Economic Policy Implications of World Demographic Change

By Johnson, Richard | Economic Review - Federal Reserve Bank of Kansas City, First Quarter 2004 | Go to article overview
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Economic Policy Implications of World Demographic Change


Johnson, Richard, Economic Review - Federal Reserve Bank of Kansas City


Demographic changes over the next 50 years will affect the world economy in many ways. Some of these effects will be beneficial. In developing countries, for example, falling birthrates will enable women to supply more paid labor and families to invest more in the education of each child. Other demographic changes will cause economic problems. In developed countries, population aging is likely to imply government pension systems cannot continue with their current rules. Population growth in developing countries could also change patterns of world trade and thereby reduce the wages of some workers in developed countries.

Economists have argued that policy changes are needed to maximize the rewards of some demographic changes and reduce the negative impacts of others. For example, governments of developing countries may need to create more flexible labor markets if their increased female workforce is to find employment. The governments of many developed countries need to plan how much they will support the high number of retirees expected in the future and communicate this plan to workers.

This article describes aspects of predicted world demographic changes that are likely to pose challenges for economic policy and explores how policy could react to these changes. The first section summarizes a forecast of world demographic changes up to 2050. The second section discusses the economic effects of demographic changes in developing countries, and the third section considers such effects in developed countries. The fourth section examines the effects of demographic changes on world trade and capital flows. The article concludes that the economic effects of such changes will depend heavily on future government policy. In particular, the effect of population growth in developing countries will depend on whether their governments' policies encourage economic growth. Government policy in developed countries will affect the size and distribution of problems created by population aging but will not be able to remove these problems altogether.

I. SUMMARY OF THE UNITED NATIONS' 2002 WORLD POPULATION FORECAST

The most widely used population forecasts are those produced by the United Nations. This section summarizes the latest U.N. forecast for world population change to 2050. It concentrates on two aspects of this forecast, the rate of population growth and the dependency ratio, the ratio of people of non-working age to those of working age. These aspects of demographic change are likely to have important economic effects. In general, the forecasts for developing countries follow one pattern, while those for developed countries follow another. An appendix to this article considers the reliability of long-term population forecasts.

Population growth

The United Nations expects world population to grow rapidly between 2000 and 2050. Over this period it predicts the worlds population will grow from 6.1 to 8.9 billion, or by 47 percent (Chart 1). While the forecast is for rapid population growth, growth would in fact be slower than that observed between 1950 and 2000. Slower growth reflects a decrease in the fertility rate-the number of births per woman's lifetime. Due to continued declines in world fertility rates, the U.N. expects the world's population to start decreasing steadily later this century.

Chart 2 shows the U.N. s population forecast by countries' level of economic development. This article defines a country's level of economic development by its GDP per capita in 2000, a different definition than that used by the U.N.1 The developed countries are defined as those with per capita GDP above $10,000 per year. The less developed countries are those with per capita GDP between $500 and $10,000 per year, while the least developed countries are those with per capita GDP below $500 per year.

The U.N. predicts, in general, that the more economically developed a country is today, the slower its population will grow.

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