Macroeconomic Review and Outlook: Issue I

Population Growing?  Think again.

A common belief today is that our world is becoming increasingly overpopulated and that the world’s population will become an intensive burden on the human species.  This theory was initiated by Reverend Thomas Malthus in An Essay on the Principle of Population, first published in 1798.  Malthusian theory is essentially an exponential growth model based on a constant rate of compound interest (growth) applied to the world’s population.  The primary issue at stake was not whether the population would grow exponentially, but that the food supply was growing at a constant, linear rate.  Using simple mathematics, it can be seen that if the population in fact grew exponentially while food supply grew linearly, there would eventually be a food shortage.

The Malthusian model seems to have held true from antiquity to about 1950, at which time population trends started to change.  Since then, population growth has slowed due to dropping fertility rates.  In order for a population to naturally replace each individual, a fertility rate of 2.1 births per woman must be achieved.  Clearly, a couple must have two babies to replace the members of the couple, and the 0.1 accounts for babies that experience infertility, early death, or choose to not have children of their own.  (Lomborg)

Examining the trends in fertility rates over the last 50 years leads one to the conclusion that the rates drop as a nation becomes more developed.  It is theorized that this is because of the rise in costs of childcare while the economic benefits of raising children falls.  We no longer need to raise 5 children in order for 3 to survive long enough to care for ourselves when we are no longer physically independent.  Families tend to do a cost-benefit analysis (consciously or subconsciously) and determine that 1-2 children is the most beneficial.  As a result, it is reasonable to expect that fertility rates will continue to drop on a worldwide level as the underdeveloped nations become more developed (a trend that is, in fact, occurring). (Lomborg)

All in all, if the current trend holds true, the UN estimates that the world population will stabilize around 9 billion people in 2050 (while continuing to grow at a very slow pace).  If the rate of decline in fertility increases, the world’s population will peak at about 7 billion in 2050 and then begin declining.  Essentially, this all means that our frequent belief that the world is becoming overpopulated is untrue and the Malthusian theory does not hold true.

Europe currently holds many of the world’s lowest fertility rates (not surprising, given our earlier discussion of the relationship between fertility rates and economic development).  According to the CIA, Spain and Italy have a fertility rate of 1.28 births per woman, Greece 1.34, Germany 1.39, Switzerland and the United Kingdom 1.66 and the European Union as a whole is at 1.47.  With less children being born and longer life expectancies, it is a very real concern that the region will be relying on fewer and fewer workers to support the elderly.

In fact, the population aged 15-64 in Europe is expected to decline to 375 million from about 500 million by 2050 while the population over 65 will increase from 115 million to 180 million.  Furthermore, the population over 80 will increase from 25 million to 62 million!  Illustrated another way, the median age of European residents will rise from 39 years old today to 47 in 2050. (UN Database)

This change in population makeup will have serious consequences.  Specifically, two possible scenarios can be foreseen:

1)Tax rates across Europe will have to rise significantly to cover the rising costs of providing healthcare and pensions to the elderly; or,

2)Benefits provided to the elderly will have to fall, causing families to have a higher expense to care for their own relatives.

In the next issue of Macroeconomic Review and Outlook (next week), we will look in detail at both of these scenarios and possible investment strategies to deal with them.

Sources:

Recommended Reading:


Posted

in

by

Tags: