Bernard Hickey looks at whether a demographic dividend for the economy over the last 50 years is about to turn into a demographic drag

By Bernard Hickey

Is our demography our destiny?

In other words, does the structure of our population completely drive how our society performs, both economically and socially?

That was the slightly disturbing question raised in a speech this month by renowned Economics and Demography Professor David Bloom from Harvard University's School of Public Health.

He was talking in Wellington at an event organised by Waikato University and economic research group Motu about the idea of a demographic dividend and what might be done to soften or offset it when it unwinds.

Like most developed countries, New Zealand's economic growth rate sped up through the 1950s, 1960s, 1970s and into the 1990s as people began living longer, the birth rate fell (in part due to the contraceptive pill) and the proportion of people in the most productive working age ranges rose.

More people worked, they had more time to work because they had to spend less time looking after fewer children and more women joined the workforce.

At the same time, better healthcare, vaccines, clean water and antibiotics meant many more people lived for longer.

The resulting surge of people in the working age groups created a 'Demographic Dividend' of stronger economic growth and more surpluses for investing in new technology and even more growth.

This idea seems increasingly relevant now that ageing economies all around the developed world seem to be slowing down inexorably as more working people retire, they save less, spend less and and they begin getting sick, particularly of non-communicable diseases such as diabetes, cancer, heart disease, mental illness and alzheimers.

The idea is that the headwinds to economic growth are building as populations age and the dividend is reversing into a drag.

The most cited example is Japan, which has been in or near recession for most of the last 25 years as its population aged faster than many others, in part because it allows almost no migration and has never been very good at encouraging more women in the workforce. Now Japan's economy is really struggling.

There are now more adult nappies sold than nappies for babies. Japan is cautionary tale of what happens to an economy and society when it fails to adjust its policies (such as migration) to offset the reversal of the demographic dividend.

Bloom pointed out China's population structure faced similar problems as its one-child policy rebounded on it with a vengeance through a declining working age population and a rise in the portion of its population over 65 from 9% now to 24% by 2050.

"In the US we had something we called the 'Fiscal Cliff.' China is about to go over the demographic cliff and the rapidity of the ageing in China is quite astonishing," he said.

So what about New Zealand?

Where is our demography driving us and what should we do about it?

Bloom was more positive about our current situation, given our relatively high net migration rates and our high workforce participation rates, which means we have plenty of workers producing.

He was also upbeat about our ability to adjust our public policies and for businesses and technologies to adjust to cope, but he did flag a few challenges.

"Demographics are providing a very high octane fuel for New Zealand's economy. They've done that for the past five decades and they're continuing to do it today," Bloom said.

"But the demographic cylinders in New Zealand's economic growth engine are now starting to shift into reverse. New Zealand is on a glide path down in terms of the working age to non working age ratio of the population," he said, pointing to a rise in the portion of the population over 65 from 13% now to 23% by 2050.

"This impulse in favour of economic growth is about to start dissipating and everyone should be quite concerned that the demographic dividend that New Zealand has enjoyed might be transformed into a demographic drag," he said.

He said this process was relatively gradual and gave New Zealand time to adjust, potentially by investing more to improve the health and education of its population, encouraging migration and extending the age of eligibility for New Zealand Superannuation.

However, it had other headwinds, including having the third highest rate of obesity in the OECD behind the United States and Mexico, and a sliding performance in the OECD's most recent PISA tests for maths and science education. "That's going to weigh down the economy - pun intended - by reducing productivity and increasing the burden of medical care costs," he said, pointing to our high consumption rates for fast food and low consumption of fruit and vegetables.

Bloom is optimistic there is the time and the ability to make those adjustments.

Record high net migration figures this week show that part of the solution is already in place, but the rejection of Labour's proposal for an extended age of retirement suggests not all is well, along with Prime Minister John Key's insistence there is no need to change it, at least not while he's Prime Minister.

New Zealand's drag may not be as painful as some others, but that does not mean it can be ignored, particularly when it appears a looming issue for our largest trading partner and much of the rest of the developed world.

Our demography does not have to be our destiny, but it sure can be a set of handy hints on what to do and, more importantly, what not to do.

Bloom's argument in favour of investing more heavily and urgently in education and health to reduce the drag is a strong one.

It also tallies nicely with the Prime Minister's much stronger focus in recent weeks on reducing child poverty, which would do much to improve the health and wealth of the cohort who will have to support those baby boomers into their 80s as we enter the 2030s.

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A version of this article was first published in the Herald on Sunday. It is here with permission.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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15 Comments

Record high migration just delays the inevitable.
What about all of the elderly 'hangers on'that have to be a burden on the health and welfare systems?

This is why we need good quality, highly skilled, hard working and young people emigrating into NZ.  This will not be a popular opinion but it is what will pay for this demographic time-bomb.

No increasing population is not the way the world needs to go any longer, the human race has got to understand that a falling population is just what is needed in order for the planet to sustain us, so Japan is on the right track. 
In future older people will need to contribute for longer, and for many that will be a positive, and much more natural as the only reason nature lets us live on well past our reproductive use by dates is so that we are around to contribute to child care of our own children. It is only recently that we have veered away from that, therefore the older generation has become something of a burden.
A huge change must happen if we are not to breed ourselves to the point that something radical will be done to rectify it. Lets use the brains we have to solve this in a more considered way

Yes, as is usual shift a few more deck chairs around.
Short term thinking.

That is silly because it just delays the problem and makes the next round worse. 
How about stopping the pyramid scheme and cutting back tax expenditure on the boomers.

Record high net migration figures this week show that part of the solution is already in place, but the rejection of Labour's proposal for an extended age of retirement suggests not all is well, along with Prime Minister John Key's insistence there is no need to change it, at least not while he's Prime Minister.
 
Fear not - Bill and John have it all under control.
 
New Housing NZ Minister Bill English is pushing ahead with reforms to the Government's NZ$18.7 billion stock of state houses that he hopes could ramp up the development of social housing by Iwi and other community-owned housing providers to address a massive shortage of affordable housing. Read more
 
Speaking this week about high house prices, and the Government's plan to get more homes built, the prime minister said some people will have to consider going into an apartment, in line with international trends.
"If you're a young person buying your first place in Sydney or Melbourne or Brisbane, in most instances you'll be going into an apartment," he said. Read more
 
Thereafter, the population will face the demands of rack rents to finance the needs of the deserving.
 
There are plently of examples where the population has been herded into government initiated and financed high rise/density  housing only to turned over to the likes of Goldman Sachs etc. Let's be clear there is always a way forward for the right sort of government.
 
(Reuters) - Last year Madrid’s city and regional governments sold almost 5,000 rent-controlled flats to private equity investors including Goldman Sachs and Blackstone. At the time, the tenants were told their rental conditions would remain the same.
But as old contracts expire, dozens of people have received demands for higher rent, been told their rents will increase dramatically, been threatened with eviction or moved out to escape the insecurity. Thousands of Spain’s poor now depend for their homes on the generosity of private equity. Read more

As well as the deflationary, ZIRP drag 
"Just the other day the Governor of the Reserve Bank announced that the official cash rate was being increased to 3 per cent. During questioning he gave "forward guidance" that it would be 4% by the end of the year and probably 5 per cent within two years. He further stated that a neutral OCR is estimated to be 4.5 per cent."  NZ Herald
It is obvious that the OCR is not going to be 4% by Dec, or 5% by 2015 year end. 
This means continuous cautious consumer spending for the medium term.

One of the important things a relatively higher (= normal) OCR can do (apart from reward savers), is to pressure 'investors' who seek untaxed gains from property. Property 'investors' who rely on and benefit from leverage operate their 'business' in a way no other exporter or normal business operates - with extreme leverage risk (which I would define anything over 40% LVR). If the government won't close that type of irresponsible activity, then the RBNZ is right to attack it.
 
And given that gains from housing are currently exceeding our export revenue, that is a bigger problem than just about anything else in New Zealand's economy. I hope the RBNZ raises the pressure on this rort. But I agree it would be better if there was tax and legislative pressure so that the work did not fall to the central bank.
 
The coming IRD pressure on gains is a step in the right direction, however. They also have rules for companies against 'thin capitalisation'. Lets get the IRD to apply them to high-leverage businesses like property investment as well.
 
Together Wheeler and the IRD could make a big, positive difference.

Inflation is now dead 
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1134...
So the "inflation cult" engaging in interest rate hikes and threats continually is killing the general economy, especially areas outside Auckland.  
 

Too much of the housing stock is in the hands of investors, therefore they are the problem, sorry about that, as you appear to be part of it

It seems important in the debate to consider what the measures of success should be- what does success look like? The article doesn't mention what Mr Bloom's views are. Potentially he is considering GDP, where I would prefer GDP per capita at PPP, and really would prefer GNP per capita at PPP. GDP measures the value of production, GNP the value of income- and notably the Japanese have increased their income more than their production, because they have saved a lot where we have gone into debt. Much of the returns on our increased production actually now go to the foreigners who own the assets.
Nevertheless Japan's GDP per capita at PPP has gone from US$ $29,500 in 1990 to $35,500 now. NZ's has gone from US$24k to US$33k. We have had the more impressive growth, but still haven't caught up. Has our quicker growth been due mostly to demographics. or to other economic circumstances? I would argue Japan has faced more competition in its key industries from the growth of China and Korea, and from Germany's gaming of the Euro, where NZ has benefitted greatly from the growth of China. Demographics have not been the key driver.
Ageing no doubt has issues regardless. Alzheimers and adult nappies don't appeal to anyone, but immigration doesn't fix them. 
I am not against immigration, especially for skills clearly in need; and also I enjoy the more international feel of NZ that has resulted. But do not encourage it for the wrong reasons. GDP on its own is a poor measure. Education certainly remains a priority.
 
 

Let's not just measure GNP - Let's  look at NNP.
 
Depreciation is a real cost and Gross is pre depreciation - so we need to look at  NNP to monitor how well we have invested our capital over time.  There are a number of assets that have not been very productive or lasted as long as intended.  You can't close down a factory and write off the assets without consequence to the national accounts.

Fair point. Even gnp at PPP data doesn't seem easy to find so suspect NNP is even harder.

Ever increasing population is the answer then. Just keep doubling every few years. Oh. Hang on -what about ?

This is the biggest load of drivel i have read in a very long, long, long time.
 
Let us say all our population was UNDER 60 years of age.
 
Now what would we all do? What would we invent and build to keep us in jobs?
 
Washing machines - no allready have them
Cars = no allready have them
Fridges - no allready have them
Dishwashers - no allready have them
Clothes dryers - no allready have them
 
Hmmm now what could we invent that will create jobs and make us all rich
Ahh, got it
APPS, we will all invent apps for the smart phone.
That will solve all our problems
 
Clever me.