Trade Brief 3: Move the capital from the old world to young Africa

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We tend to not think about population growth too much, because the changes are so slow. Until they’re not. Until very recently, human population has been growing and that assumption is baked into our economic theories, even when not explicitly stated. For an economy to grow, it either has to sell more stuff or the same stuff to more people or both. When there are fewer people to sell to, the size of the market is shrinking. At the micro level, this doesn’t matter too much, but when this happens at scale, the problem becomes rather serious. Most of our policies cater for more people, but when that changes, these policies no longer work. This is where we are now. Let’s start with the world’s lowest birthrate country.

No kids in South Korea

Only women have children so when we consider birth rate, we need to measure the births per woman in the population. The replacement rate for a population is 2.1 kids per woman (one for each parent and 0.1 for the kids who don’t make it beyond childhood). Korea is at 0.81 births per woman in 2023. Unless this changes, Korea will struggle to exist as a country. Here is why.

If we start with 40 parents now, 20 of those would be women and as only they can have kids, we need to apply the birthrate of 0.81 to them. 20 women x 0.81 = 16.2. You can’t have 0.2 of a child, so let’s round down to 16. Now continue this down and 5 generations on you are left with 2 people. South Korea currently has a population of 52 million people. At the current birthrate this will be at 30 million by 2100 (a 44% drop in 77 years). Korea has great healthcare, good nutrition and low crime rates, so people live long, which is why the population fall is not as precipitous as you would expect. It turns out that raising fertility is a really difficult problem to solve and Korea has been trying very hard to sort it out.

Visualise Korea in 2100, with half the population it has now. Currently the median age is 43.7. According to the United Nations, this will be 59.3 years old in 2100. At present Korea has around 37 million working age people (71%), by 2100 this will be around 16.5 million (55%). You can see how this creates a productivity problem of staggering proportions. Who will do the work? Where will the money come from to support the old folks who are not working?

Unless you’re in South Africa, your soldiers are young. With a massive drop in the number of young people, it becomes increasingly difficult to protect your borders. As population density drops, what happens to the vacant houses and the empty factories? Even though Korea is exceptionally well educated and no doubt will still be so in 2100, there will be fewer Koreans around to know things. Technology will help, but innovation, at least for now, is a human skill and heavily concentrated in young people (85 year old grandma is not likely to invent the Korean answer to ChatGPT).

China. Eish.

The problem in China is arguably worse, even though their birth rate is higher (1.15 children per woman), but the ratio of men to women in China is 111.3 men to 100 woman and 116 to 100 in children. The normal distribution globally is 98.8 men to 100 women, if we exclude China. China’s current population is estimated at approximately 1.4 billion people, meaning 660 million of these are women. If this were a normally distributed population, we would expect there to be 704 million women. The missing 44 million women has a disproportionate impact on the downstream population simply because none of the men which have replaced them will have children. Because the sex ratio is more skewed towards younger people, the effect is that more women are removed from future populations than the current average.

By 2050 (27 years from now), China’s population is projected to drop by 100 million people, but its working age population by 200 million.

Why does this matter?

The engine of China’s growth has been a large pool of cheap labour in the countryside, which could be relocated to the coastal cities. Because China’s economy has been so heavily export focused, this cheap labour could be sold at global prices, pushing a flood of cash into China. China’s population was younger than the West for decades which means they had deep labour pools, but this is changing fast. The average person working in China has fewer and fewer working years ahead of them and because the population fall is so dramatic, they are unable to fill those positions with younger people. China has low levels of inward bound migration, which is not helping.

Young people are more productive than old people and also consume more. The rapidly changing shape to China’s population pyramid means betting on growing local consumption is going to be a difficult bet to win in the long term. Already China has villages which are emptying out or populated largely by old people. China’s oldest village, Zhongcun, in Jiangsu Province, has a median age of 67.4 years. Pause. Think about that. When you count from youngest to oldest person, you get to 67.4 years before you reach the halfway mark. Given that people don’t live to 134, it means the older half of the population fall within a 20-year range only. The population plunge will be ever more severe with each passing year.

The labour shortages are pushing up labour costs, with China now having the second fastest growing wage rate in the world (8.4% – Vietnam is number one at 10.2%). This doesn’t spell the end of China, but it does mean that China’s political heft in the world will slowly reduce as their population continues to fall. It is difficult to keep growing GDP at the stellar rates China has managed for the last three decades with a shrinking population. GDP is a factor of consumption (number of consumers times how much they consume) and productivity. Productivity is a function of number of people multiplied by their output. If there are dramatically fewer people, it would require enormous productivity growth to compensate. Perhaps this is possible, but the burden will keep growing with each passing year.

Make more babies?

The key to a high fertility rate, it worryingly seems, is uneducated women with no access to birth control. In Niger, the average girl will marry at 15, have 6.73 children (actually 7.1, but childhood mortality is at medieval levels) and be subject to a literacy rate of 29.5%. In South Korea that woman would marry at 31.3 years old, have 0.81 kids and 99% sure to be literate. This presents a dilemma on both sides, but fixing the problem in Niger doesn’t require a one child policy like in China. Just educate girls and give them access to birth control and they seem to sort the rest out themselves. Here is the picture for Niger, which you will notice is the complete inverse and then some of the Korean picture.

Where 40 people ended up as two descendants after five generations in Korea, two people in Niger will end up with 296 descendants after five generations.

Deferring marriage and kids is a sensible decision for the woman in Korea, but the aggregate effect of this is fewer Koreans. Tax incentives, cash grants and increasing migration have all been tried with limited success. Japan, the world’s oldest country for a long time, has been trying to sort this problem out for decades with little success.

The African opportunity

This does not however make Niger a success story. Yes it is a very young country (median age of 15), but it is also extremely unproductive. Poor education, staggering levels of corruption and essentially a non-existent government, makes it very difficult for Niger to take up the slack Korea is leaving, but does this have to be so?

The demographer, Dr Myrskylä notes “Much of the challenges at the global level are questions of distribution, so some places have too many old people. Some places have too many young people. It would of course make enormous sense to open the borders much more. And at the same time we see that’s incredibly difficult with the increasing right-wing populist movements.”

Japan has exported its abundant capital to where the workers are and used the dividends flowing back to take care of the elderly. The price paid however, is virtually no growth back home. Africa needs to position itself for the increased capital flows out of the ageing countries to the youthful continent, but this requires intelligent policy formulation now. Health economist Carolina Cardona observes that “if you don’t have employment for those [young] people who are entering the labor force, then it’s no guarantee that the demographic dividend is going to happen.” In fact, the very opposite might occur, if we have ever growing numbers of young people without jobs or education. This is the stuff of social instability as we South Africans are all too aware of.

Most of the world’s working age population for 2050 have already been born, so we know the shape of things already. Between now and then, Africa needs to wean itself off aid money and take its rightful place in the world. Not as a beggar but as an equal. Africa has the most valuable resource in the world. People. We need to position ourself to make the most of our demographic dividend over the next decades.

Be honest. You were chilling and watching soapies while we thought about populations and demographics and how to get the world’s capital to flow to Africa.

Contact us at info@xagta.com to engage the 100% African brainpower at XA Global Trade Advisors

 

 

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