Fourth Quarter 2008
Important socio-economic predictions are based on demographics. For example, virtually all of the people who will retire in 2058 are living today and retirement age, immigration and mortality trends are utilized to create assumptions that will be used to predict the number of future retirees. The labor force of 2028 and the military age population of 2025 are similarly predictable. These factors are major drivers of government burdens, GDP growth and military potential. Demographics indicate that the world is unlikely to age gracefully.
World Demographic Trends
Richard Jackson and Neil Howe’s The Graying of the Great Powers provides an excellent summary of current demographic trends. Its authors conclude that, "The world is entering a demographic transformation of unprecedented dimensions…a fundamental demographic shift with no parallel in the history of humanity.… There is almost no chance that it will not happen—or that it will be reversed in our lifetime." 1
The world’s current great powers 2 are aging at remarkably divergent rates. The United States is barely aging and has a fertility rate of 2.0 to 2.1 births per woman during child-bearing years, very near long-term zero population growth. This country is one of the youngest developed nations, and the age gap between the United States and other developed countries is projected to widen. “By the mid-2020’s, the United States will be the only major developed country with more children under age 20 than elderly over age 65—and the only one whose working-age population will still be growing,” write Jackson and Howe. The U.S. work force is projected to grow 14% between 2005 and 2030.3
Russian fertility rates plunged through the 1980s and rest today at 1.2 to 1.3 births. Risky lifestyles and a poor health care system have caused mortality rates to soar. Life expectancy for a Russian male has dropped to 59 years, lower than that of Bangladeshi males! Russia’s working age population (those aged 20 to 64) will plunge 17% from 2005 to 2030.4 Prime Minister Vladimir Putin termed Russia’s lack of births as "the most acute problem facing our country today." 5
Jackson and Howe note that Japan is ground zero for demographic aging. Like Russia, its fertility rate has fallen to an average of 1.3 children per woman. In 1980, Japan was the youngest developed country, with only 9% of its population over age 65. By 2005, its elderly (those aged 65 and over) accounted for 20% of its population, making it one of the oldest developed countries. Japan’s working-age population started shrinking in 2000 and from 2005 to 2030 it is expected to drop 18%.6
China’s one-child policy collapsed fertility rates, which have since rebounded to 1.7 to 1.8. But China’s pre-one-child-policy population bulge is aging rapidly. China’s working age population will fall after 2015 and China’s ratio of workers to retirees will triple from 2005 to 2030. The Chinese have relied on family rather than the government for old age support and, with shrunken families, China by 2030 could have over 100 million indigent seniors. The Asian Tigers’ fertility rates range from 0.9 to 1.4, and the Tigers also are rapidly aging.7,8
There are two demographic categories of Western European countries: those with likely slow population declines and those with likely fast population drops. Slow decliners have fertility rates of around 1.8 and include the United Kingdom, France and northern Europe, except Germany. Fast decliners have fertility rates of 1.3 and include Germany and southern Europe. The working age population of Europe is projected to shrink 6% by 2030. Public pensions already cost Europe twice the percentage of GDP as compared to the United States, and will get worse. Europe’s elderly will account for over 25% of its population in 2030, up from 17% in 2005.9
The image of rapidly growing populations all over the developing world is outdated. Only a few areas of the world, including sub-Saharan Africa and some Muslim countries (Iraq, Yemen, Somalia, Sudan, Afghanistan and Pakistan) have fertility rates of 4.0 or higher. Fertility has trended down in most other developing countries. In non-Muslim South Asia, including India, fertility has fallen to about 3.0. Latin America fertility has dropped to 2.5 from 6.0 in the 1960s. Turkey and Iran have current fertility rates around 2.1. However, many developing countries have high percentages of women in childbearing ages, so despite declining fertility rates, their absolute numbers of youths and working age populations will grow rapidly for several decades.10
Immigration will impact the numbers in the United States and Europe. Migration is at or near records in many countries. Some 13% of the U.S. population consists of immigrants, as does 8% to 13% of France, the United Kingdom and Germany. Hispanics are the primary immigrants into the United States; most are employed and data indicates that second generation Hispanics have higher incomes than their parents. That in turn suggests higher productivity and some degree of assimilation. Muslims are the primary immigrants in many European countries; their unemployment rates are high and most of their second generation seems to be making little economic progress; many are not assimilating. This suggests future productivity problems in much of Europe, and possibly diverging national interests.11
Jackson and Howe cite numerous geopolitical implications from demographic changes. Within the developed world, only the United States will likely have the capacity to remain a great power. It was the third most populous country in the world in 1950 and is forecasted to remain so in 2050. Germany, the United Kingdom, Italy and France had populations among the top dozen countries in the world in 1950, but of them, Germany will be the leader at 26th in 2050. Western Europe and Japan will be aged and Western Europe especially will have huge public pension costs. While the United States and Western Europe each accounted for 37% of the developed world’s economy in the 1980s, the U.S. will likely grow to 54% and Western Europe is projected to shrink to 23% by 2050.12 The United States’ increasing relative strength will likely mean that it will need to provide for an even greater proportion of the developed world’s security.
Though the U.S. share of the developed world’s population and economy will rise, its share of the total world’s population and economy will fall. Howe and Jackson note that 90% of the world’s population growth to 2050 will occur in sub-Saharan Africa, Muslim countries and South Asia, in nations largely troubled by poverty, religious conflict or both.13
Due to the characteristics of population segments, security risks are likely to rise and peak in the 2020s. This will come at a time when most of the historically great powers are likely to have military recruiting challenges along with budget problems. Jackson and Howe also worry about the effects of aging on savings rates and creativity. In a book by Mark Steyn titled America Alone,14 the author writes that the United States should do a better job exporting its values of liberty, women’s rights, freedom of speech, self reliance, decentralization and responsibility. He believes this is one way the U.S. influence can make a positive impact.
Investment Implications
Change creates investment risks and opportunities. Recognizing these powerful trends and understanding when they are likely to occur could mitigate the risks and result in profitable investments.
Studies indicate that an individual’s creativity, as measured by works of art, peaks between the ages of 30 and 50 and that Nobel achievements peak when people are in their 30s.15 An aging worldwide population may make innovation more scarce and consequently more highly rewarded. Innovative companies may become less subject to competition and be more highly valued in financial markets.
Small- and mid-cap companies tend to be innovative and adaptable. Many existing companies provide goods and services to growing population segments and more will emerge in the future to do so. Our analysts will continue to pursue these opportunities around the world.
The United States has excellent prospects compared to much of the rest of the developed world. Many investment analysts have tracked the baby boomer and echo baby boomer age segments, and as a result have predicted demand for goods and services such as toys, school books, automobiles, housing, leisure items and health care. Long-term demand for leisure and health care continues to appear promising, and additional opportunities may include companies producing labor saving devices and military technology. The United States stands to benefit from woes elsewhere, as highly productive people migrate here for employment and entrepreneurial opportunities, lower taxes and, in some cases, less strife.
There will continue to be investment opportunities overseas. In developed countries, companies that provide products or services to aging populations should benefit. Once the world economy recovers, capital goods suppliers to developing countries should resume growing. Developing countries that have moderate population growth and attractive climates for capitalism are likely to increase their share of world GDP and provide investment opportunities. Companies that participate in domestic growth within these countries should especially benefit.
Charles P. McQuaid
President and Chief Investment Officer
Columbia Wanger Asset Management, L.P.
The information and data provided in this analysis are derived from sources that we deem to be reliable and accurate. These views are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict so actual outcomes and results may differ significantly from the views expressed. The views/opinions expressed in “Squirrel Chatter II” are those of the author and not of the Columbia Acorn Trust Board, are subject to change at any time based upon economic, market or other conditions, may differ from views expressed by other Columbia Management associates or other divisions of Bank of America and the respective parties disclaim any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a Columbia Acorn Fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any particular Columbia Acorn Fund.
1 Jackson, Richard and Howe, Neil, The Graying of the Great Powers, (Washington, D.C., Center for Strategic & International Studies, 2008), pg. 1.
2 By popular definition, the “great powers” are the worlds most powerful countries based on wealth, military strength and population.
3 Jackson, Richard and Howe, Neil, op. cit., pgs. 39-40.
4 Ibid, pg. 179.
5 "Vladimir Putin on Raising Russia’s Birth Rate," Population and Development Review 32, no. 2 (June 2006).
6 Jackson, Richard and Howe, Neil, op. cit., pg. 44.
7 The Asian Tiger countries include Hong Kong, Singapore, South Korea and Taiwan.
8 Jackson, Richard and Howe, Neil, op. cit., pgs. 155, 171, 175.
9 Ibid, pg. 42.
10 Ibid, pgs. 163-176.
11 Ibid, pgs. 122-126.
12 Ibid, pgs. 191-192.
13 Ibid, pg. 194.
14 Steyn, Mark, America Alone: The End of the World As We Know It, (Washington, D.C., Regnery Publishing, Inc., 2006), pgs. 173, 205.
15 Jackson, Richard and Howe, Neil, op. cit., pg. 111.
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