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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. 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