No Setting Sun
It has long been an article of faith among economists and government planners that a declining population means an eventual decline in the prestige, power and influence of a nation. From Singapore to most of Eastern Europe to Russia, worried government planners have for decades been involved in attempts to turn around their shrinking birth rates. Russian President Vladimir Putin, for instance, recently began offering cash rewards to couples to have more children in the face of a country whose population is falling by 700,000 annually.
But is falling population necessarily a disaster? Sharmilla Whelan, an economist for CLSA Asia Pacific Markets in Hong Kong, argues that in the case of Japan, the situation spells opportunity. Although her 28-page report for CLSA deals only with Japan, if Whelan is right, her arguments have deep implications across the globe. The answer, she says, is not in more people but in driving technology to new levels.
Mind you, Whelan’s view is definitely in the minority. The European Society for Population Economics argues that scientific and political debate is being shaped by declining fertility rates and unstable family structures. “As the labor force is aging and the funding problems of pension and health insurance are growing, governments are finding it increasingly difficult to keep up the provision of public goods without resorting to high budget deficits,” the society reported. Germany’s population is forecast to decline from 80 million to 43 million by 2050.
Singapore’s birth rate fell below replacement levels in 1977 and despite intensive efforts at social engineering to raise it over nearly 30 years, the rate has never risen back, particularly among the Chinese, stirring concerns among government planners that Malays would in effect outbreed the Chinese on their own island. Among other things, in the 1980s the government formed what it called the Social Development Unit—the SDU—and chartered what became known as the Love Boat for romantic young Singaporeans to meet and date in coastal waters. Unfortunately for the government, the romantic young Singaporeans immediately tagged the SDU to mean Single, Desperate and Ugly.
Hong Kong’s birth rate is even lower, with a fertility rate of 0.93 per couple, the second-lowest in the world after Macau. Hong Kong has been allowing mainlanders to immigrate at a relatively low level in a bid to make up the difference.
The question is what that costs in terms of economics. For Japan, the Organization for Economic Co-Operation and Development argues that shrinking population means an annual trend growth rate falling to 1.25 percent over the next five years. Deutsche Bank, in a status report on the country at the time Shinzo Abe was elevated to the prime ministry last week, is gloomier. Japan’s population, according to economist Stefan Bergheim, has been shrinking at an ever-increasing rate since 2005. Bergheim describes an enervated society in which China eclipses Japan in absolute number of university graduates, and with Korea close behind in the number of per-capita graduates. The Japanese education system must be opened and internationalised and English, “the language of globalization,” must be emphasized, he wrote in a recent report.
But CLSA’s Whelan says slowing population growth has had no impact on the economic effect of other advanced countries, nor do large declines in population lead to permanently lower gross domestic product. Growth, she argues, has historically been driven by specialization, innovation and trade, not population growth. Otherwise, Africa would be a world leader. Population size mattered in economies with harvest cycles rather than business cycles.
“The experiences of World War I and World War II show that the impact on GDP is short-term if at all. In both instances, GDP 10 years after the wars was 20-30 percent higher than pre-war levels.”
Instead, Whelan argues, Japan’s ability to compete in the coming decade will depend on the country’s ability to use specialization and innovation to create a knowledge-based economy. Japan, she says, has the wherewithal to do that.
In 23 measures of innovation and specialization, she says, Japan’s knowledge-based industries are driving research and development, registering more patents than any of its peer countries. Of the world’s top companies specializing in information, communications and technology, 13 are in Japan against Germany, France and the UK, which have only two each. The entire EU has only leading 11 ITC companies, the US 17.
Japan, she says, “is a different beast today—lean, mean and hungry to compete.”
But is it?
Bergheim argues that hours worked per capita have been declining since the 1990s, for instance. Second, Japan now has one of the oldest populations in the world, putting an increasing burden on the young for productivity. Despite higher life expectancy, the elderly have not remained in the work force, and any increase in work-force participation by women is almost exclusively in tax-subsidized, low-paid part-time jobs, he says.
Last year, Paul Hewitt, deputy commissioner for policy at the US Social Security Administration and former director of the Center for Strategic and International Studies' Global Aging Initiative, told Nova that Japan won’t have the world’s second-largest economy for very long.
“First,” Hewitt said, “there is the problem of shrinking numbers of workers. Beginning around 2010, the workforce decline will average about 1 percent a year for at least 20 to 30 years. A nation's economic output is the number of workers times the average income per worker. With a labor force shrinkage of about 1 percent a year, Japan could see long recessions lasting a decade or more. You might see the real incomes of workers rising during that period, but rising income per worker won't necessarily make up for the contractionary effect of a shrinking labor force on GDP.”
Not true, Whelan says. “Japan’s future is bright. She has been a winner before and she can be one again.”
New startups are rising, she says, foreign ownership is rising and so too are mergers and acquisitions in the wake of 15 years of industrial stagnation. The main point is that greater output can be produced without additional labor or capital resources. “In fact,” she writes, “an economy can grow with a stationary labor force.”
She expects Japan’s trend GDP growth to rise to 2.5 percent to 3 percent, slightly ahead of Europe at 2-2.5 percent although behind the US at 3-3.5 percent. Japan, she says, “has the potential to outperform her peers in the coming decade. She was setting the global standards in operational productivity in the 1970s and the 1980s,” a trend aborted by the simultaneous bursting of the country’s property and stock market bubbles, which Whelan says was a good thing.
“Japan Inc. was long overdue for a spring clean. Having got rid of a legacy of structural distortions today Japan Inc is stronger and more formidable.” In particular, Japan’s just-in-time manufacturing, attention to quality, the drive to lower costs, and design innovation are deeply entrenched in the corporate psyche. The country’s lead in robotics and automation is likely to widen as businesses are forced to economize on labour, driving cost savings and lifting overall corporate profitability.
Is all that true? Ask Sony, once the global bellwether of consumer electronics. Hewlett Packard has surpassed both Toshiba and Sony in market share for notebook computers, with Sony falling to a 9 percent share. Sony’s attempts to produce a PC-based music player to go up against the IPod was called a “story of corporate mismanagement, miscommunication and unmitigated disaster” by the online business journal ZDNet.
Having brought in British businessman Howard Stringer to take over the operations, Sony is struggling to find its feet. So is Japan. Summer economic numbers were weak, although the third-quarter Tankan report showed that the recovery remains on track. Investment plans are being revised higher and sentiment in the manufacturing sector continues to improve in the wake of worsening economic news from abroad, particularly the United States. It is going to take time to discover if Whelan is right.