Transcript www.exchangetradedforum.com

How Global Aging Will Reshape the
Economy and Financial Markets
Richard Jackson
Center for Strategic and International Studies
Exchange Traded Forum 2011
Toronto
May 11, 2011
Part I
The Global Demographic
Transformation
Behind the developed-world age wave:
Falling fertility and rising longevity.
Total Fertility Rate and Life Expectancy: G-7 Countries
Total Fertility Rate
Life Expectancy at Birth
1960-65
1980-85
2005-10
1960-65
1980-85
2005-10
Canada
3.7
1.6
1.6
71.4
75.9
80.7
France
2.9
1.9
1.9
70.7
74.7
81.2
Germany
2.5
1.5
1.3
70.3
73.8
79.9
Italy
2.5
1.5
1.4
69.6
74.7
81.2
Japan
2.0
1.8
1.3
68.9
76.9
82.7
UK
2.8
1.8
1.8
70.8
74.0
79.4
US
3.3
1.8
2.1
70.0
74.3
79.2
Source: UN (2009)
The developed countries are entering an
unprecedented era of “hyperaging.”
45%
40%
Elderly (Aged 65 & Over), as a Percent
of the Population, 2010-2050
39%
35%
34%
35%
31%
29%
30%
27%
27%
25%
20%
23%
19%
20%
23%
21%
17%
15%
24%
27%
23%
20%
20%
17%
14%
13%
10%
5%
0%
US
Source: UN (2009)
UK
France
2010
Canada
2030
Germany
2050
Italy
Japan
Along with aging populations, most developed
countries will have stagnant or contracting ones.
40%
Cumulative Percentage Change in the Working-Age
Population (Aged 20-64) and Total Population: 2010-2050
34%
30%
22%
25%
20%
16%
8%
10%
8%
9%
0%
-5%
-10%
-9%
-20%
Total Population
-30%
Working Age (Age 20-64)
-18%
-23%
-25%
-31%
-40%
-38%
-50%
US
Canada
UK
France
Italy
Germany
Japan
Source: UN (2009)
The developing world is still much younger, but it
too is in the midst of the “demographic transition.”
Demographic Indicators for the Developing World
Life
Fertility Rate Expectancy
Median Age
Total Pop.
Change
Elderly Share
1975
2010
1975
2010
2010
2030
2050
2010
2030
5.1
2.7
57.2
67.0
27.5
31.6
34.6
6.2%
9.8%
13.7%
48.7%
Sub-Saharan Africa
6.7
5.2
45.5
51.7
18.5
20.6
24.6
3.1%
3.6%
5.2%
131.2%
Muslim World
6.2
2.9
52.2
68.2
24.7
29.4
32.8
4.6%
7.4%
12.2%
69.5%
China & East Asia
4.7
1.7
63.2
73.2
34.4
41.6
46.4
8.4%
16.3%
24.2%
1.8%
India & South Asia
5.4
2.7
51.4
64.9
25.4
30.3
34.0
5.1%
8.4%
12.4%
52.6%
Russian Sphere
2.1
1.4
69.3
67.3
38.2
44.5
48.6
13.5%
20.1%
26.3%
-26.7%
Eastern Europe
2.4
1.4
70.0
74.9
38.9
46.0
51.2
14.9%
21.6%
30.0%
-17.6%
Latin America
5.1
2.3
61.3
73.5
27.7
33.5
37.5
6.9%
11.7%
17.4%
38.8%
Developing World
2050 2010-50
Source: UN (2009)
Part II
Challenges for the
Developed World
Rising Retirement Costs
 Falling fertility and rising
longevity translate directly
into a falling support ratio
of workers to retirees.
Number of Working-Age Adults (Aged 20-64)
per Elder (Aged 65 & Over), 2010-2050
5.0
4.6
4.5
2010
2030
2050
4.0
 A falling support ratio in
turn translates into a rising
cost rate for PAYGO
retirement systems.
3.6
3.5
3.0
3.0
3.0
2.7
2.6
2.4
2.0
2.0
1.9
1.5
1.4
1.2
1.0
0.0
US
UK
Source: UN (2009)
Canada France Germany
Italy
Japan
Rising Retirement Costs
CSIS “Current Deal” Projection:
Government Old-Age Benefits, as a Percent of GDP, 2007–2050
Public Pensions
2007
2030
2050
Health Benefits
2007
2030
2050
Total
2007
2030
2050
Canada
3.9%
7.0%
8.4%
3.6%
6.1%
8.9%
7.5%
13.1%
17.3%
France
11.2%
17.8%
19.6%
4.5%
7.8%
10.2%
15.6%
25.6%
29.8%
Germany
10.0%
17.0%
20.4%
4.1%
6.3%
8.5%
14.1%
23.3%
28.9%
Italy
12.3%
18.9%
24.6%
3.4%
5.5%
7.5%
15.7%
24.4%
32.1%
Japan
9.1%
13.9%
19.3%
4.0%
6.0%
8.0%
13.2%
19.9%
27.3%
UK
5.8%
7.9%
8.5%
4.0%
6.3%
8.8%
9.8%
14.2%
17.3%
United States
4.1%
6.6%
7.0%
4.2%
8.0%
10.2%
8.3%
14.6%
17.2%
Developed World
8.8%
13.7%
16.6%
3.8%
6.3%
8.6%
11.2%
17.9%
22.5%
Note: Data refer to benefits to persons aged 60 and over. Pension projections assume retirement ages remain unchanged and benefits continue to replace
the same share of wages they do today.
Source: The Global Aging Preparedness Index (CSIS, 2010)
Rising Retirement Costs
 Few countries will be able
to raise taxes enough to
cover more than a fraction
of the age wave’s cost.
 Most will have to cut
benefits—but the required
adjustments are large and
are likely to meet growing
political resistance from
aging electorates.
 The likely alternatives:
crowd out other spending
or let deficits grow—
undermining national
savings and growth.
Public Benefits in 2007, as a Percent of
Total Elderly Cash Income
Average
3rd Quintile
Canada
31%
47%
France
59%
72%
Germany
47%
76%
Italy
55%
77%
Japan
39%
61%
UK
42%
69%
US
22%
38%
Source: The Global Aging Preparedness Index (CSIS, 2010)
Slower Economic Growth
 The slowdown in workforce
growth in the developed world
will translate into slower growth
in GDP.
Average Annual Growth Rate in the Working-Age
Population (Aged 20-64), by Decade
 Japan and some faster-aging
European countries face a future
of secular stagnation.
Canada
1.7%
1.1%
1.2%
0.5%
0.2%
0.1%
France
1.0%
0.4%
0.6%
-0.2% -0.1% -0.2%
0.0%
 Productivity and living standard
growth may also slow as rates of
saving and investment decline.
Germany
1.1%
0.2%
-0.2% -0.3% -1.2% -1.2% -0.9%
Italy
0.9%
0.2%
0.3%
Japan
0.7%
0.4%
-0.4% -1.0% -0.7% -1.5% -1.5%
UK
0.6%
0.4%
0.6%
0.3%
0.0%
0.1%
0.3%
US
1.4%
1.2%
1.1%
0.6%
0.3%
0.6%
0.6%
 Aging workforces may be less
flexible, less mobile, and less
entrepreneurial—putting a further
drag on economic growth.
1980s 1990s 2000s 2010s 2020s 2030s 2040s
Source: UN (2009)
0.0%
-0.3% -0.6% -1.2% -0.9%
Emerging Capital Shortages
 As more of the population
enters its harvest years,
consumption rates will rise
and savings rates will fall.
 Growing fiscal deficits may
exacerbate the decline in
household savings rates.
 The danger of a “Great
Depreciation” in financial
markets as postwar baby
booms retire is overstated.
 Instead, aging developed
countries are likely to
become even more
dependent on capital imports
from a younger and fastergrowing developing world.
Adults Aged 20 & Over by Age Group,
as a Percent of All Adults
US
Canada
EU15
Japan
Source: UN (2009)
2010
2020
2030
2040
Age 20-34
28%
28%
26%
26%
Age 35-59
47%
42%
41%
41%
Age 60 & Over
25%
30%
33%
33%
Age 20-34
20%
20%
17%
18%
Age 35-59
37%
34%
32%
31%
Age 60 & Over
20%
25%
29%
31%
Age 20-34
24%
22%
20%
19%
Age 35-59
46%
44%
40%
38%
Age 60 & Over
31%
34%
40%
43%
Age 20-34
22%
18%
18%
16%
Age 35-59
41%
41%
38%
34%
Age 60 & Over
37%
41%
45%
50%
Shifts in Economic Structure
and Business Psychology
 The secular economic shift
from manufacturing to
services will accelerate.
 The “youth demographic”
will give way to a new
“silver demographic.”
Cumulative Percentage Change in the Canadian
Population, by Age Group and Time Period
100%
Age 0-19
90%
Age 20-39
80%
 Business growth will come
to depend more on market
deepening than on market
broadening.
70%
 Adjustment costs in both
product markets and labor
markets will rise.
40%
Age 40-64
Age 65 & Over
65%
60%
54%
50%
30%
20%
 Stagnant or contracting
markets will increase the
risk of “beggar-thyneighbor” protectionism.
10%
5% 3%
3%
2%
0%
-10%
-3%
1990-2010
Source: UN (2009)
2010-2030
90%
The Impact on Social Mood
 As societies age, the overall
social mood may become
more risk averse and
“small c” conservative.
 Smaller families may find it
more difficult to socialize the
young—and care for the old.
Share of Population with Less than 20 Years of
Life Remaining, by Country, 1950-2050
35%
30%
Japan
Italy
 Elder-dominated electorates
may lock in current public
spending commitments at the
expense of new priorities.
 As the developed countries
age, they will also grow more
diverse—challenging social
cohesion in some countries.
25%
Germany
UK
20%
Canada
France
15%
US
10%
1950
1970
1990
2010
2030
2050
Source: CSIS calculations based on UN (2007) and Human Mortality Database,
University of California, Berkeley and Max Planck Institute for Demographic Research
Part III
Global Aging
and Emerging Markets
The Promise of the “Demographic Dividend”




The demographic transition
opens up a window of
opportunity for economic
growth and development.
Falling dependency burdens
and larger shares of the
population in the working
years boost per capita GDP.
Over time, this demographic
shift may also encourage
higher labor-force
participation rates, higher
saving rates, and greater
investment in human capital.
The dynamic is called the
“demographic dividend”—
and it explains as much as
two-fifths of the growth in
living standards in East Asia
since the mid-1970s.
Working-Age Population (Aged 20–64), as a Percent of
the Total Population, 1975–2050
1975 1990 2000 2010 2020 2030 2040 2050
East Asia
46.8
55.7 59.6
64.1
63.9 61.5
57.8
56.5
Eastern Europe 56.8
58.3 60.4
63.8
62.1 60.5
58.9
54.6
Latin America
43.8
48.5 52.3
56.3
58.0 57.3
56.5
55.3
Muslim World
42.6
45.1 49.1
54.3
56.1 56.3
56.8
55.9
Russian
Sphere
57.7
59.6 60.8
65.6
63.5 61.1
61.3
57.3
South Asia
45.2
48.1 50.8
54.8
56.9 57.2
58.1
57.6
Sub-Saharan
Africa
42.0
41.1 42.1
43.5
44.9 47.2
50.6
53.0
Note: Highest share is highlighted.
Source: UN (2009)
Risks to Growth and Stability:
Squandered Dividends




The demographic dividend
creates an economic
opportunity , but does not
guarantee economic success.
Large parts of the developing
world are nearly as far through
the demographic transition as
East Asia, yet have not come
close to matching its stellar
growth performance.
Average Annual Growth Rate in Real GDP Per Capita
(in 2005 PPP Dollars) by Period, 1975–2009
Average Annual Growth Rate
in Real GDP Per Capita
8.0%
7.0%
6.0%
5.0%
6.9% 7.1%
1975-95 1995-09 1975-09
1975-09
1995-09
Brazil
China
India
Russia
1.5%
9.0%
5.1%
4.0%
1.3%
8.3%
3.6%
1.1%
4.5%
4.1%
4.0%
3.5%
3.7%
3.0%
Over the past 10 to 15 years,
economic growth has finally
begun to accelerate in a large
number of emerging markets.
1.1%
7.8%
2.6%
-0.8%
2.0%
2.5%
1.5%
1.7%
1.2%
1.8%
1.1%
1.0%
0.8%
0.2%
0.0%
Whether the recent boom
represents a long-term shift
toward higher growth rates
remains to be seen.
Source: World Bank (2010); Angus Maddison (2010); and UN (2009).
Risks to Growth and Stability:
The Second Wave of Global Aging



The demographic dividend is
already ending in some of today’s
fastest-growing emerging markets.
Elderly Share and Average Annual Growth Rate in
the Working-Age
Cumulative
Percentage
Population,
Change
by Decade
in the
Russian
China vs. the
United States:
Elderly
(Aged
65 &
Population,
2010-2050
Over),
as
a
Percent
of
the
Population,
1970-2050
30%
As in the developed world, rapid
population aging may soon become
a drag on economic growth.
0%
25%
China faces a massive age wave
that is due to arrive while it is still
in the midst of development.
-10%
20%
Russia’s economy has been riding
high on the commodity boom, but
its ruinous demographics are
undermining its long-term growth
potential.
15%
-20%
Brazil
4.3%
5.0%
China
6.2%
China
5.1%
7.5% 10.0% 13.9% 19.1% 23.0%
India
-11% 4.0%
3.7%
Russia


By the 2030s, India will be one of
the few of today’s leading emerging
markets whose demographics will
still be favorable to growth.
1980s 1990s 2000s 2010s 2020s 2030s 2040s
2010-30
2010-50
Elderly (65+), % of Population
S. Korea
10%
-30%
Brazil
China
5%
India
-40%
Russia
6.1%
8.1% 11.2% 14.7% 18.4%
US
4.6%
5.5%
7.1%
8.8% 10.8%
10.2% 11.2% 12.6% 14.3% 17.8% 20.8% 23.7%
-18%
4.4% 6.2% 9.2% 13.3% 19.5% 27.3% 33.6%
Average Annual Growth Rate in the Working-Age
-25%
Population (Age 20-64)
2.9%
2.3%
2.0%
Total
2.8% Population
1.7% 1.4%
1.2%
0.5%
0.2% -0.2%
0.5% -0.2% -0.7% -0.6%
-35%
Working-Age (Age 20-64)
2.5%
2.4%
2.3%
1.9%
1.3%
1.1%
0.7%
0.7%
0.1%
0.4% -0.9% -1.0% -0.7% -1.6%
0%
1970
S. Korea
-50%
1980
2040
2.9% 1990
1.6% 2000
0.7% 2010
0.3% 2020
-1.1% 2030
-1.5%
-1.6% 2050
Source: UN (2009)
Source: UN (2009)
Source: UN (2009)
Population Pyramids of China and India in 2010, 2030, and 2050
Men
Women
100+
100+
100+
90-94
90-94
90-94
80-84
80-84
80-84
70-74
70-74
70-74
60-64
60-64
60-64
50-54
50-54
50-54
40-44
40-44
40-44
30-34
30-34
30-34
20-24
20-24
20-24
10-14
10-14
10-14
0-4
0-4
80000
40000
0
40000
80000
80000
80000
Women
40000
0
40000
China 2010
0
40000
80000
0-4
80000
India 2030
India 2010
Men
40000
40000
0
40000
80000
India 2050
100+
100+
100+
90-94
90-94
90-94
80-84
80-84
80-84
70-74
70-74
70-74
60-64
60-64
60-64
50-54
50-54
50-54
40-44
40-44
40-44
30-34
30-34
30-34
20-24
20-24
20-24
10-14
10-14
10-14
0-4
0-4
0-4
80000
80000
40000
0
40000
China 2030
80000
80000
40000
0
40000
80000
China 2050
Source: UN (2009)
Risks to Growth and Stability:
Journeys can be more dangerous than destinations.
Societies undergo tremendous
stress as they move from the
traditional to the modern. When
plotted against development,
most of the stressors describe
an inverted-U—meaning that
they become most dangerous
midway through the transition.

These stressors include:






Contact with the global
marketplace and culture
Urbanization
Environmental degradation
Growing income inequality
Growing ethnic competition
Religious extremism
The "Inverted U" Relationship
Level of Stress & Risk of Violence

Stage of Demographic Transition & Development
Part IV
The Shape of the Global
Economy
The Developed World:
A Shrinking Share of Global Population
25%
Developed World Population by Region,
as a Share of World Total, 1950-2050
Population as a Share of World Total
US
Western Europe
Japan
Other English-Speaking
Countries
20%
1950 2005 2030 2050
6%
5% 4% 4%
10% 5% 4% 3%
3%
2% 1% 1%
3%
2% 2% 1%
15%
Japan
10%
Other English-Speaking Countries
Western Europe
US
5%
0%
1950
1960
1970
1980
1990
2000
2010
2020
2030
2040
2050
Source: The Graying of the Great Powers (CSIS, 2008)
12 Largest Countries Ranked by Population
Ranking 1950
1
2
3
4
5
6
7
8
9
10
11
12
China
India
US
Russian Federation
Japan
Indonesia
Germany
Brazil
UK
Italy
Bangladesh
France
2010
2050
China
India
US
Indonesia
Brazil
Pakistan
Bangladesh
Nigeria
Russian Federation
Japan
Mexico
Philippines
India
China
US
Pakistan
Nigeria
Indonesia
Bangladesh
Brazil
Ethiopia
Philippines
Dem. Rep. Congo
Egypt
Germany (16)
France (21)
UK (22)
Italy (23)
Russian Federation (16)
Japan (19)
UK (27)
France (29)
Germany (30)
Italy (37)
Source: UN (2009)
Note: Rankings for developed countries that have fallen below 12 are in parentheses.
The Developed World:
A Shrinking Share of Global GDP
70%
Developed World GDP (in 2005 PPP Dollars),
as a Percent of World Total, 1950-2050
GDP as a Share of World Total
1950 2005 2030 2050
US
Western Europe
Japan
Other English-Speaking
Countries
60%
29%
23%
3%
9%
22% 19% 17%
17% 10% 7%
7% 4% 3%
7% 5% 4%
50%
40%
30%
20%
10%
0%
1950
Japan
Other English-Speaking Countries
Western Europe
US
1960
1970
1980
1990
2000
2010
2020
2030
2040
2050
Source: The Graying of the Great Powers (CSIS, 2008)
The Composition of G-20 GDP:
From Majority to Minority Partners
GDP (in 2005 US Dollars) by Country or Country Group, as
a Percent of G-20 Total, 2009-2050
100%
90%
28%
Emerging Markets
80%
50%
70%
59%
Other G-7
60%
50%
38%
US
40%
72%
24%
16%
30%
20%
50%
41%
34%
10%
26%
24%
2030
2050
0%
2009
Source: Carnegie Endowment for International Peace (2010)
Some Bottom Lines






Long-term decline of the developed
world and rise of emerging markets,
especially in East and South Asia.
The United States is a partial but
important exception to hyperaging
and population decline.
Economic success will depend on
leveraging differentials in population
and economic growth rates across
different regions of the world.
Yet aging societies with stagnant or
contracting domestic markets may
face increasing political pressure to
roll back globalization.
Likely global slowdown starting in
the mid-2020s as “second wave” of
global aging sweeps the developing
world.
Question: Who can replace East
Asia as the engine of global growth?
Population by Region as a Percent of World Total,
2005-2050
2005
21.5%
2030
17.5%
2050
14.0%
Latin America
8.6%
8.8%
8.8%
Muslim World
17.2%
19.6%
21.1%
5.4%
3.5%
2.5%
South Asia
22.9%
24.5%
25.2%
Sub-Saharan Africa
11.1%
15.1%
18.8%
United States
4.6%
4.3%
4.1%
Rest of the Developed World
8.8%
6.8%
5.5%
East Asia
Russia & Eastern Europe
GDP (in 2005 PPP Dollars) by Region as a Percent of
World Total, 2005-2050
2005
2030
2050
13.3%
26.0%
29.3%
Latin America
8.3%
6.6%
6.3%
Muslim World
9.2%
9.6%
10.3%
Russia & Eastern Europe
7.1%
6.7%
5.1%
South Asia
6.4%
10.3%
13.5%
Sub-Saharan Africa
2.2%
3.1%
4.5%
United States
22.3%
18.6%
16.9%
Rest of the Developed World
31.4%
19.1%
14.1%
East Asia
Source: The Graying of the Great Powers (CSIS, 2008)
We live in an era defined by many challenges,
from global warming to global terrorism.
None is as certain as global aging.
And none is likely to have such a large and
enduring effect on the shape of national
economies and the world order.
CSIS/GAI.ORG
GAPINDEX.CSIS.ORG
30%
China vs. the United States: Elderly (Aged 65 &
Over), as a Percent of the Population, 1970-2050
25%
20%
China
US
15%
10%
5%
0%
1970
1980
1990
Source: UN (2009)
2000
2010
2020
2030
2040
2050
Cumulative Percentage Change in the Russian Population, 2010-2050
2010-30
2010-50
0%
-10%
-11%
-18%
-20%
Total Population
Working-Age (Age 20-64)
-25%
-30%
-35%
-40%
-50%
Source: UN (2009)