Also the more I read the more alarmed I became. What scared me most was
how the near term demographic impact is almost completely being ignored
by politicians and the media.
For good reason because the situation looks really grim.
I was reminded about the book last week by the excellent article by Andy Xie
called Our Next
Economic Plague: Japan disease: Growing old is hard, but watching
formally vibrant economies choke on debt and wither away is downright
ugly.
In the article Andy explains that the lot of the economic problems has
experienced cannot only be traced back to the bursting of its property
bubble in the 1990s but is also related to the ageing of its population
and the resulting impact on the economy.
That is also the reason why he says normal economy stimulus measures has
not worked to get the Japanese economy to grow but only managed to
saddle it with debt of nearly two times its GDP.
The unsettling main idea of the article is that the ageing of society
and its impact on the economy is not something that can be avoided or
postponed and more alarmingly will be arriving in Europe shortly and the
US not long thereafter.
Okay so the world is getting older, and you may be thinking is not such a
big thing.
I want to argue that it is important and has been ignored so far because
demographic projections have mainly been shown in decades rather than
what will happen to us next year or the year thereafter.
Germany, which is going to be quite hard hit by its demographic
developments has done a lot of research on the topic but it does not
mean that you can read about in the newspapers or current magazines. I
wrote on how badly Germany will be affected in Slow
motion train wreck – German demographics.
I think the subject may be so unpleasant to address, because of the
substantial adjustment to the social support system in Germany that the
media and the short term thinking politicians have been trying to block
it from their minds.
The only problem is that it is already substantially impacting certain
parts in Germany and people are forced to urgently address the issue.
For a taste of what an aging society may mean for us here is a current
example.
In the May 2007 EU
report Europe’s demographic future: facts and figures, page 43
lists the following example of the impact of demographic change on the
state of Saxony in Germany, formerly part of East Germany.
“A very impressive example of a regional response was given by Georg
Milbradt, Prime Minister of Saxony, at the First European Demography
Forum.
The population of Saxony has been shrinking since 1967. In 1950, it
had 5.7 million inhabitants; in 2005 this number had fallen to 4.3
million. The projection for the year 2020 is 3.8 million.
After German reunification in 1989, the number of births
fell by more than 50% and a few years later nursery schools,
kindergartens and primary schools had to be closed because of a lack of
children. These small cohorts have now reached the secondary and
vocational school age and universities will be affected next.
Although birth rates have since recovered, they have not
regained their old level.
The initial drop in birth rates will in the future be compounded by the
exodus of young people. Many high-skilled young people, in particular
women, are leaving Saxony to study or work elsewhere in Germany.
The working age population will shrink approximately twice as much as
the overall population and firms in Saxony are already having problems
finding sufficient numbers of qualified young professionals to replace
retiring staff. The shortage of qualified staff is going to get worse
during the next three or four years when the large baby boomer cohorts
start to retire.
The shortage of qualified labour will hamper Saxony’s economic growth
prospects.
The population decline has led to decreasing utilisation of the region’s
infrastructure. Already more than 400.000 housing units are
permanently empty, out of a total of 2.3 million. Water and sewage
systems are used far below their normal capacity, resulting in hygiene
problems and increasing costs per capita. The number of elderly persons
in institutional care is growing rapidly resulting in a sharp increase
in health and nursing expenditure. At the same time, budget revenue will
decrease by nearly a quarter up to 2020. Even though Saxony does not
intend to take on any new debt from 2007 onwards, public debt per capita
is expected to increase.
However, Saxony has anticipated the negative consequences of ageing and
emigration and has started to adapt. Mr Milbradt gave two examples. Saxony
has started to reconstruct its cities by demolishing 50.000 empty
housing units, with a target of 250.000 units by 2015. Local
authorities are required to adjust their urban planning to a shrinking
population. Saxony has also begun to downsize its administrative
structures. Saxony needs to ensure that it remains an attractive place
for business and to make sure that ‘nobody will fall behind’. The main
challenge, as Mr Milbradt sees it ‘is to ensure access to education and
healthcare all over Saxony (...) without producing any additional
debts.’
Mr Milbradt pleaded for a new way of thinking in which the universal
growth paradigm is replaced by a limited number of strong local growth
centres against the backdrop of an otherwise shrinking periphery.
Only with such a strategy will it be possible to focus the limited
available resources. Saxony has started to apply a demographic test to
all its laws and funding programmes. In spite of its shrinking
population Saxony hopes to remain one of the most dynamic regions in
Germany, and, so far, it has been able to maintain its economic growth.”
Just imagine what 400,000 empty apartments, and that and only one state
in Germany, looks like.
Granted that some of the state of Saxony's problems relate to migration
to the large cities in western Germany but Saxony is a great example of
what Germany as a whole, will have to deal with in future as, in
the next 50 years its population is expected to decline 20% or by 17
million people (equal to the current total population of the
Netherlands).
In spite of the problems mentioned above in Germany, Japan has an even
older demographic profile so in a way Japan is a laboratory where Europe
and, at a later stage, America can learn from.
What exactly are the main changes and ageing population will bring?
The most obvious is that there will be a labour problem. It is not just
that there will be a lack of people to do all kinds of work like
cleaning, serving and selling as everyone has retired or too old to work.
But what may happen is that because of decreasing pension payments
people will just simply have to work longer than what they ever thought
they'd have to.
Not just because they will not have enough money in a retirement but
also because there will be nobody to do the work.
In terms of investment am not sure what the ageing populations impact
will be.
Here are my initial thoughts:
- Available capital will decrease as people withdraw funds to live on
- Capital will move to less risky assets i.e. from equities to bonds
- Healthcare spending will increase
- Property will not be a good investment
- Emerging markets may be an answer
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Policy
The immediate sector that will benefit from our older population is
pharmaceuticals, medical devices such as hip and knee replacements, as
well as hospitals and services such as caring for the aged.
If this will be a long-term profitable investment trend is still
unclear. What worries me is that a lot of these services have to be
provided by the government, and because of declining tax revenues and
already high debt burdens, they will try and save putting pressure on
what they are willing to pay.
It is not an easy question to answer as there is no history to look at
and because of the complex nature of economic systems.
Your, worrying if he has saved enough for retirement analyst.
