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How Global Aging Will Reshape the Economy and Financial Markets Richard Jackson Center for Strategic and International Studies Exchange Traded Forum 2011 Toronto May 11, 2011. Part I The Global Demographic Transformation. - PowerPoint PPT PresentationTRANSCRIPT
How Global Aging Will Reshape the
Economy and Financial Markets
Richard JacksonCenter for Strategic and International Studies
Exchange Traded Forum 2011Toronto
May 11, 2011
Part IThe Global Demographic
Transformation
Behind the developed-world age wave:Falling fertility and rising longevity.
Total Fertility Rate and Life Expectancy: G-7 Countries
Total Fertility Rate Life Expectancy at Birth
1960-65 1980-85 2005-10 1960-65 1980-85 2005-10
Canada 3.7 1.6 1.6 71.4 75.9 80.7
France 2.9 1.9 1.9 70.7 74.7 81.2
Germany 2.5 1.5 1.3 70.3 73.8 79.9
Italy 2.5 1.5 1.4 69.6 74.7 81.2
Japan 2.0 1.8 1.3 68.9 76.9 82.7
UK 2.8 1.8 1.8 70.8 74.0 79.4
US 3.3 1.8 2.1 70.0 74.3 79.2
Source: UN (2009)
The developed countries are entering an unprecedented era of “hyperaging.”
US UK France Canada Germany Italy Japan0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
13%
17% 17%14%
20% 20%23%
19%21%
24% 23%
29%27%
31%
20%23%
27% 27%
34% 35%
39%
2010 2030 2050
Elderly (Aged 65 & Over), as a Percent of the Population, 2010-2050
Source: UN (2009)
Along with aging populations, most developed countries will have stagnant or contracting ones.
US Canada UK France Italy Germany Japan-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%34%
25%
16%
9%
-9%
-18%-23%
22%
8% 8%
-5%
-25%-31%
-38%
Total Population
Working Age (Age 20-64)
Source: UN (2009)
Cumulative Percentage Change in the Working-Age Popu-lation (Aged 20-64) and Total Population: 2010-2050
The developing world is still much younger, but it too is in the midst of the “demographic
transition.”
Source: UN (2009)
Demographic Indicators for the Developing World
Fertility RateLife
Expectancy Median Age Elderly ShareTotal Pop. Change
1975 2010 1975 2010 2010 2030 2050 2010 2030 2050 2010-50
Developing World 5.1 2.7 57.2 67.0 27.5 31.6 34.6 6.2% 9.8% 13.7% 48.7%
Sub-Saharan Africa 6.7 5.2 45.5 51.7 18.5 20.6 24.6 3.1% 3.6% 5.2% 131.2%
Muslim World 6.2 2.9 52.2 68.2 24.7 29.4 32.8 4.6% 7.4% 12.2% 69.5%
China & East Asia 4.7 1.7 63.2 73.2 34.4 41.6 46.4 8.4% 16.3% 24.2% 1.8%
India & South Asia 5.4 2.7 51.4 64.9 25.4 30.3 34.0 5.1% 8.4% 12.4% 52.6%
Russian Sphere 2.1 1.4 69.3 67.3 38.2 44.5 48.6 13.5% 20.1% 26.3% -26.7%
Eastern Europe 2.4 1.4 70.0 74.9 38.9 46.0 51.2 14.9% 21.6% 30.0% -17.6%
Latin America 5.1 2.3 61.3 73.5 27.7 33.5 37.5 6.9% 11.7% 17.4% 38.8%
Part IIChallenges for theDeveloped World
Falling fertility and rising longevity translate directly into a falling support ratio of workers to retirees.
A falling support ratio in turn translates into a rising cost rate for PAYGO retirement systems.
US UK Canada France Germany Italy Japan0.0
1.0
2.0
3.0
4.0
5.04.6
3.6
4.5
3.5
3.0 3.0
2.62.72.4
2.01.9
1.5 1.41.2
2010 2030 2050
Number of Working-Age Adults (Aged 20-64) per Elder (Aged 65 & Over), 2010-2050
Source: UN (2009)
Rising Retirement Costs
CSIS “Current Deal” Projection:Government Old-Age Benefits, as a Percent of GDP, 2007–2050
Public Pensions Health Benefits Total
2007 2030 2050 2007 2030 2050 2007 2030 2050
Canada 3.9% 7.0% 8.4% 3.6% 6.1% 8.9% 7.5% 13.1% 17.3%
France 11.2% 17.8% 19.6% 4.5% 7.8% 10.2% 15.6% 25.6% 29.8%
Germany 10.0% 17.0% 20.4% 4.1% 6.3% 8.5% 14.1% 23.3% 28.9%
Italy 12.3% 18.9% 24.6% 3.4% 5.5% 7.5% 15.7% 24.4% 32.1%
Japan 9.1% 13.9% 19.3% 4.0% 6.0% 8.0% 13.2% 19.9% 27.3%
UK 5.8% 7.9% 8.5% 4.0% 6.3% 8.8% 9.8% 14.2% 17.3%
United States 4.1% 6.6% 7.0% 4.2% 8.0% 10.2% 8.3% 14.6% 17.2%
Developed World 8.8% 13.7% 16.6% 3.8% 6.3% 8.6% 11.2% 17.9% 22.5%
Note: Data refer to benefits to persons aged 60 and over. Pension projections assume retirement ages remain unchanged and benefits continue to replace the same share of wages they do today.Source: The Global Aging Preparedness Index (CSIS, 2010)
Rising Retirement Costs
Few countries will be able to raise taxes enough to cover more than a fraction of the age wave’s cost.
Most will have to cut benefits—but the required adjustments are large and are likely to meet growing political resistance from aging electorates.
The likely alternatives: crowd out other spending or let deficits grow—undermining national savings and growth.
Public Benefits in 2007, as a Percent of Total Elderly Cash Income
Average 3rd Quintile
Canada 31% 47%
France 59% 72%
Germany 47% 76%
Italy 55% 77%
Japan 39% 61%
UK 42% 69%
US 22% 38%
Source: The Global Aging Preparedness Index (CSIS, 2010)
Rising Retirement Costs
The slowdown in workforce growth in the developed world will translate into slower growth in GDP.
Japan and some faster-aging European countries face a future of secular stagnation.
Productivity and living standard growth may also slow as rates of saving and investment decline.
Aging workforces may be less flexible, less mobile, and less entrepreneurial—putting a further drag on economic growth.
Average Annual Growth Rate in the Working-Age Population (Aged 20-64), by Decade
1980s 1990s 2000s 2010s 2020s 2030s 2040s
Canada 1.7% 1.1% 1.2% 0.5% 0.0% 0.2% 0.1%
France 1.0% 0.4% 0.6% -0.2% -0.1% -0.2% 0.0%
Germany 1.1% 0.2% -0.2% -0.3% -1.2% -1.2% -0.9%
Italy 0.9% 0.2% 0.3% -0.3% -0.6% -1.2% -0.9%
Japan 0.7% 0.4% -0.4% -1.0% -0.7% -1.5% -1.5%
UK 0.6% 0.4% 0.6% 0.3% 0.0% 0.1% 0.3%
US 1.4% 1.2% 1.1% 0.6% 0.3% 0.6% 0.6%
Source: UN (2009)
Slower Economic Growth
As more of the population enters its harvest years, consumption rates will rise and savings rates will fall.
Growing fiscal deficits may exacerbate the decline in household savings rates.
The danger of a “Great Depreciation” in financial markets as postwar baby booms retire is overstated.
Instead, aging developed countries are likely to become even more dependent on capital imports from a younger and faster-growing developing world.
Adults Aged 20 & Over by Age Group, as a Percent of All Adults
2010 2020 2030 2040
US Age 20-34 28% 28% 26% 26%
Age 35-59 47% 42% 41% 41%
Age 60 & Over 25% 30% 33% 33%
Canada Age 20-34 20% 20% 17% 18%
Age 35-59 37% 34% 32% 31%
Age 60 & Over 20% 25% 29% 31%
EU15 Age 20-34 24% 22% 20% 19%
Age 35-59 46% 44% 40% 38%
Age 60 & Over 31% 34% 40% 43%
Japan Age 20-34 22% 18% 18% 16%
Age 35-59 41% 41% 38% 34%
Age 60 & Over 37% 41% 45% 50%
Source: UN (2009)
Emerging Capital Shortages
The secular economic shift from manufacturing to services will accelerate.
The “youth demographic” will give way to a new “silver demographic.”
Business growth will come to depend more on market deepening than on market broadening.
Adjustment costs in both product markets and labor markets will rise.
Stagnant or contracting markets will increase the risk of “beggar-thy-neighbor” protectionism.
Shifts in Economic Structureand Business Psychology
1990-2010 2010-2030-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2% 5%
-3%
3%
65%
3%
54%
90%Age 0-19
Age 20-39
Age 40-64
Age 65 & Over
Cumulative Percentage Change in the Canadian Population, by Age Group and Time Period
Source: UN (2009)
As societies age, the overall social mood may become more risk averse and “small c” conservative.
Smaller families may find it more difficult to socialize the young—and care for the old.
Elder-dominated electorates may lock in current public spending commitments at the expense of new priorities.
As the developed countries age, they will also grow more diverse—challenging social cohesion in some countries.
The Impact on Social Mood
Share of Population with Less than 20 Years of Life Remaining, by Country, 1950-2050
Source: CSIS calculations based on UN (2007) and Human Mortality Database, University of California, Berkeley and Max Planck Institute for Demographic Research
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
10%
15%
20%
25%
30%
35%
Japan
Italy
Germany
UK
Canada
France
US
Part III
Global Aging and Emerging Markets
The demographic transition opens up a window of opportunity for economic growth and development.
Falling dependency burdens and larger shares of the population in the working years boost per capita GDP.
Over time, this demographic shift may also encourage higher labor-force participation rates, higher saving rates, and greater investment in human capital.
The dynamic is called the “demographic dividend”—and it explains as much as two-fifths of the growth in living standards in East Asia since the mid-1970s.
The Promise of the “Demographic Dividend”
Working-Age Population (Aged 20–64), as a Percent of the Total Population, 1975–2050
1975 1990 2000 2010 2020 2030 2040 2050
East Asia 46.8 55.7 59.6 64.1 63.9 61.5 57.8 56.5
Eastern Europe 56.8 58.3 60.4 63.8 62.1 60.5 58.9 54.6
Latin America 43.8 48.5 52.3 56.3 58.0 57.3 56.5 55.3
Muslim World 42.6 45.1 49.1 54.3 56.1 56.3 56.8 55.9
Russian Sphere 57.7 59.6 60.8 65.6 63.5 61.1 61.3 57.3
South Asia 45.2 48.1 50.8 54.8 56.9 57.2 58.1 57.6
Sub-Saharan Africa 42.0 41.1 42.1 43.5 44.9 47.2 50.6 53.0
Note: Highest share is highlighted.Source: UN (2009)
Risks to Growth and Stability: Squandered Dividends
The demographic dividend creates an economic opportunity , but does not guarantee economic success.
Large parts of the developing world are nearly as far through the demographic transition as East Asia, yet have not come close to matching its stellar growth performance.
Over the past 10 to 15 years, economic growth has finally begun to accelerate in a large number of emerging markets.
Whether the recent boom represents a long-term shift toward higher growth rates remains to be seen.
East Asia
South Asia
Eastern Europe
Latin America
Muslim World
Russian Sphere
Sub-Saharan Africa0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
6.9%
3.5%
1.5%1.2% 1.1%
0.8%
0.2%
7.1%
4.5%
3.7%
1.7%
2.5%
4.1%
1.8%
1975-09 1995-09
Average Annual Growth Rate in Real GDP Per Capita (in 2005 PPP Dollars) by Period, 1975–2009
Source: World Bank (2010); Angus Maddison (2010); and UN (2009).
1975-95 1995-09 1975-09BrazilChinaIndiaRussia
Average Annual Growth Rate in Real GDP Per Capita
1.1% 1.5% 1.3%7.8% 9.0% 8.3%2.6% 5.1% 3.6%
-0.8% 4.0% 1.1%
The demographic dividend is already ending in some of today’s fastest-growing emerging markets.
As in the developed world, rapid population aging may soon become a drag on economic growth.
China faces a massive age wave that is due to arrive while it is still in the midst of development.
Russia’s economy has been riding high on the commodity boom, but its ruinous demographics are undermining its long-term growth potential.
By the 2030s, India will be one of the few of today’s leading emerging markets whose demographics will still be favorable to growth.
Risks to Growth and Stability:The Second Wave of Global Aging
Elderly Share and Average Annual Growth Rate in the Working-Age Population, by Decade
1980s 1990s 2000s 2010s 2020s 2030s 2040s
Elderly (65+), % of Population
Brazil 4.3% 5.0% 6.2% 8.1% 11.2% 14.7% 18.4%
China 5.1% 6.1% 7.5% 10.0% 13.9% 19.1% 23.0%
India 3.7% 4.0% 4.6% 5.5% 7.1% 8.8% 10.8%
Russia 10.2% 11.2% 12.6% 14.3% 17.8% 20.8% 23.7%
S. Korea 4.4% 6.2% 9.2% 13.3% 19.5% 27.3% 33.6%
Average Annual Growth Rate in the Working-Age Population (Age 20-64)
Brazil 2.9% 2.3% 2.0% 1.2% 0.5% 0.2% -0.2%
China 2.8% 1.7% 1.4% 0.5% -0.2% -0.7% -0.6%
India 2.5% 2.4% 2.3% 1.9% 1.3% 1.1% 0.7%
Russia 0.7% 0.1% 0.4% -0.9% -1.0% -0.7% -1.6%
S. Korea 2.9% 1.6% 0.7% 0.3% -1.1% -1.5% -1.6%
Source: UN (2009)
0%
5%
10%
15%
20%
25%
30%
China
US
China vs. the United States: Elderly (Aged 65 & Over), as a Percent of the Population, 1970-2050
Source: UN (2009)
2010-30 2010-50
-50%
-40%
-30%
-20%
-10%
0%
-11%
-25%
-18%
-35%Total Population
Working-Age (Age 20-64)
Cumulative Percentage Change in the Russian Population, 2010-2050
Source: UN (2009)
WomenMen
WomenMen
Population Pyramids of China and India in 2010, 2030, and 2050
0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85-89 90-94 95-99 100+
80000 40000 0 40000 80000
India 2010
0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85-89 90-94 95-99 100+
80000 40000 0 40000 80000
India 2030
0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85-89 90-94 95-99 100+
80000 40000 0 40000 80000
India 2050
0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85-89 90-94 95-99 100+
80000 40000 0 40000 80000
China 2010
0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85-89 90-94 95-99 100+
80000 40000 0 40000 80000
China 2030
0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85-89 90-94 95-99 100+
80000 40000 0 40000 80000
China 2050
Source: UN (2009)
Risks to Growth and Stability: Journeys can be more dangerous than destinations.
Societies undergo tremendous stress as they move from the traditional to the modern. When plotted against development, most of the stressors describe an inverted-U—meaning that they become most dangerous midway through the transition.
These stressors include:
Contact with the global marketplace and culture
Urbanization Environmental degradation Growing income inequality Growing ethnic competition Religious extremism
The "Inverted U" Relationship
Stage of Demographic Transition & Devel-opment
Leve
l of S
tress
& R
isk
of V
iole
nce
Part IV
The Shape of the Global Economy
The Developed World:A Shrinking Share of Global Population
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
0%
5%
10%
15%
20%
25%
JapanOther English-Speaking CountriesWestern EuropeUS
Developed World Population by Region, as a Share of World Total, 1950-2050
1950 2005 2030 2050USWestern EuropeJapanOther English-Speaking Countries
Population as a Share of World Total
6% 5% 4% 4%10% 5% 4% 3% 3% 2% 1% 1% 3% 2% 2% 1%
Source: The Graying of the Great Powers (CSIS, 2008)
12 Largest Countries Ranked by Population
Ranking 1950 2010 205012345678
9101112
Source: UN (2009)Note: Rankings for developed countries that have fallen below 12 are in parentheses.
ChinaIndiaUSRussian FederationJapanIndonesiaGermanyBrazilUKItalyBangladeshFrance
ChinaIndiaUSIndonesiaBrazilPakistanBangladeshNigeriaRussian FederationJapanMexicoPhilippines
Germany (16)France (21)UK (22)Italy (23)
IndiaChinaUSPakistanNigeriaIndonesiaBangladeshBrazilEthiopiaPhilippinesDem. Rep. CongoEgypt
Russian Federation (16)Japan (19)UK (27)France (29)Germany (30)Italy (37)
The Developed World:A Shrinking Share of Global GDP
1950195519601965197019751980198519901995200020052010201520202025203020352040204520500%
10%
20%
30%
40%
50%
60%
70%
JapanOther English-Speaking CountriesWestern EuropeUS
Source: The Graying of the Great Powers (CSIS, 2008)
Developed World GDP (in 2005 PPP Dollars), as a Percent of World Total, 1950-2050
1950 2005 2030 2050USWestern EuropeJapanOther English-Speaking Countries
GDP as a Share of World Total
29% 22% 19% 17%23% 17% 10% 7% 3% 7% 4% 3% 9% 7% 5% 4%
2009 2030 20500%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
34%26% 24%
38%
24%16%
28%
50%59%
Emerging Markets
Other G-7
US
Source: Carnegie Endowment for International Peace (2010)
GDP (in 2005 US Dollars) by Country or Country Group, as a Percent of G-20 Total, 2009-2050
72%
50%41%
The Composition of G-20 GDP:From Majority to Minority Partners
Some Bottom Lines Long-term decline of the developed
world and rise of emerging markets, especially in East and South Asia.
The United States is a partial but important exception to hyperaging and population decline.
Economic success will depend on leveraging differentials in population and economic growth rates across different regions of the world.
Yet aging societies with stagnant or contracting domestic markets may face increasing political pressure to roll back globalization.
Likely global slowdown starting in the mid-2020s as “second wave” of global aging sweeps the developing world.
Question: Who can replace East Asia as the engine of global growth?
Population by Region as a Percent of World Total, 2005-2050
2005 2030 2050East Asia 21.5% 17.5% 14.0%Latin America 8.6% 8.8% 8.8%Muslim World 17.2% 19.6% 21.1%Russia & Eastern Europe 5.4% 3.5% 2.5%South Asia 22.9% 24.5% 25.2%Sub-Saharan Africa 11.1% 15.1% 18.8%
United States 4.6% 4.3% 4.1%Rest of the Developed World 8.8% 6.8% 5.5%
GDP (in 2005 PPP Dollars) by Region as a Percent of World Total, 2005-2050
2005 2030 2050East Asia 13.3% 26.0% 29.3%Latin America 8.3% 6.6% 6.3%Muslim World 9.2% 9.6% 10.3%Russia & Eastern Europe 7.1% 6.7% 5.1%South Asia 6.4% 10.3% 13.5%Sub-Saharan Africa 2.2% 3.1% 4.5%
United States 22.3% 18.6% 16.9%Rest of the Developed World 31.4% 19.1% 14.1%
Source: The Graying of the Great Powers (CSIS, 2008)
We live in an era defined by many challenges, from global warming to global terrorism.
None is as certain as global aging.
And none is likely to have such a large and enduring effect on the shape of national economies and the world order.
CSIS/GAI.ORG GAPINDEX.CSIS.ORG
0%
5%
10%
15%
20%
25%
30%
China US
China vs. the United States: Elderly (Aged 65 & Over), as a Percent of the Population, 1970-2050
Source: UN (2009)
2010-30 2010-50
-50%
-40%
-30%
-20%
-10%
0%
-11%
-25%
-18%
-35%
Total Population Working-Age (Age 20-64)
Cumulative Percentage Change in the Russian Population, 2010-2050
Source: UN (2009)