Shrinking populations will force nations to compete harder

Allister Heath
In the long run, Keynes used to say, we are all dead, meaning that we should care about fixing today’s problems regardless of any side-effects temporary solutions – such as increased borrowing – might eventually saddle us with.

Like many of Keynes’ other soundbites, this one feels clever and self-evidently true – but in fact really isn’t. Time has a tendency to fly, and a succession of short runs mutate into the long run pretty quickly.

Take the financial crisis, which came to these shores in earnest in February 2007, when HSBC announced a major write-down on its US sub-prime operations. That was more than six years ago, which most people would see as the “long-run”.

Over many years and decades, monetary policy doesn’t really matter; it is real factors such as the growth of capital, labour, innovation and productivity that make all the difference to an economy’s performance (though relentlessly bad monetary policy can of course hinder these). Mortality and migration rates are thus vitally important determinants of a how a country fares, the size of its markets, its fiscal position and the shape of its society.

So the fact that fertility rates in OECD countries have fallen dramatically over the last few decades, as highlighted by figures out this week, remains one of the most important single facts about the modern world. Fertility rates slumped across the OECD from 2.76 in 1970 to 1.74 children per woman of childbearing age in 2010. The world’s richest countries are not having enough babies to maintain their own population sizes.

The total fertility rate is below its replacement level of 2.1 in nearly all OECD countries bar Iceland, Israel and New Zealand. A similar trend is at play in emerging giants such as Brazil, China and Russia, all of which have total fertility rates below the replacement level. India, Indonesia and South Africa remain above, though have all recorded reduced fertility rates in recent decades. The UK's rate is down too, to 1.98, but remains higher than that of most other rich countries, and is roughly the same as France and Sweden.

It is none of the government’s business how many children people choose to have, so I don’t support political action to remedy this. But this trend suggests that, over time, either populations will fall in size or will have to rely on increased migration from those ever decreasing parts of the world where fertility rates remain high.

Population matters for many reasons: denser urban areas tend to allow far more economic activity per person than sparsely populated ones. As long as the infrastructure can cope, and isn't messed up by short-sighted politicians, larger populations allow an improved division of labour and knowledge, and a better matching of the needs of employees and employers, key drivers of success, productivity and innovation. Ageing populations are good for stability but less good for risk-taking. All of this is therefore bad news for many nations.

There is hope for successful urban areas, however, but only if they continue to attract the best and brightest, not just from their own countries but globally, thus allowing them to buck the declining trend. But that means competing on many metrics, including tax, quality of life, infrastructure, crime, services such as education and health, housing costs and leisure facilities.

At the moment, we are falling behind on many of these: in particular, London desperately needs more family homes. As populations age and even shrink, the competition between nations and cities for people will intensify dramatically.
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