The New York Times

April 25, 2009
Op-Ed Contributor

This Crisis Is Getting Old


HONG KONG — Demography, which is about long term trends, may seem an unusual prism through which to view a global crisis sparked by financial sector bubbles. But those seeking a sustainable way out of the crisis would do well to take account of it.

This is a crisis not only of too-great expectations of asset price growth, but of too-great expectations of how fast the economy of an aging world can grow, leading to massive overinvestment in everything from houses to cars.

The global annual average growth of 5 percent in the five years ending in 2007 was bought at a high cost to the future, and a slowing growth in the workforce means expectations must be lowered further. Policies need to be shaped to demographic realities.

Think of Japan, the world’s oldest society. Years of fiscal stimulus have had only a modest impact on growth. Infusions of yet more yen borrowed from its citizenry and from companies reluctant to re-invest their profits seem unlikely to have more than short-term impact.

Japan’s workforce is declining and age is taking a toll both on innovation and the desire to spend. Yet what does Japan now do? It seeks to protect its aging workforce from rising unemployment by offering one-way exits to (mostly much younger) foreign workers. The short-term benefit will be small, the long-term damage great.

Europe, headed by Germany, is close behind Japan’s demographic path, albeit slightly ameliorated by the European Union’s freedom of movement. Germany is more aware of the fiscal perils it faces, but has no real solution to its overdependence on exports to support a growing pension and health burden.

Countries such as Britain, Spain and Ireland have fewer immediate demographic constraints, but they are bumping up against their fiscal deficit ceilings. The United States has better demographics but faces years of rebuilding household savings.

Do not imagine, either, that a successful East Asia can somehow compensate for Western and Japanese weakness. East Asian countries may have fiscal headroom to boost demand in the short run, but workforce growth rates in most are tiny.

The percentage of people of working age in countries such as Korea and even Thailand is close to a peak and female participation in the workforce is already very high. Even China, often assumed to have an inexhaustible labor supply, has a rapidly slowing workforce growth, now under 1 percent a year. There are 60 million more Chinese in their 30s than in their 20s, and the percentage of old people will rise dramatically after 2015. Middle-income countries in Latin America and elsewhere are showing similar if less dramatic trends.

Thus the only chance for global growth rates to return to previous norms is to find ways of increasing growth in those countries that have more favorable demographics.

In theory, that might be Africa. But stability issues in many sub-Saharan African countries suggest that the more realistic opportunities exist in South Asia, parts of Southeast Asia and the Middle East/North Africa. Yet in some of the countries with potential — Iran is a good example — the politics is forbidding. In others, the financing tools or social infrastructure are inadequate.

Still, these countries offer the most hope of compensating for demography-driven slowdowns elsewhere. A trillion or two dollars in credit for them will do more for the global economy than similar stimulus for countries with aging populations.

As for aging countries, the crisis has clearly shown the need to raise retirement ages by five years to reflect increases in life spans to relieve the state budgets now weighed down by bank bailouts, and to reduce the burden on corporate and other pension schemes.

In East and West alike, most people are willing and able to work longer and remain productive members of society until 70 or beyond. Few are doing so.

Only a return to replacement-level fertility rates will provide a lasting solution. Meanwhile, the need for later retirement is urgent. This crisis underlines the necessity for developed country governments to adjust spending and social policies to demographic realities at home and abroad.