According to Ruchir Sharma, depopulation, and specifically a decline in working age population, will significantly reduce economic growth going forward. And while most people are already aware of this problem in developed economies (particularly in Europe and Japan), many are still not accounting for this same demographic shift occurring in middle-income and emerging economies. Depopulation, and the resulting slowdown in economic growth, is occurring across the board says Ruchir, so its time people change their benchmarks and shift their mindset to the “new normal”.
Ruchir Sharma – an Indian investor and fund manager who has written widely on global economics and politics, Ruchir is Head of Emerging Markets and Chief Global Strategist at Morgan Stanley Investment Management.
The world has a shrinking working population (people between the age of 15 to 64). And with the growth rate of working age people dropping fast, that affects the growth of the economy. According to UN statistics, between 1950 and 2005, the average growth rate of the working-age population was about 1.8%. Now it’s down to roughly 1%. That kind of drop in population growth rate is huge. Its much more than most economic forecasts are accounting for, one very much underappreciated according to Ruchir Sharma. With improving education and the adoption of population control policies (family planning, birth control, contraception), which is a narrative very different from the 70s and 80s, its likely that we’ll continue to see a huge decline take place in the population growth rates as well as the working age population growth rate.
There are two drivers of economic growth.
- growth rate of working population
- productivity
This is a very simple economic equation. Typically, both contribute to economic growth in equal measure. So if the growth rate of the working age population is slowing down – significantly in most countries – then people need to start shifting their mindset for world growth. Ruchir points to continued expectations in India for 7 to 8 percent growth, in China for 6 percent growth, and in the US for 3 or 4 percent growth. He maintains that such economic growth rates are unrealistic considering the downward trend in number of working age people entering the workforce.
And even though some people believe that the decline in growth rate of the working population will be offset by productivity improvements through technological innovation, Ruchir sees no evidence of this is happening. He points out that productivity increases have been somewhat disappointing given the tech boom that we’ve experienced over the last few decades.
Ruchir Sharma illustrates that India is no exception in the downward trend in working age growth rate. It is slowing dramatically in India as well. If you look at the growth rate of the working age, it used to be about 2.5 percent a year. Its now down to 1.4 percent. This is inline with the global decline of 1.8 percent to 1 percent. In the 1960s, the average fertility rate of an Indian family (number of kids they would have), was about 5 or 6 children. India is now down to slightly above 2 children. This is a huge change taking place. Birth rates have significantly declined. So with a working age population only growing at 1.4 percent, it is extremely difficult to grow the economy at 5 or 6 percent. And trying to make up the balance from productivity increases is very tough, maybe even unrealistic.
Another startling figure that Ruchir Sharma has unearthed, is that many countries are not even growing their working age population at 1.4 percent, or even 1 percent, but at a negative growth rate. The working age population, in fact, is going down. Its something Ruchir calls depopulation. This depopulation of working age people, in turn, results in negative economic growth rates in the respective countries. And the trend in depopulation is growing. In 1985, for instance, only two countries had a negative growth rate for working age population. In 2019, that number has risen to 42 countries. The list countries with a contracting working age population includes huge economies like China, Japan, Italy, Germany, Russia, etc. So this is a huge change taking place, one Ruchir believes, we still haven’t quite appreciated. Its the opposite of the demographic dividend, from the demographic boom, that spurred economic development in the 70s and 80s. So if it was the “population bomb” during the growth phase, perhaps we can refer to the present trend as the “depopulation bomb”.
So based on the slowing growth rate in the working age population, Ruchir Sharma maintains that we need to set new benchmarks for economic success going forward. Its simply unfair to expect an economy such as India to grow at 7 or 8 percent. With fewer workers resulting in slower economic growth, perhaps for low-income countries we can expect something around 5 percent for a successful growth rate. For middle-income countries 3 or 4 percent is very good, and for developed countries, 1 or 2 percent should suffice, particularly for Japan and EU nations, which should be happy to avoid negative growth.
If you go back to a decade ago, there were about 40 countries in the world that registered a growth rate above 7 percent. In 2019, this number shrunk to only 8 to 9 countries in the world (never mind the fact that these are very small countries where you can’t really trust the data). So for the 195 countries in the world, it has become extremely difficult in this environment, for all but a few to grow at a rate of 7 plus percent per year. Yet, as Ruchir Sharma points out, “we keep thinking our benchmark for economic success needs to be 7 to 9 percent growth and we make all sorts of projections of 5 trillion dollar economy based on these kind of projections. But that is just unrealistic is my feeling.”
Per Capita Income – New Indicator Of Economic Success
Finally, Ruchir Sharmay points out that, in addition to simply looking at GDP growth, per capita income is now an equally important measure of economic success. Using Japan as an example, its important to recognize that the nation’s per capita income has grown at roughly the same rate as the US and Europe over the last 20 years. This is in spite of the fact that Japan has inferior demographics compared to their contemporaries, and virtually no headline economic growth. Ruchir asks, why is there no social unrest? Why is there not greater angst? He believes its because in per capita terms, Japan is still doing OK.
Investing During Depopulation And Slower Economic Growth
Worldwide, economic growth is being hampered by a decline in the growth rate of the working population. So how does one invest in a world of depopulation and slower economic growth?
Since the classic formula for economic growth is: population growth + productivity growth, in the absence of population growth, labor productivity will become crucial and may present an opportunity for investors. Problem is, productivity gains have been slowing despite technological advances.
Technology has disrupted the labor force in a way that has not added productivity. Tech companies seem overly focused on skimming wealth from the low-end of the economy. They are fixated on self-driving vehicles, self-checkout at the store, robots in kitchens and any other way of cutting out labor. That doesn’t add productivity to the economy when it creates massive unemployment. All it does is divert more money to fewer people. This doesn’t seem sustainable.
So instead of investing in tech that skims wealth from the low-end of the economy (investments that will have diminishing returns), we believe that companies focused on improving work processes and productivity, will be the real winners long-term. Companies that are focused on education and skills acquisition, creating process improvement tools, and tools for increased employee engagement. Not only will such companies help offset slower economic growth by enhancing labor force productivity, but they will benefit per capita income as well.
Below are 8 companies focused on labor force productivity…
