Edward Hugh Book

A Study of Ageing, Fertility and Global Imbalances

We are getting older.

This commonplace is both self-evident - individually we are always that little bit older, each and every day - and surprising - Niger is getting older, Mali is getting older, Somalia is getting older. This is surprising since these are, effectively, among the youngest societies on earth (Niger, median age 15.8, Mali, median age 16.35, Somalia, median age 17.59). Now everyone is aware that Japan is getting older, everyone is aware that Germany is getting older (these are currently the two oldest societies on the planet), but Niger, Mali and Somalia!

In fact, apart from 18 'demographic outliers' as identified in the 2005 United Nations Human Development Report, each and every country on the planet is getting older. Nor is this societal 'ageing' a recent phenomenon, it starts from virually the outset of what has become known as the demographic transition - a process which began in many European societies in the late 18th and early 19th centuries. This transition begins with a sudden and sustained drop in mortality, especially in infant mortality, as a result the society becomes 'suddenly young' since the child and youth cohorts rapidly become large in comparison with older age groups, and after this it is continuous ageing all the way. Global life expectancy, for example, has more than doubled over the past two hundred years, climbing from an estimated 25 years in 1800, to the present level of 65 for men and 70 for women. During this whole period maximum life expectancy has risen steadily by more than two years a decade

So if this work is about ageing, its starting point is that this ageing is not a new or recent phenomenon (the 'discovery of ageing' is of course more recent, but that is another story) or even a phenomenon which we should view with particular preoccupation. What about the end point? Well, here is the interesting part, there is no end point, as life expectancy continues to push ever onwards and upwards we will all be living longer, and to date there does not seem to be any special biological limit to this process. That is the good news.

There is some potential bad news however, and this comes with the how. As I have said, following the sharp mortality decline which characterises the onset of the modern demographic transition ageing commences, but historically it has done so at a relatively slow rate. The difficult part of the ageing process as it affects us today is that this ageing is now proceeding more rapidly, with the most recent evidence suggesting that those societies which began the transition later are ageing even more rapidly than their predecessors. Countries like China and Brazil have experienced sharp declines in their birth rates accompanied by rapid increases in life expectancy. This means that the median age rises at historically unprecedented rates, and that these societies run the risk of becoming 'old' before they become 'rich', with old here, of course, being a fairly relative term.

Ageing then is produced by a combination of two processes, increasing life expectancy and declining fertility. Global life expectancy has more than doubled over the past two centuries, climbing from an estimated 25 years in 1800, to the present level of 65 for men and 70 for women. At the same time maximum life expectancy has risen steadily by more than two years a decade (Oeppen and Vaupel, 2002).

Perhaps the most significant detail on the fertility decline front has been the arrival of what is called below replacement fertility. This has come as something of a surprise since it is now clear that as well as lifespans having no known upper limit, fertility also seems to have no natural bottom level. Once upon a time it was thought that human fertility in modern societies would have a natural tendency to stabilise around pure replacement level. This idea, however, has no strong theoretical foundation, and also seems to lack empirical justification since fertility levels have now remained consistently below the theoretical replacement level of 2.1 children per woman for at least 25 years in 20 European countries and Japan, whilst between 1995 and 2000 a further 44 countries began to 'enjoy' below-replacement fertility. Such countries now include several Caribbean islands (Barbados, Cuba, Guadeloupe, Martinique, Puerto Rico and Trinidad and Tobago) as well as a number of countries in Eastern and South-Eastern Asia (China, the Democratic People’s Republic of Korea, Hong Kong SAR, Macao SAR, the Republic of Korea and Singapore) all of which have one thing in common: they have entered the below replacement zone even though their fertility only began its substantial decline well after 1950.

In addition, a further 13 countries seem likely to start to exhibit below-replacement-level fertility in a not too distant future: in Latin America - Argentina, Brazil, Colombia and Mexico; in North Africa - Algeria, Egypt, Morocco; in Asian - Indonesia, Iran, Philippines, Turkey, Vietnam and in sub-Saharan Africa - South Africa.

Indeed the key issue which is looming in global demographics is what will actually happen to those countries which are termed by the United Nation as the intermediate-fertility ones. Before the start of their transition to low fertility started in the years after the second world war, most of the 143 countries in what we currently describe as the developing world had total fertility levels of 5 children per woman or higher. Today, only 49 countries still do. Among the rest, 73 had a total fertility between 2.1 and 5 in the years 1995-2000, and 21 already had below-replacement fertility. Those in the 2.1 to 5 range (the so-called intermediate fertility countries accounted for 43 per cent of the world population in 2000.

The ageing process is also associated with sizeable changes in the age structure of the population, changes, and these, given our existing customary boundaries between working and retirement ages, are likely to produce a significant increase in elderly dependency ratios in the very near future across all the OECD countries.

There are however solutions available to address the problems which this rapid ageing will produce. In part it will be the objective of this book to describe and explain the changes which are taking place around us, and in part the aim will be to outine some possible responses, and in so doing to explain and justify the changes we ourselves need to make if contemporary 'ageing' is to become not a threat, but a boon and a challenge.

The provisional structure of the book is as follows:

Chap I Nasty Brutish and Short?

Chap II The Second Stage?

Chap III The Importance of Age Structure

Chap IV The Mystery of Growth

Chap V The Life Cycle

Chap VI Asymetric Shocks

Chap VII Longer and More Productive Lives?

Chap VIII Global Imbalances

Chap IX Remedying the Global Imbalances

Basically I consider the writing of this book to be a process. Many of the ideas I am working on here are being 'sounded out' on a continuing basis on the weblog "A Fistful of Euros". The final chapter - which is provisionally headed: "Remedying the Global Imbalances" - will address the issues involved in our facing up to the consequences of having fertility declines and life expectancy increases occuring similtaneously in different parts of the planet at different rates. I see the completion of this chapter as involving substantial feedback. I haven't really decided yet how best to achieve this. A dedicated weblog will probably form part of the picture, but there may well be other dimensions to the process. If you wish to participate, or have any ideas you would like to contribute, please feel free to contact me.

As I have said, at the heart of the book lies the demographic transition, and as will be seen from the first chapter there is no real consensus on what that transition actually is or what actually drives it.

In reality economists normally argue that the demographic transition is one from a stagnant growth (Malthusian regime) to a modern high-growth regime. What I will argue is that this is only half the picture. The full demographic transition may well be one from a slow but stagnant growth regime to another slow but stagnant growth regime. The high growth interlude is most probably driven by the transitional dynamics of moving from one steady state to another. These transitional dynamics constitute the economic representation of the demographic transition.

The initial steady state I suppose is reasonably self-evident, in particular since it is already part of our received wisdom. In fact in the book I go to some effort to argue that historically there was much more "volatility" in living standards, health, life expectancy etc during this 'Malthusian regime' than the 'consensus view' normally allows.

Howevere it is the second steady state which presents us with all the problems. Basically, sometime this century global population is likely to peak, after that it will probably slowly come down: the actually timing of this historic 'event' depends on how much success we have in helping the development of the population laggards.

Now no-one really knows what a steady state TFR would look like - indeed until very recently most theorists imagined that the 'transition' would come to a halt with something like replacement fertility. However there was no good reason offered as to why this should be, and basically I don't think too many people were especially bothered, there was simply an underlying predisposition to imagine that an equilibrium at replacement level would form part of some ongoing homeostatic process.

The current 'best guess' for a steady state TFR (UN medium term projections) is somewhere in the 1.9 range. There seem to be good theoretical arguments to back the idea that readings above this will be hard to sustain, and I expound on them in the book. There are, however few sound theoretical arguments as to why this level should be a 'floor', and why fertility should not continue to decline.

What I attempt to do, however is tie any continuing decline in fertility to accompanying (compensating) increases in life expectancy, and increases in "nurture" in the early years of life (should we consider maternal care as now lasting up to 30??) as the length of the human 'learning-period' increases. As may be noted, this argument has a lot to do with evolutionary biology (much more to do with evolutionary biology than it does with a great deal of contemporary macro- economics it seems).

So is what we could see a second steady state with a slowly reducing population? Well, not possibly not, since it is not unreasonable also to assume a steady incremental rise in life expectancy. What we could have then is a stationary population with a very slowly rising median age.

There is however one issue left to address if we want to try to think of this evolution in terms of the neoclassical economicgrowth apparatus, and that is what happens to 'effective labour'? (Effective labour is the idea economists use to describe the constant-quality-evaluted measure of our work time). The intuition lying behind this is that time has an arrow, and as the universal clock moves forward we constantly learn to distribute our time more effectively - so an hour in fact isn't an hour an hour after all, it is really (1 + x) hours, where x is some measure of rising human capital qualities.

Now it would be nice to assume, and I reckon it's a reasonably valid assumption, that human capital formation (remember there are stock-flow issues here) could rise just sufficiently to offset any ageing implications. Certainly I think making this assumption helps us set up a nice workhorse baseline model from which to test the what-if type questions.

It is also perhaps worth noting that this approach would make a not inconsiderable difference to how we understand steady-state dynamics in macroeconomics today. If my fundamental intuition is right, there is a steady state end-point, but no country has achieved this yet, indeed we may be the best part of a century away from the first examples. And logically, if we don't have a steady state economy yet, what we have been attempting to describe as if it was is really a transition dynamic.

The so-called steady state growth rate of the US economy over the last 100 years has been something like 2% per annum. Now what part of this growth comes from increased factor inputs (labour and capital) and what from making better use of better quality inputs (productivity) is still a hotly debated issue. But whatever the actual proportions it is abundantly clear that in a more stationary population context only one part of the growth impetus will remain. Just exactly how all this may work itself out is what I am writing the book to explore.

In fact the origins of this work go back to the fact that for the last five years I have been trying to understand the impact of the aforementioned demographic changes on the advanced industrial economies. We are talking here, on the one hand, about Japan and Germany, and on the other about those notorious imbalances between the US and China. This is at the end of the day where all the analysis leads, and this, as well as the big, bigtime divergence with those 18 outliers mentioned at the start of this introduction, is what the so-called "global rebalancing" is all about..

Up to very recently I have been trying to use two very crude measures to try and get a handle on the problem: median age and fertility:

On the linked page there is a list of countries classified according to these two variables, and my feeling is that (with our current human capacities and expectations) an important point in the ageing process is reached when a society crosses the median age of 42 threshold. This is what the recent history of Germany, Japan and now Italy seems to be telling us. In particular the relations between saving, consumption and investment appear to change. More of this much later (in the book itself), all I am trying to do here is give an idea, a flavour, of what lies in store. Part of the point in compiling such a list is to tey to see just what predictive power it actually has. (Italy, it will be recalled, is getting into itself into a lot of economic hot water, 'nicely', right on schedule, just as the theory predicts, now we need to wait and see what happens to the next in line: Finland.)

However since preparing the initial list I have come to the conclusion that a key variable is missing, with median age and fertility there isn't enough, the rate of increase in life expectancy also needs to be there. Again, more on this later. as the book progresses.

This chapter examines the concept of the demographic transition, and looks critically at the idea that before the transition there was a a universal high-fertility, high-mortality regime.

It is argued that the Western European evidence seems consistent with the idea that there was in fact some considerable volatility in both fertility and mortality rates, with changes in fertility outcomes normally being driven by changes in marriage age.

The industrial revolution in the UK actually gained traction during one of these exogenously driven fertility and life expectancy upswings, which provided the contextual background for take-off.

Section One: The Demographic Transition | Read More # (PDF File) | HTML Page

Sectrion Two: Cohort-Based Mortality | Read More # (PDF File) | HTML Page

The chapter focuses on the modern fertility regime, ie the one which sees fertility drop below replacement level, and in some cases to what has been called lowest-low fertility (TFR rates below 1.3) in the developed world . It examines the idea that this constitutes a second demographic transition, looks at the underlying causal explanations offered, and points to the difficulties encountered in estabishing actual underlying fertility levells due to the presence of tempo and quantum effects. There is also an examination of the idea that maintaining stable population levels constitutes some kind of homeostatic process, or is it (following Lutz) a continuous process of fertility decline with TFRs consistently below 1.5 representing some variant of a of 'fertility trap'. Finally the idea that all societies pass though four phases of a demographic transition - as suggested by the Swedish demographer Bo Malmberg - is explored.

Section One: The Scond Stage of the Demographic Transition.
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Section Two: The Postponment in Childbearing
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Section Three: Four Phases of the Demographic Transition
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Population studies and economic theory have had a long and fluctuating history. Views have normally oscillated between, neo-Malthusian, too much population is the problem views, to the opposite pole, a la physiocrat, where population growth is seen as forming part of national wealth, and being part of the pre-requisite for growth. Some of the more recent ideas-driven endogenous growth models would arguably fall into this category. More recently endogenous growth models have tended to fall out of favour, and a more 'neutralist' population attitude has typified most macro-economic thinking.

At the same time one group of economists - the Harvard School (Jeffrey Williamson, David Bloom, David Canning, Mathew Higgins etc) - have persuasively argued that it is not population size which matters for economics, rather it is population structure.

This view has also been taken up by some demographers, most notably the Swedish demographer Bo Malmberg as typiffied by his idea that the demographic transition may be broken down into four phases.

These ideas are explored, as are those of the critics who try to show that simple 'compositional' effects may not reveal the full force of the age-structure impact.

Section One: The Rediscovery | Read More #

Section Two: Growth Tigers and Growth Dividends | Read more #

This chapter follows dircetly from the previous one, and constitutes a general review of the empirical models offered in the 90s to explain the 'growth phenomenon' - principally Barro-type econometric convergence models (searching for the Zs), and Solow derivitive work using the production function framework (the X files).

In so doing the validity of ideas like 'steady state growth', transition dynamics, path dependency, initial conditions etc, are explored in the context of the earlier discussion of the demographic transition and what we now know about this.

Finally the chapter concludes with an exploration of how those attempts to develop a 'unified growth theory' (eg Oded Galor) which are grounded in the transition from a Malthusian to a 'growth' economy stand in the light of what has been said.

Given the central role which the life cycle theory of savings and consumption plays in the general work of the Harvard economists, this chapter carries out a review of the state of play of the Modigliani and Brumberg theory in the light of subsequent research findings. It also examines how the essential idea behind this theory has been deployed in the more recent Overlapping Generations models of life-cycle activity.

One of the principal impacts of are growing awareness of coming demographic changes on economic theory has been the use of large scale multi-country macroeconomic models to explore the international impact of enduring differences in fertility rates across countries. In the forefront of this research have been a group of 'Brookings economists' lead by Ralph Bryant and Warwick McKibbin. This work overlaps with that of a number of IMF staff economists, and in particular that of Hamid Faruqee, as well as work of a network of European researchers coordinated via The European Network of Economic Policy Research Institutes (ENEPRI).

All these models tend to treat the fertility differentials as a consequence of 'shocks' to a common underying 'core economic process'. The validity of this assumption will be explored, togther with a review of some of the key findings which have emerged from the work

We are living longer, and all the evidence seems to suggest that increases in our life expectancy will continue at at least the pace they have advanced during the last 150 years. Possible explanations for this evolution in life expectancy together its possible implications for other areas like fertility and economic growth will be examined.

But will quantity also mean quality? And will the increase in years be also accompanied by an increase in our productive capacity? Evidence to help us try and get to grips with these and other issues which seem to be relatively important for the sustainability of living standards and economic welfare in the developed economies will form the core of this chapter.

Perhaps the most topical theme of debate relating to the global economy at the present time is that of the imbalances in trade, saving and investment which are to be seen across the planet. The existence of this quandry was sharply highlighted when Ben Bernanke - Chairman of the Federal Reserve elect - advanced the hypothesis of the 'global savings glut'.

The best known examples of such imbalances are of course the US current account deficit and the investment share as a proportion of GDP which is currently to be found in China.

But there are other cases. Why, for example, is the UN able to identify 18 demographic outliers whose long term outlook seems to be continually deteriorating, and why is it still possible to talk of divergence bigtime?

Why is the European Growth and Stability Pact so important, why does France seem so much more able to grow than Germany, despite the remarkable efficiency of the individual German enterprise, and why is consumer demand in Japan and Germany so stagnant?

Interestingly, most of the work in the asymmetric shocks tradition tends to predict the evolution of just these imbalances, and here we will look at the validity of these claims in the present contyext.

So we know - more or less - what is happening, but what can we do to lessen the negative impacts? Can we increase fertility in the developed world. Do we want to?

What do we do about the 'other' population problem, the sustained high fertility in some of the demographic outliers, and what can be done to make the 'fertility landing' of these societies a 'soft' rather than a 'hard' one when they finally do gain traction with their demographic transition.

What do we do about retirement and welfare systems in the developed world? Is immigration part of the answer?

These and other pertinent questions will be addressed in this, the final chapter.

Median Age

Median age is the age that divides a population into two numerically equal groups; that is, half the population are younger than this age and half are older. It is a single index that summarizes the age distribution of a population. Currently, median ages range from a low of around 15 in Uganda and the Gaza Strip to 40 or more in several European countries and Japan. See the entry for "Age structure" for the importance of a young versus an older age structure and, by implication, a low versus a higher median age.

CIA World Factbook Median Age 2008

Total Fertility Rate

TFR gives a single manageable figure which gives an indication of the average number of children that would be born per woman if all women lived to the end of their childbearing years and bore children according to a given fertility rate at each age. The total fertility rate (TFR) is a more direct measure of the level of fertility than the crude birth rate, since it refers to births per woman. This indicator shows the potential for population change in the country. A rate of approximately two children per woman (2.1) is considered to be the replacement rate for a population, resulting in relative stability in terms of total numbers. Rates above two children per woman normally indicate populations growing quite rapidly in size and in cases of very high fertility population median age may even be declining (dependenment on movements in life expectancy). Higher rates may also indicate difficulties for families, in some situations, to feed and educate their children and for women to enter the labor force. Rates below two children indicate populations which may at some point begin to decrease in size. Global fertility rates are in general decline and this trend is most pronounced in industrialized countries, especially in Europe and the economically developed parts of Asia, where populations are projected to start to decline, and in some cases substantially so, over the next 50 years.

CIA World Factbook Total Fertility Rate 2008

Life Expectancy At Birth

Life Expectancy at Birth provides a simple estimate of the average number of years anticipated to be lived by a group of people born in the same year, if mortality at each age remains constant in the future. This statistic includes total population but the male and female components are spearately interesting. Life expectancy at birth is also a measure of overall quality of life in a country and summarizes mortality at all ages. It can also be thought of as indicating the potential return on investment in human capital and is necessary for the calculation of various actuarial measures.

CIA World Factbook Life Expectancy 2008

Age Structure

The Age Structure of a Population is quite simply the distribution of that population according to age. This is normally thought about in terms of sex and age group (0-14 years, 15-64 years, 65 years and over). The age structure of a population affects a nation's key socioeconomic indicators. Countries with young populations (high percentage under age 15) need to invest more in schools, while countries with older populations (high percentage ages 65 and over) need to invest more in health care and pensions. Age structure can also be used to some extent as a predictor potential political developments. For example, the rapid growth of a young adult population unable to find employment can lead to more general social unrest.

CIA World Factbook Age Structure 2008