A NEW CHALLENGE FACES THE WORLD. It is not a problem that can be photographed, reduced to a sound bite, or rendered into the conventional formulations of Left and Right. It has everything to do with sex, death, money, and power, yet is rarely the subject of a headline. Rather, its reality dwells beneath the surface of everyday events, in the realm of what historian Arnold Toynbee once called the "deeper, slower movements that, in the end, make history." The trend, if properly managed, presents many positive opportunities for mankind, but also poses deep risks to the world's standard of living and geo-political order.
In 2003, the number of human beings on Earth increased by roughly 75 million. Thus it is hardly surprising that the prospect of over-population continues to cause widespread alarm around the globe. Yet a closer look at demographic trends shows world population growth has already slowed dramatically over the last generation and is headed on a course for absolute decline. Indeed, forecasts by the United Nations and others show world population growth could well turn negative during the lifetime of people now in their forties and fifties, and is very likely to do so before today's children reach retirement age. Long before then, many nations will shrink in absolute size, and the average age of the world's citizens will shoot up dramatically, as the elderly in many parts of the world become far more numerous than children.
These predictions come with considerable certainty. The primary reason is the unprecedented fall in fertility rates over the last generation that is now spreading to every corner of the globe. In both hemispheres, in nations rich and poor, in Christian, Taoist, Confucian, Hindu, and especially Islamic countries, one broad social trend holds constant at the beginning of the twenty-first century: As more and more of the world's population moves to crowded urban areas, and as the economy demands more and more education from men and women alike, people are producing fewer and fewer children.
Today, global fertility rates are half what they were in 1972. No industrialized nation still produces enough children to sustain its population over time, or to prevent rapid population aging. Germany could easily lose the equivalent of the current population of East Germany over the next half-century. Russia's population is already contracting by three-quarters of a million a year. Japan's population meanwhile is expected to fall by as much as one-third -- a decline equivalent, the demographer Hideo Ibe once noted, to that experienced in medieval Europe during the scourges of the plague.
Yet the steepest drops in fertility, and the most rapid rates of population aging, are now occurring in the developing world, where many nations are now growing old before they reach economic prosperity. Today, when Americans think of Mexico, for example, they think of televised images of desperate, unemployed youths swimming the Rio Grande or slipping through border fences. Yet because Mexican fertility rates have dropped so dramatically, Mexico will not only be a less youthful country than the United States by mid-century, its population will be older than Japan's is today. The same is true for much of the rest of Latin America, according to UN projections.
Similarly, those televised images of desperate, unemployed youth broadcast from the Middle East create a misleading impression. Fertility rates are falling faster in the Middle East than anywhere else on earth, and as a result, the region's population is aging at an unprecedented rate. It took the United States 50 years to go from a median age of 30 to today's 35. By contrast, during the first fifty years of the twenty-first century, Algeria will increase its median age from 21.7 to 40, according to UN projections.
China's low fertility, brought on in part by its one-family/one-child policy, has put the country on a course in which by 2020 its labor supply will be shrinking and its median age will be far older than that of the United States. By mid-century, China could easily be losing 20 to 30 percent of its population per generation.
India's fertility rate has dropped by roughly a fifth since the first half of the 1990s. Already, residents of the major southern provinces Kerala and Tamil Nadu produce too few children to replace themselves, as will be true for Indians as a whole by the end of the next decade if current trends continue. Meanwhile, the country's sudden drop in fertility means that its population will be aging three times faster than will the U.S. population over the next half century. By 2050, the median age in India is expected to be 37.9, making its population older than that of the United States today.
All told, some 59 countries, comprising roughly 44 percent of the world's total population, are currently not producing enough children to avoid population decline, and the phenomenon continues to spread. By 2050, according to the latest United Nations projections, 75 percent of all countries in even under-developed regions will be reproducing at below replacement levels.
How will the global economy and balance of power evolve, given current trends in fertility and population aging? Let us begin with the positive possibilities.
SLOWER WORLD POPULATION GROWTH offers many benefits, some of which have already been realized. Many economists believe, for example, that falling birthrates made possible the great economic boom that occurred first in Japan, and then in many other Asian nations beginning in the 1960s. As the relative number of children declined, so did the burden of their dependency, thereby freeing up more resources for investment and adult consumption. In East Asia, the working-aged population grew nearly four times faster than its dependent population between 1965 and 1990, freeing up a huge reserve of female labor and other social resources that would otherwise have been committed to raising up children. Today, China's rapid industrialization is aided by a dramatic decline in the share of dependent children in the population.
Over the next decade the Middle East could benefit from a similar "demographic dividend." In every single country of the Middle East, birth rates fell during the 1990s, often dramatically. The resulting "middle aging" of the Middle East will ease the overall dependency ratio over the next 10 to 20 years, thereby freeing up more resources for infrastructure and industrial development. As young adults account for a declining share of the population, the appeal of radicalism may also diminish, as Middle Eastern societies become increasingly dominated by middle-aged people concerned with such practical issues as health care and retirement savings. Because of population momentum from the past, there will still be considerable strains on water and other natural resources in the region, but much less than if the rate of population growth was not declining.
Yet even if declining fertility rates can bring a "demographic dividend," that dividend eventually has to be repaid. At first there are fewer children to feed, clothe, and educate, leaving more for adults to enjoy. But soon enough, if fertility continues to remain below replacement levels, there are fewer productive workers as well, while there are also more and more dependent elderly, who each consume far more resources than children do. Even after considering the cost of education, a typical child in the United States consumes 28 percent less than the typical working age adult, while elders consume 27 percent more, mostly in health-related expenses. Persons 65 and over receive 11 times more in federal spending per person than do children under age 18.
Largely because of this imbalance, population aging puts severe strains on government budgets. In Germany, for example, public spending on pensions, even after accounting for a reduction in future benefits written into current law, is expected to swell from an already staggering 10.3 percent of GDP to 15.4 by 2040 -- even as the number of workers available to support each retiree shrinks from 2.6 to 1.4. Meanwhile, the cost of government health-care benefits for the elderly is expected to rise from today's 3.8 percent of GDP to 8.4 percent by 2040.
Theoretically, raising the retirement age could help to ease the burden of unfunded old age benefits, but declining fitness among the general population places severe obstacles to more productive aging. The dramatic increases in obesity and sedentary lifestyles so evident in the United States today, for example, are now spreading to many other nations, and are likely to overwhelm any public health benefits achieved through medical technology. According to the International Association for the Study of Obesity, an "alarming rise in obesity presents a pan-European epidemic." A full 35 percent of Italian children are overweight. In the case of European men, the percentage who are overweight or obese ranges from over 40 percent in France to 70 percent in Germany. Meanwhile, as Western lifestyles spread throughout the developing world so do Western ways of dying. According to the World Health Organization, half of all deaths in places such as Mexico, China, and the Middle East are now caused by non-communicable diseases related to Western lifestyle, such as cancers and heart attacks induced by smoking and obesity.
POPULATION AGING AND DECLINE also present severe challenges to the global economy. One reason is that population growth is a major source of economic growth. More people create more demand for the products capitalists sell, and more supply of the labor capitalists buy. Economists may be able to construct models of how economies could grow amidst a shrinking population, but in the real world it has never happened.
New businesses flock to areas where the population is increasing, such as the Sun Belt, and avoid or leave areas where population is falling. Across the Great Plains of the United States, for example, where fewer people now live than in the 1920s, thousands of small towns are caught in a vicious cycle of depopulation, as younger workers and local business flee in search of economic opportunity, leaving behind shuttered storefronts, empty schools, and understaffed nursing homes. Drought and falling commodity prices may in this instance have set the cycle in motion, but once depopulation begins, new investment soon vanishes. Indeed, capitalism has never flourished except when accompanied by population growth, and is now languishing in those parts of the world (Japan, Europe, the Great Plains of the United States), where population has become stagnant.
A nation's gross domestic product (GDP) is literally the sum of its labor force times average output per worker. Thus, a decline in the number of workers implies a decline in an economy's growth potential. When the size of the workforce is falling, economic growth occurs, if at all, only through compensating increases in productivity. The European Commission, for example, projects that Europe's potential economic growth rate over the next 50 years will fall by 40 percent due to the shrinking size of the European work force. Italy expects its working-age populations to plunge by 41 percent by 2050, meaning that output per worker will have to increase by at least that amount just to keep Italy's rate of economic growth from falling below zero. With a shrinking labor supply, Europe's future economic growth will depend entirely on getting more out of each remaining worker (many of them unskilled, recently arrived immigrants) even as it has to tax workers at higher and higher rates to pay for old age pensions and health care.
Meanwhile, abundant evidence also suggests that these very population trends work to depress the rate of technological and organizational innovation. Cross-country comparisons imply, for example, that after the proportion of elders increases in a society beyond a certain point, the level of entrepreneurship and inventiveness decreases. In 2002, Babson College and the London School of Business released their latest index of entrepreneurial activity by country. It shows that there is a distinct correlation between countries with a high ratio of workers-to-retirees and countries with a high degree of entrepreneurship, and that conversely, in countries in which a large share of the population is retired, the amount of new business formation is low. So, for example, among the most entrepreneurial countries on earth are India and China, where (at least for now) there are roughly five people of working age for every person of retirement age. Meanwhile, Japan and France are among the least entrepreneurial countries on earth and have among the lowest ratio of workers-to-retirees.
There are many possible reasons for this correlation. One, of course, may be that aging workers and investors tend to be less flexible and more risk averse. Both common sense and a vast literature in finance and psychology support the claim that as we approach retirement age, we become more reluctant to take risks with our careers and nest eggs. It is not surprising, therefore, that aging countries such as Japan, Italy, and France are marked by exceptionally low rates of job turnover, and by exceptionally conservative use of capital.
Because prudence required that older investors take less risks with their investments, we can also expect that as populations age, investor preference will shift toward safe bonds and bank deposits and away from speculative stocks and venture funds. As populations age further, we can expect an ever-higher share of citizens to be cashing out their investments and spending down their savings. Neither of these trends is consistent with a future marked by high levels of high-risk investment in new technology. Instead, many observers believe that population aging will eventually cause steep and destabilizing drops in stock and real estate prices.
Also to be considered are the huge public deficits projected to be run by major industrialized countries over the next several decades. Because of the mounting costs of pensions and health care, government-financed research and development expenditures as well as educational spending will likely be under increasing budgetary pressure. Moreover, massive government borrowing could easily crowd out financial capital that would otherwise be available to the private sector for investment in new technology. Even after assuming a rebound in fertility rate levels, a massive increase in the percentage of women in the labor force, and large cuts in future pension benefits, the European Commission recently calculated that population aging in Europe will lead to an increase in public spending of between 3 and 7 percentage points of GDP in most member states by 2050. To finance the cost of aging, Germany would have to increase its public indebtedness by as much as 384 percent while the French national debt would rise to more than three times the country's entire annual economic output. Population aging gives Japan an even gloomier long-term financial outlook.
Theoretically, a highly efficient, global financial market could lend financial resources from rich, old countries that are short on labor, to young, poor countries that are short on capital, and make the whole world better off. But for this to happen, old countries would have to contain their deficits, while also investing their savings in places that are themselves either on the threshold of hyper-aging (China, India, Mexico) or highly destabilized by religious fanaticism, disease, and war (most of the Middle East, Sub-Saharan Africa, Indonesia), or both.
Moreover, who exactly, under this scenario would buy the products produced by these investments? Japan, Korea, and the other recently industrialized countries relied on massive exports to the United States and Europe to develop. But if the population of Europe and Japan is falling away, while the only population growth in the United States comes from old people, where will the demand come from to support development in places like the Middle East and sub-Saharan Africa?
Population aging is also likely to depress economic activity by creating huge legacy costs for employers. This is particularly true in the United States, where health and pension benefits are largely provided by the private sector. General Motors (GM) now has 2.5 retirees on its pension rolls for every active worker, and an unfunded pension debt of $19.2 billion. Honoring its legacy costs to retirees now adds $1,800 to the cost of every vehicle GM makes, according to a 2003 estimate by Morgan Stanley. Just between 2001 and 2002, the U.S. government's projected short-term liability for bailing out failing private pension plans increased from $11 billion to $35 billion, with huge defaults expected from the steel industry.
An aging workforce may also be less able or inclined to take advantage of new technology. This seems to be part of what is behind Japan's declining rates of productivity growth in the 1990s. Before that decade, the aging of Japan's highly educated work force was a weak, but positive force in increasing the nation's productivity, according to studies. Older workers "learned by doing," developed specialized knowledge and craft skills, as well as the famous company spirit that made Japan an unrivaled manufacturing power. But by the 1990s, the continued aging of Japan's workforce contributed to Japan's declining competitiveness.
No longer did the Japanese firms with the oldest workforces show the strongest rates of productivity growth; instead they showed the weakest. Japan was able to use information technology to compensate for its vanishing supply of low-skilled, younger workers, but did not succeed in using information technology to boost the productivity of its highly skilled older workers. Yoshiaki Nakamura of the University of Tokyo and other economists have found that during the 1990s, Japanese firms reached the limits of what productivity increases could be achieved by deepening the skills and experience of Japan's manufacturing workers, who were essentially hardworking, but aging craftsmen. Aging went from having a mildly positive to a negative effect on productivity growth that technology could not overcome.
Population aging works against innovation in another way as well. As growth in population dwindles, so does the need to increase the supply of just about everything, save health care. That means there is less incentive to find ways to making a gallon of gas go farther, or of increasing the capacity of existing infrastructure. Population growth is the mother of necessity. Without it, why bother to innovate when you could be contentedly enjoying an ample supply of affordable houses, open roads, and comparatively abundant natural resources? An aging society may have an urgent need to gain more output from each remaining worker, but without growing markets, individual firms have little incentive to learn how to do more with less -- and with a dwindling supply of human capital, they have fewer ideas to draw on.
IMMIGRATION IS AT BEST only a partial solution. To be sure, the United States and other developed nations derive many benefits from their imported human capital. Yet immigration does less than one might think to ease the challenges of population aging. One reason is that most immigrants arrive not as babies, but with a third or so of their lives already behind them, and then go on to become elderly themselves. In the short term, immigrants can help to increase the ratio of workers to retirees, but in the long term they add much less youth to the population than would newborn children.
Indeed, according to a study by the United Nations Population Division, in order to maintain the current ratio of workers to retirees in the United States over time, it would be necessary to absorb an average of 10.8 million immigrants annually through 2050. At that point, the U.S. population would be 1.1 billion, 73 percent of whom would be immigrants who had arrived in this country since 1995 or their descendents. Just housing such a flow would require the equivalent of building another New York City every 10 months.
Meanwhile, it is unclear how long the United States and other developed nations can sustain even current rates of immigration. One reason, of course, is the heightened security concerns about terrorism. Another is the prospect of a cultural backlash against immigrants, the chances of which increase as native birthrates decline. In the 1920s, when widespread apprehension about declining native fertility found voice in books like Lothrop Stoddard's, The Rising Tide of Color Against White World-Supremacy, the American political system responded by shutting off immigration. Germany, Sweden, and France did the same in the 1970s as the reality of population decline among the native born started to set in.
Another constraint on immigration to the United States involves supply. Birth rates, having already fallen well below replacement levels in Europe and Asia, are now plummeting throughout Latin America as well, creating the prospect that America's last major source of imported manpower will offer a declining pool of applicants. The fall in Mexican fertility rates has been so dramatic that the country is now aging at a far more rapid pace than the United States, and is destined to do so for at least the next two generations. According to UN projections, the median age of Americans will increase by four and a half years during the first half of the twenty-first century, reaching 39.7 years by 2050. By contrast, during the same period Mexico's median age will increase 20 years, leaving half the population over age 42. Put another way, during the course of a year, the U.S. population as a whole ages by little more than one month, while the Mexican population ages by nearly five months. Notes Enrique Quintana, co-author of a book on Mexico's aging population, "Picture a scenario in which almost 23 million people are over the age of 60, most of them have few descendents and many of them scant savings, no job, no retirement coverage scheme. The results can hardly be described as anything but catastrophic."
Long before Mexico reaches this point, the supply of Mexicans available to work in the United States could easily evaporate, as the example of Puerto Rico shows. When most Americans think of Puerto Rico, they think of a sunny, over-crowded island that sends millions of immigrants to the West Side of New York or to Florida. Yet with a fertility rate well below replacement level and a median age of 31.8 years, Puerto Rico no longer provides a net flow of immigrants to the mainland, despite an open border and a lower standard of living.
Sub-Saharan Africa still produces many potential immigrants to the United States, as does the Middle East and parts of South Asia. But to attract immigrants from these regions, the U.S. must compete with Europe, which is closer geographically and has a more acute need for imported labor. Europe also offers higher wages for unskilled work, more generous social benefits, as well as large, already established populations of immigrants from these areas.
Moreover, it is by no means clear how many potential immigrants these regions will produce in the future. Birthrates are falling in sub-Saharan Africa as well, even as war and disease leave mortality rates extraordinarily high. UN projections for the continent as a whole show fertility declining to 2.4 children per woman by mid-century, which may well be below replacement levels if mortality does not dramatically improve. Although the course of the HIV/AIDS epidemic through Sub-Saharan Africa remains uncertain, the Central Intelligence Agency projects that AIDS and related diseases could kill as many as a quarter of the region's inhabitants by 2010.
GLOBAL AGING IS A SLOW moving phenomenon. The long-term deficits and unfunded liabilities it creates are more akin to termites in the basement than to a wolf at the door. Yet it is also true that any solutions to the challenges presented by global aging will take decades to achieve, and must therefore be initiated in short order.
For example, the single greatest requirement of an aging society is sustained improvement in productivity. Yet the productive potential of workers 30 or 40 years from now depends critically on the health and education of today's children. We cannot expect, for example, that today's 10-year-olds will grow up to be far more productive workers than today's 50-year-olds ever were, or that they will be able to work for a far greater share of their lives, unless we quickly address problems like the rising incidence of childhood obesity and childhood poverty.
Sustaining future productivity growth also requires many other short-term trade offs. In general, for example, protecting jobs in declining industries entails a long-term loss of productive potential. So does running up large public deficits to underwrite current consumption. Similarly, the longer the United States waits to reform its Social Security and Medicare systems, the more the deficits in those systems will crowd out more productive uses of the nation's resources.
Fortunately, for the United States at least, the cost of aging may be offset in part by an ability to reduce its enormous military budget without any compromise of national security. China, for example, may emerge as a formidable economic competitor, but its ability to expand its territory will diminish as its supply of youth dwindles and the cost of its elders soars. By 2030 more than 23 percent of China's population will be 60 or over -- a higher share than seen in Japan today. Just as Japan now lacks the human resources to invade any of its neighbors, or even to maintain a large standing army, China in the next generation will likely turn away from militarism. Instead, it will become even more preoccupied with pampering its few children and with a quest for meaning and community as more and more individuals find themselves aging without the support and comfort of large kinship networks.
Similarly, the "youth bulges" in the Middle East will likely prove to be transient phenomena that do not require an ongoing military response. Just as population aging in the West during the 1980s was accompanied by the disappearance of youthful indigenous terrorist groups like the Red Brigades or the Weather Underground, falling birth rates in the Middle East could well produce societies far less prone to radicalism and political violence. Scanning the future, one can imagine population aging leading to political and economic turmoil of the kind recently seen in Argentina, as citizens revolt against cuts in benefits and other austerity programs. But revolts led by outraged pensioners and laid-off middle-aged workers over changes in domestic policy, while perhaps capable of producing failed states, are not nihilistic by nature.
Yet while global aging will likely diminish straightforward military threats to the United States, the phenomenon creates new and more baffling challenges. Clearly, there is no law of nature that ensures human beings will reproduce themselves. It is in precisely those areas of the world where life is most safe and prosperous that children are scarcest. When the economic and social incentives to procreate and raise families are weak or negative, as they increasingly are in most nations, and when people know how to achieve sexual gratification without producing children, avoiding extreme population aging and decline may require enormously increased incentives to parents, or else a radical shift in values away from individualism. If free and liberal societies do not discover equalitarian means to raise their fertility rates to replacement levels, then the future belongs to societies that use more coercive measures, such as reduced freedom for women, or eugenics programs. Global aging puts much more at stake than simply the sustainability of today's health and pension plans.
In his 1968 bestseller, The Population Bomb, Paul R. Ehrlich warned: "The battle to feed all of humanity is over. In the 1970s the world will undergo famines -- hundreds of millions of people are going to starve to death in spite of any crash programs embarked upon now." Fortunately, Ehrlich's prediction proved wrong. But having averted the specter of over-population, the world now faces the unexpected challenge of population aging and decline. We are in many ways blessed to have this problem instead of its opposite, but a problem it still is.