Download Demography explains two-thirds of everything

June 2013
THE ARTICLE
‘DEMOGRAPHY
EXPLAINS TWO-THIRDS
OF EVERYTHING’
IS AN ABSTRACT FROM THE
JULIUS BAER PUBLICATION,
‘FROM INSIGHT TO
ACTION’.
From insight
to action
GROWTH
How can investments
help change the world?
PEOPLE
Women – the working force
of the future?
PLANET
How humility will take us
a long way
Demography explains
two-thirds of everything
With the baby-boomer generation entering retirement age,
pension funds are increasingly facing the problem that
they struggle to secure their financing. David K. Foot, Professor Emeritus of Economics at the University of Toronto,
says that if people had paid more attention to demographics,
these problems would have become obvious years ago and
one could have prepared for them. Furthermore, he argues
that in order for a country to be economically successful,
you do not necessarily need growth.
30 PEOPLE
Interview with David K. Foot, Professor Emeritus
of Economics at the University of Toronto
Text: Ayako Lehmann
Professor Foot, you argue that demography explains
two-thirds of everything. Can you comment on that?
In the very short term, that is over the next one to
two years, the state of the economy is the most important explanatory factor. But in the medium to
longer term, that is three to ten years, demographics
becomes more important in understanding the big
picture trends. On average, demographics has a
major explanatory power in the medium to longer
term in almost every sector of the economy.
The fact that the baby-boomer generation will eventually retire doesn’t come unexpectedly. And we knew
life expectancy was increasing. But it hasn’t been
realised in all consequences that life expectancy was
increasing two years every decade and the pension
funds have not taken this into consideration in their
projections. And yet this has been the case in all
developed countries for the last 60 years. It’s not until
something becomes a problem that people start
paying attention to it.
Will emerging market countries eventually overtake developed market countries?
Not necessarily. It depends whether we pursue sensible policies or not. I’m bothered about the common
thinking in developed markets: you can have negative
economic growth, which a lot of people feel is terrible,
but with negative population growth you can still have
rising per capita income, as this means that fewer
people get richer and richer. That’s for example what’s
currently happening in Japan. It’s not necessarily a
bad thing to have slower growth, you just have to make
sure that your growth exceeds population growth. At
the end of the day, it’s a question of income distribution.
So you’re arguing we don’t need growth?
Why are we so wrapped up with growth? It’s killing
the planet. As long as per capita income goes up, and
with much slower population growth, you can live
with slower economic growth to raise per capita income, so you don’t need growth. How? By saving
money on education and spending it instead more on
healthcare and pensions, thereby redistributing
spending. With demographics in developed markets
resulting in fewer and fewer people in the younger
generations, there’s less need to spend money on
education. At the same time, the elderly generation
is living longer and increasing, and that’s why more
money should be spent on healthcare.
Today the most rapidly ageing society is Japan, and
the developed markets are all following Japan. Europe
today is facing the problems Japan had in the 1990s,
and that was perfectly predictable from demographics.
If Europe had redistributed the spending earlier, we
wouldn’t see the problems we are seeing now.
Also, with demographics shrinking, there should be
enough job opportunities for the younger generation
if there is no need for desperate growth. Overall,
I feel we’re doing all the wrong things by thinking
of the past, when developed market countries were
young. But they are not young anymore, and we
haven’t been looking forward for the last 20 years.
Which countries are going to be the biggest
global players in the next 10 to 20 years?
China will definitely be one of the global players. The
question for China is: are they going to get old before
they get rich or are they going to get rich before they
get old? China is facing the same future as developed
market countries.
But let’s talk about other countries people haven’t
really thought about: Brazil and Turkey, but also Vietnam. Brazil is a country with close to 200 million
people, a big economy, with educated women, a very
well educated workforce under age 30 and still a
young society, so they don’t have to tax them for pension or healthcare. Turkey is another example and
shares several characteristics with Brazil. Within five
years, Turkey will become the biggest country in
Western Europe if you consider them as part of Western Europe, thereby overtaking Germany. Turkey has
a big domestic market, will have a population of over
80 million people who are well educated and young.
In a few year’s time, Turkey will turn and negotiate
deals with China and let Western Europe freeze in the
dark. The power has moved, Western Europe doesn’t
have the power anymore, neither does the USA. But as
the USA has a birth rate which allows them to replace
themselves, they will still remain more powerful than
other developed market countries. Vietnam has also a
very well educated population and a demographic
profile similar to Brazil and Turkey. It’s currently a little
further behind, but watch out, Vietnam is going to be
a major player down the road.
Which birth rate is necessary for an economy
so it can replace itself?
Research has taught me that a replacement birth
rate of 2.1 per family is ideal. You can have 0.4 points
above or below that and still do very well economically. If you have a birth rate which is above that, like
in India or the whole of the Arab countries, with a
PEOPLE 31
couple of exceptions, then you will have too many unemployed people which brings instability to the whole
society and that’s pretty much the case in most of
Africa.
Many countries in Western Europe face the exact opposite problem. With a birth rate below 1.7, which
I think is the absolute lowest threshold, you don’t have
enough children to support an ageing population.
Then you are mired in difficulties because you don’t
have a growing economy to pay off national debt.
So countries with less than 2.1 birth rate, say 1.7 to
1.9, don’t need growth but they can still do well
as long as they are good at managing stability. And
Scandinavia will do that. You allocate your spending
very differently. You may have to shrink the size of
towns, have the same municipal services and not live
more than ten miles from a city hall, for example.
You just allocate your resources very differently.
And what about countries which have a birth rate
below 1.7? What should they do?
Germany for example has a birth rate of 1.35, so it
will get into trouble down the road. In ageing soci eties, if you want to encourage spending you have
to raise interest rates and increase their income from
capital. That’s why I completely disagree with the
current central bank policies to keep interest rates at
such low rates. Germany has so far postponed the
problem very successfully by concentrating on high
productivity exports. Furthermore, they benefited
from the weak euro. But in the long run, this won’t
work. So far, not a single country with a low birth
rate has found a solution to this problem.
And by the way, a number of countries in the past said
they cannot pay back their national debt and hence
had to either default or restructure their debt. That may
not be sustainable from a lender’s perspective, but
it’s not uncommon to happen. Because the last thing
you want to do is impose austerity on a society as
that is not sustainable, so the current government policies in several European countries are not sustainable.
Japan owns most of the debt to themselves, so they
would only have to forgive themselves. And Argentina
restructured its national debt in the 1990s and they’ve
done reasonably well since. And yet neither quantitative easing, nor low interest rates, nor austerity are
the solution to the problem in the long run.
Back to the future
1900
1910
1925
1935
1954
The American eng-
The American
The electronics
The magazine
The first nuclear
ineer John Elfreth
inventor Hudson
expert Hugo Gerns-
‘Everyday Science
power station
Watkins makes his
Maxim predicts
back raises the
and Mechanics’
becomes operational
predictions for the
enormous green-
possibility of the
believes microfilm
at Obninsk in the
year 2000: world-
houses to feed
teledactyl, a device
will take over from
Soviet Union, with
wide wireless com-
mankind and flying
which enables doc-
books. People would
physicists predicting
munication, ready
machines gliding
tors to make diagno-
soon be looking at
the nuclear age.
meals, high-speed
over gigantic cities.
ses remotely and
words on a projec-
Even cars would
trains and televi-
allows them not only
tion screen rather
soon run on nuclear
sion.
to see patients but
than on the page.
propulsion. The idea
also touch them
of the flying car
using robotic arms.
takes hold around
He continues to
this time.
believe in this vision
until 1975.
32 PEOPLE
David K. Foot, Professor Emeritus of Economics
at the University of Toronto, has been exploring
for more than 30 years how changing demographics, especially the aging of the massive
baby-boomer generation and the coming into
the marketplace of their children, the echo generation, is redefining society’s needs. Prof.
Foot contends that demography explains twothirds of everything – whether the subject is
business planning, marketing, human resources,
career planning, corporate organisation, the
stock market, housing, education, health, recreation, leisure, or social and global trends.
Change cannot be avoided, but it can be prepared for and managed. With an understanding of demographics, a business, an individual
or a government has a strong foundation upon
which to build.
He is the author of the best-selling books Boom
Bust & Echo: How to Profit from the Coming
Demographic Shift and the updated paperback,
Boom Bust & Echo: Profiting from the Demographic Shift in the 21st Century.
More information on Prof. Foot can be found
on: www.footwork.com
“What if?” is the question mankind has always asked.
People used to ask priests, astrologers or fortune
tellers to see what the future held. In later times it was
scientists making the predictions.
1967
1972
1986
1999
The American futurologists
‘The Limits to Growth’
The reactor catastrophe at
The IT guru Ray Kurzweil
Herman Kahn and Anthony
appears, a famous study
Chernobyl encourages the
predicts most people will
Wiener look forward to the
commissioned by the ‘Club
development of new
be wearing a voice-oper-
year 2000. They predict the
of Rome’. It warns of a pos-
methods for estimating the
ated computer next to their
rise of China and Europe,
sible breakdown in the
impact of new technologies.
body by 2009. The long-
with the USA and the Soviet
global order if we use up
term prediction is a fusion
Union on the decline.
raw materials and water too
of man and computer.
quickly, create excessive
environmental pollution and
allow the world’s population
to boom.
PEOPLE 33
Important legal information
This publication constitutes marketing material and is not the result of independent financial research. Therefore the legal requirements
regarding the independence of financial research do not apply.
The information and opinions expressed in this publication were produced by Bank Julius Baer & Co. Ltd., Zurich, as of the date of writing
and are subject to change without notice. This publication is intended for information purposes only and does not constitute an offer,
a recommendation or an invitation by, or on behalf of, Julius Baer to make any investments. Opinions and comments of the authors reflect
their current views, but not necessarily of other Julius Baer entities or any other third party.
Services and/or products mentioned in this publication may not be suitable for all recipients and may not be available in all countries.
Clients of Julius Baer are kindly requested to get in touch with the local Julius Baer entity in order to be informed about the
services and/or products available in such country.
This publication has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Before
entering into any transaction, investors should consider the suitability of the transaction to individual circumstances and objectives. Any
investment or trading or other decision should only be made by the client after a thorough reading of the relevant product term sheet,
subscription agreement, information memorandum, prospectus or other offering document relating to the issue of the securities or other
financial instruments. Nothing in this publication constitutes investment, legal, accounting or tax advice, or a representation that any
investment or strategy is suitable or appropriate for individual circumstances, or otherwise constitutes a personal recommendation for any
specific investor. Julius Baer recommends that investors independently assess, with a professional advisor, the specific financial risks as
well as legal, regulatory, credit, tax and accounting consequences. Past performance is not a reliable indicator of future results.
Performance forecasts are not a reliable indicator of future performance. The investor may not get back the amount invested.
Although the information and data herein are obtained from sources believed to be reliable, no representation is made that the information
is accurate or complete. Bank Julius Baer & Co. Ltd., Zurich, its subsidiaries and affiliated companies do not accept liability for any loss
arising from the use of this publication. This publication may only be distributed in countries where its distribution is legally
permitted. This publication is not directed to any person in any jurisdiction where (by reason of that person’s nationality, residence or
otherwise) such publications are prohibited.
External Asset Managers/External Financial Advisers: in case this marketing publication is provided to an External Asset Manager or an
External Financial Adviser, Julius Baer expressly prohibits that it is redistributed by the External Asset Manager or the External Financial
Adviser and is made available to their clients and/or third parties. By receiving any marketing publication the External Asset Managers or the
External Financial Advisers confirm that they will make their own independent analysis and investment decisions.
Dubai International Financial Centre: this publication is distributed by Julius Baer (Middle East) Ltd. It may not be relied upon by
or distributed to retail clients. Please note that Julius Baer (Middle East) Ltd. offers financial products or services only to professional
clients who have sufficient financial experience and understanding of financial markets, products or transactions and any associated risks.
The products or services mentioned will be available only to professional clients in line with the definition of the Dubai Financial Services
Authority (DFSA) Conduct of Business Module. Julius Baer (Middle East) Ltd. is duly licenced and regulated by the DFSA.
Germany: Bank Julius Bär Europe AG, authorised and regulated by the German Federal Financial Supervisory Authority (BaFin), distributes
this publication to its clients. This publication has been produced by Bank Julius Baer & Co. Ltd., Zurich, which is supervised by the Swiss
Financial Market Supervisory Authority FINMA. Neither the legal requirements regarding the independence of investment research nor the
prohibition of trading previous to the announcement of financial analyses do apply.
Hong Kong: this publication is distributed in Hong Kong by and on behalf of, and is attributable to Bank Julius Baer & Co. Ltd., Hong Kong
branch, which holds a full banking licence issued by the Hong Kong Monetary Authority under the Banking Ordinance (Chapter 155 of the
Laws of Hong Kong SAR). The Bank is also a registered institution under the Securities and Futures Ordinance (SFO) (Chapter 571 of the
Laws of Hong Kong SAR) to carry on Type 1 (dealing in securities), Type 4 (advising on securities) and Type 9 (asset management) regulated
activities with Central Entity number AUR302. This publication must not be issued, circulated or distributed in Hong Kong other than to
‘professional investors’ as defined in the SFO. The contents of this publication have not been reviewed by any regulatory authority. If you
have any queries concerning this publication, please contact your Hong Kong relationship manager. Bank Julius Baer & Co. Ltd. is
incorporated in Switzerland with limited liability.
Indonesia: this publication is not intended to be an offer of or invitation to buy securities in Indonesia. This publication is also not intended
to be the provision of investment advice in Indonesia. The securities referred to in this publication have not been registered with
the Indonesian Financial Services Authority (OJK) pursuant to relevant capital market laws and regulations, and may not be offered or sold
within the territory of the Republic of Indonesia or to Indonesian citizens through a public offering or in circumstances which constitute an
offer within the meaning of the Indonesian capital market law and regulations.
Monaco: Bank Julius Baer (Monaco) S.A.M., an institution approved by the Minister of State for Monaco and the Bank of France, distributes
to its clients this publication produced by Bank Julius Baer & Co. Ltd., Zurich, an institution in Switzerland under the supervision of the Swiss
Financial Market Supervisory Authority FINMA.
Julius Baer Wealth Management (Monaco) S.A.M., an asset management company authorised in Monaco, distributes to its clients this
publication produced by Bank Julius Baer & Co. Ltd., Zurich, an institution in Switzerland under the supervision of the Swiss Financial Market
Supervisory Authority FINMA.
Singapore: this publication is available from Bank Julius Baer & Co. Ltd., Singapore branch, for accredited investors only. As Bank Julius Baer
& Co. Ltd., Singapore branch, has a Unit exemption under Section 100(2) of the Financial Advisers Act, Cap. 110 of Singapore (the FAA), it is
exempted from many of the requirements of the FAA, amongst others, the requirement to disclose any interest in, or any interest in the
acquisition or disposal of, any securities or financial instruments that may be referred to in this publication. Further details of these exemptions are available on request. This publication has not been reviewed by and is not endorsed by the Monetary Authority of Singapore (MAS).
Any document or material relating to the offer or sale, or invitation for subscription or purchase, of securities or investment funds (i.e. collective investment schemes) may not be circulated or distributed, nor may such securities or investment funds be offered or sold, or be made
the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 or 304 respectively of the Securities and Futures Act, Cap. 289 of Singapore (the SFA), (ii) to a relevant
person (which includes an accredited investor), or any person pursuant to Section 275(1A) or 305(2) respectively, and in accordance with
the conditions, specified in Section 275 or 305 respectively of the SFA, or (iii) otherwise pursuant to, and in accordance with the conditions
of, any other applicable provision of the SFA. In particular, for investment funds that are not authorised or recognised by the MAS, units in
such funds are not allowed to be offered to the retail public; any written material issued to persons as aforementioned in connection with an
offer is not a prospectus as defined in the SFA and, accordingly, statutory liability under the SFA in relation to the content of prospectuses
does not apply, and investors should consider carefully whether the investment is suitable for them. Please contact a representative of Bank
Julius Baer & Co. Ltd., Singapore branch, with respect to any inquiries concerning this publication.
Switzerland: in Switzerland this publication is distributed by Bank Julius Baer & Co. Ltd., Zurich, authorised and regulated by the Swiss
Financial Market Supervisory Authority FINMA.
The Bahamas: This information has been distributed by Julius Baer Bank & Trust (Bahamas) Limited, an entity licensed by the Central Bank
of The Bahamas and also regulated by the Securities Commission of The Bahamas. This document does not constitute a prospectus or a
communication for the purposes of the Securities Industry Act, 2011 or the Securities Industry Regulations, 2012. In addition, it is only
intended for persons who are designated or who are deemed ‘non-resident’ for the purposes of Bahamian Exchange Control Regulations and
rules.
United Arab Emirates: this publication has been produced by Bank Julius Baer & Co. Ltd., Zurich, and has not been approved or licensed by
the UAE Central Bank, the UAE Securities and Commodities Authority or any other relevant authority in the UAE. It is strictly private and
confidential and is being issued to a limited number of sophisticated individual and institutional investors upon their request and must not be
provided to, or relied upon, by any other person.
United Kingdom: this publication has been produced by Bank Julius Baer & Co. Ltd., Zurich. It is a financial promotion for the purposes
of Section 21 of the Financial Services and Markets Act 2000 (FSMA) and has been approved for distribution in the United Kingdom by
Julius Baer International Limited, which is authorised and regulated by the Financial Conduct Authority (FCA). Rules made by the FCA under
the FSMA for the protection of retail clients do not apply to services provided by members of the Julius Baer Group outside the UK and the
Financial Services Compensation Scheme will not apply.
United States: NEITHER THIS PUBLICATION NOR ANY COPY THEREOF MAY BE SENT, TAKEN INTO OR DISTRIBUTED IN THE UNITED
STATES OR TO ANY US PERSON.
© Julius Baer Group, 2014