Does Economic Growth Require a Growing Population?

World Population 1800-2100

World Population 1800-2100 showing alternative growth projections

The UK’s Royal Society has just announced a major new research project on the implications of population growth. The study is to be headed by the Nobel Laureate, Sir John Sulston. As the RI points out populations studies is quite a cyclical area of research. The '60s and '70s were a boom time for the field with less focus being given the the subject in the '80s and '90s. The fact that the topic is moving back up the political agenda probably has much to do with the intersection of population on two key policy issues; economic growth and climate change.

The political debate about population growth has being going on for nearly three hundred years. Thomas Malthus, seen as the father of demography, clearly held the view that exponential population growth would outstrip improvements in agricultural production, condemning economies to a permanent state of subsistence. Adam Smith on the other hand believed that economic growth and improvements in people’s socioeconomic circumstances would reduce fertility rates over time.

World Population Growth Rate

World Population Growth Rate Over Time

There’s a prima facie case supporting Smith’s assertions. The fertility rate of many of the world’s most developed economies (Much of Europe, UK, Japan etc. but notably not the United States due in large part to the impacts of immigration) has tumbled over the last forty years. That decline has mirrored a period of massive economic growth and rising living standards in these countries. The 'Baby boom' has become the 'Baby bust' with very significant implications for affected geographies. As the demographic mix inverts there are fewer and fewer younger workers able to carry the social cost of the rising number of elderly in the population.

Interestingly, even though the total global population is still growing the rate of growth has in decline since the mid-sixties. There is a diversity of research which shows that fertility rate has an inverse relationship with factors like educational level (Particularly in Women) and income level. If the RI study is to be useful in guiding policy makers then it needs to deliver some definitive research on which factors really do impact fertility rates, and in what manner.

There is a perspective (One I do not subscribe to) that a growing global population is required to sustain the needed levels of economic growth. The argument is put forward that continued growth in the production of manufactured goods will require and expanding workforce to make those goods. This gets to the heart of one of my personal interests regarding the impact of technology on economic growth. I would argue that the opposite scenario is more likely i.e. that even an increasing supply of manufactured goods will requires less, not more workers over time.

The number of workers now employed in building cars in the most advanced and automated factories today is diminishingly small compared to just thirty years ago. With continued advances in robotics, process control technology and information systems this trend is likely to continue. Fifty years from now its likely that many factories will ingest raw materials at one end and spit out finished good at the other with very few human workers required in-between.

To date this trend has been countered by the relative ease with which manufacturing facilities can be trans-located into low wage economies. However, the very act of introducing manufacturing into low wage economies has the effect of raising living standards and worker expectations which in turn leads to demands to higher wages. When combined with worker shortages this can place a significant upward pressure on wages undermining the location’s original cost advantage. China is now witnessing this phenomenon with many manufacturers now looking to move to other lower wage cost East Asian economies. In my view this will over time lead to a leveling of the global wage cost 'Playing field'. As we reach that point the pressure to innovate in manufacturing automation will become extreme because that will be the only way to avoid being caught between the 'Pin factory' and the 'Invisible hand'. As global manufacturing competition shifts from trying to find the lowest wage economy to finding the cheapest way to manufacture through automation we will see a dramatic reduction in the global manufacturing work force.

The challenges with this scenario are daunting. If there is truly a correlation between rising income levels and declining fertility rates then a long period of technology lead efficiency improvements in manufacturing and its concomitant positive impact on economic output should correlate with a continued slowing of the global population growth rate. If the point is reached where global population growth rate becomes negative then you enter into the potentially 'Utopian' situation where a smaller and smaller global population shares an ever growing economic pie. Alternatively, if the global manufacturing work force continues to shrink due to automation while the population continues to grow and those lost manufacturing jobs can not be more than offset by growth in services sector employment then you have a political time-bomb on your hands.

I seriously hope the RI study will look at the the correlation of population dynamics and economic growth and will factor in the role that technology will play on both sides of the equation. The likely impact of climate change on these issues I will leave for another post.

3 responses

  1. Jonathan, are you aware of any research that approaches this purely from the view of the growth and sustainability of a domestic market?

    While it is hard to disagree with your points around technology driving up efficiency and productivity I do think population has an impact on how functional a countries domestic market can be, and that the domestic market is a platform that enables a country to be effective globally.

    To my mind it matters in three areas;

    1. A dense population brings diversity with it, and in turn a stronger domestic market. If you were to open «Off The Wall Co.» in a high population US coastal city there is a good chance that you will have enough off the wall individuals locally to buy whatever wacky products you are making and selling. Open that same business in rural New Zealand and it has a high (probably 100%) chance of failure. Businesses generally start by delivering to their domestic market, then once that is stabilized have the option to add export revenue.

    2. At the low end of population size you need enough people to build a diverse set of businesses in a national economy that can then be used as a foundation for growth. For any industry to grow and deliver high impact growth it needs a broad array of infrastructural services in place before it will succeed. Again, that takes people.

    3. To grow you need to be able to compete, and that often takes people with specific skills. A case in point would be New Zealand’s (again) ICT industry. The country exhibits an amazing level of innovation in the ICT area but is running on a base of about 10,000 software developers, which often makes it hard for companies to execute on the vision that their innovation brings.

    I have a view that the answer has upper and lower boundaries rather than a single binary answer. Below a certain threshold you can’t sustain a robust domestic market that is needed as a platform for growth, and above another threshold it becomes more effective to look for productivity and efficiency growth through an increased use of technology.

    The answer is unlikely to be a perfect country or population size, but rather an array of dependent percentages that connect the population needed to build a strong infrastructure with the innovative growth industries and other economic opportunities, all balanced against what it will take for those growth industries to be competitive in a global market.

    • Oliver,

      You raise very good points and indeed there are good historic examples of how national population size affects the dynamics of markets. However, those examples illustrate both the benefits and perils of having a large domestic market which can support the growth of innovative new products and services. As my political economy friends keep reminding me. Cultural, history, institutions and governance models all play a critical role in determining the trajectory of technological innovation. I also believe it makes a difference if it is a product or a service you are bringing to market and finally whether the market you are entering has established global standards or not.

      By rights Japan should have emerged as the dominant global player in mobile telephony. The size of the Japanese market and the tight coupling between the policy making machinery and Japanese industry gave them a head start. The Japanese introduced the first commercial cellular network in the world in 1979. Functionally their handsets were streets ahead of anything else available. Why did all those early advantages not translate into a dominant global position? The simple answer is standards. In this case having a large local market was a negative it lead the Japanese to define a unique set of local standards in isolation to the rest of the world. By the time mobile providers needed to start thinking about expanding outside of Japan the international standards playing field had been set and they were shut out.

      The counter point is what happened in Europe at the same time. The first analogue network in Europe was the Nordic Mobile Network launched in 1981 which was a joint project between Norway, Sweden, Denmark and Finland; all tiny countries compared with Japan. Their individual size meant that the capital investment requirements could only be sustained if the project was implemented regionally. Defining standards across multiple countries rather then within a single country leads you down a different path. Out of that came the GSM standard which was promoted by the European Commission as a pan-European and eventually global standard. That created a huge international market upon which company’s like Nokia, Ericsson and Siemens could build multi-billion dollar businesses. In this case I would argue that the small size of the Nordic country populations was an advantage, forcing industry and policy makers to think internationally from the start.

      China is already starting to define its own 'Local' standards in some markets. If you want to sell WiFi gear in China you now have to implement China’s own WAPI security standard. It remains to be seen how successful that strategy will be in markets where there are existing mature global standards already defined. However, the Chinese market is so huge that international technology companies will probably do everything possible to avoid being shut out. What will be really interesting is what happens in new markets where global standards have not yet been set. It is likely in my view that China will become a very influential player in these emerging markets with Chinese policy pushing for the adoption of home grown standards which advantage Chinese suppliers.

      Its interesting to reflect on the fact that the emergence of England as a global empire power was catalyzed by the fact that it was a 'Small' country. The physical size of the country and small size of the domestic market forced England’s proto-industrialists to look internationally for both access to raw materials and for new markets for their finished goods.

      It is my personal opinion, and I think history supports this, that having a small population can often be turned to advantage. The necessity of looking outwards often creates an urgency to innovate in order to compete with larger geographies. Singapore, Korea and Taiwan are excellent examples of that dynamic at play in the latter half of the 20th century.

      Thanks again for the thoughtful comments.

      Jonathan

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