Will population decline bring the global economy to a halt?
Population growth rates are stagnating in many countries around the world, but the economics of a declining population is still uncharted territory for modern economic theory. How will our growth-based economic systems fare when the population declines?
ABOUT THE AUTHORS
Eljas Aalto
Eljas works as an economist and data analyst at Futures Platform. He develops quantitative foresight analysis tools and participates in various customer projects to help them prepare for the future.
Henrik Södergrann
Henrik is a Foresight Analyst at Futures Platform and works with economics and finance-related research, foresight and the quantitative development of foresight analysis.
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Changing population dynamics have profound implications for societies, economic activity and living standards. Many of the existing population theories rely on the hypothesis of an ever-increasing population, and our financial systems have likewise been built on the premise of perpetual growth.
The first coherent population theory, developed in 1798 by economist and philosopher Thomas Malthus, states that population growth is potentially exponential while the supply of food and other resources is limited. When population growth outpaces agricultural production, it leads to what's been termed the Malthusian trap – lower living standards, famines, and, eventually, depopulation.
This surely was the case in the 18th century, but before long came the industrial revolution and societies were able to overcome the Malthusian trap thanks to new technologies that increased agricultural productivity.
From the 20th century onwards, the rapid population expansion has led to new fears of an environmental catastrophe brought on by mass consumption. And recently, policymakers, businesses and societies have been more worried about an opposite phenomenon – the globally declining population growth rates. Economic models are rarely constructed by assuming a declining population, so we still don't know much about the potential future effects of this decline.
AGEING SOCIETIES: BETTER OR WORSE OFF?
An ageing population means reduced labour force participation rates and reduced productivity. The expanding ratio of older adults in the population pyramid also means increased public expenditures and larger shares of income going to pensions and healthcare, making welfare states unstable. It's also expected to increase the savings rate and decrease investments, which is bad news for high-income countries that already suffer from stagnant or shrinking populations.
However, looking at the data gives a different impression: Ageing societies seem to be better off in terms of growth in living standards. In Acemoglu & Restrepo (2017), the authors show that the same positive correlation can be observed within different economic groups and regions of the world, thus providing evidence that the correlation is not only due to developed societies ageing faster (though this is also true).
So, why is this the case? Acemoglu & Restrepo argue that countries experiencing more rapid ageing are swiftly embracing automation technologies, particularly industrial robots. This bodes well also for welfare states, as increased productivity broadens the tax base.
SHORT-TERM: AUTOMATION MITIGATES THE EFFECTS OF AGEING
Economic growth models measure the increase in capital, labour and technology. If the amount of labour decreases, as it does with a shrinking population, we would need to increase either capital or technology, or both, to sustain the same output.
In their recent study of labour market dynamics, Acemoglu & Restrepo (2022) show how demographic change has boosted the adoption of automation technologies and increased productivity. The effect is especially prominent in countries experiencing rapid ageing and within sectors suffering from labour scarcity.
For example, in the US heavy manufacturing industry, automating manual production tasks, which are heavily performed by middle-aged workers, has proven effective and profitable. Hence, the labour share has declined while productivity has improved.
In cross-country comparison, the countries suffering the most from ageing demographics, such as South Korea, Germany, and Japan, are investing the highest shares in R&D and robotics. In fact, differential ageing alone accounts for more than a third of the variation in a country's investment in robotics.
Hence, data shows that automation has undone the effects of ageing. This provides evidence of non-deterministic technological change: We direct the technology, not the other way around. Thus, policy and foresight increase in significance as we navigate the obstacles and possibilities of technological change.
The correlation between growth in GDP per capita and an aging population. Source: Acemoglu et al. (2017)
LONG-TERM: FEWER PEOPLE MEANS FEWER IDEAS
There is, however, an additional perspective to consider. As futurists, we are inclined to take the long-term perspective – what happens if the population continues to decline?
Innovation is positively correlated with population, meaning that more people produce more ideas. Modern growth models usually assume a constant or growing population that provides new ideas and innovation for fuelling economic growth. However, with fertility below the replacement rate and decreasing returns from R&D activity, a declining population might erode our growth potential and stagnate living standards in the very long run.
Quite intuitively, this means that with a declining population, the share of the innovative workforce will have to grow. However, this share is minimal due to the worsening labour shortage in the productive sector. It's also unclear whether a declining population can effectively store all its accumulated knowledge or whether knowledge starts to depreciate as it did with some earlier civilisations, accelerating the economic and societal collapse.
As R&D activity reaches its natural limits in the developed world, the global economy will have to turn to the unused potential in the developing world, not only because of its workforce, but also because of its underutilised creativity. The resulting economic equilibrium and the balance of power will depend on who has control over the new knowledge produced in the developing world and what are the borders over which new ideas and knowledge will spill.
The total fertility rate in high income countries. Source: Jones (2022), United Nations (2019)
ENVIRONMENTAL IMPACTS OF POPULATION DECLINE
Given the environmental challenges the world is facing, a shrinking population may seem like a welcome change that can curb overconsumption, reduce the pressure on scarce resources, and mitigate an environmental catastrophe.
But this is a tricky problem, and there are two sides to it: On the one hand, more people consume more, which will have a negative environmental impact (consumption effect). On the other hand, with a growing population, there are more ideas and knowledge spillovers, which will bring new solutions to environmental problems (ideas effect).
Hence in the short run, a declining population will clearly have a positive environmental effect due to the consumption effect. However, if the fight against climate change is prolonged, it is not at all clear whether the consumption effect will dominate over the ideas effect. Therefore, a declining population is not a once-and-for-all solution to environmental problems.
FORESIGHT WILL BE CRUCIAL TO AVOID A ‘IDEA TRAP’ SCENARIO
The population decline may eventually drain the flow and diffusion of new ideas, which would not only erode our prospects for growth but may also cancel out the positive environmental impacts of a reduced population. So, in a way, Malthus was right. We are indeed at risk of falling into a population trap, but the problem is not overpopulation. Instead, it is the long-term negative population growth rate that might reduce our knowledge. The population trap has become an idea trap.
For a declining population, directing technological change optimally is especially important. Thus, as societies prepare for the impacts of shrinking and ageing populations, active use of foresight in policymaking will become even more vital to steer the world population into prosperous futures.
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Literature
Acemoglu, Daron & Pascual Restrepo (2017) Secular Stagnation? The Effect of Aging on Economic Growth in the Age of Automation. American Economic Review, Vol. 107(5), 174–79. Available on: https://pubs.aeaweb.org/doi/pdfplus/10.1257/aer.p20171101
Acemoglu, Daron & Pascual Restrepo (2022) Demographics and Automation. Review of Economic Studies, Vol. 89(1), 1–44. Available on: https://economics.mit.edu/sites/default/files/inline-files/Demograhics%20and%20Automation.pdf
Jones, Charles (2022) The End of Economic Growth? Unintended Consequences of a Declining Population. Available on: https://web.stanford.edu/~chadj/emptyplanet.pdf
