s real annual GDP growth likely exceeded China’s in 2015 and will continue to do so through at least 2020, according to International Monetary Fund estimates. Over the next several decades, India’s economy has the potential to overtake China’s, thanks in no small part to its demographics.