My view on what's going on in the financial markets and the global economy, and a few other things that might interest me from time to time.

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  • tim@emorningcoffee.com

Dinner Table Economics: Global Population

Updated: Nov 2, 2020

According to the Population Reference Bureau, an estimated 108 billion people have been born since the beginning of the “modern” human race around 50,000 years ago. Since the current population of the world is 7.8 billion, that means that that approximately 7.2% of all of the people ever born are alive today! You might find this interesting, but you might also be wondering what population has to do with economics?  The simple answer is “a lot”.  

As I discussed in the last Dinner Table Economics (“DTE”) article which you can find here, the absolute level of GDP of a country is much less important that GDP/capita, which measures the average wealth of each individual in a country. This is directly tied to a country’s population. Many countries also provide healthcare and / or state pensions to their population; therefore, the ratio of workers to retired people determines just how heavy the burden will be on the working population to support the retirees. There is also the question of population growth itself, a balancing act between too rapid growth leading to overly-stretched infrastructure, and too slow growth requiring a country to turn to rely on a steady flow of immigrants to maintain the existing citizens’ standards of living. And there are many more interesting things about population and demographics. Let’s start with the basics.

The growth of the world’s population

The graph below illustrates the growth of the world’s population over the last 12,000 years (source:OurWorldinData.org).

It is remarkable how steep the line became as population growth exploded exponentially around 500 years ago. However, even though it is hard to tell from this graph, the rate of population growth globally has actually slowed since the early 1960s. In fact, the population growth rate peaked in the late 1960s at around 2.2%/annum and has been steadily declining since then. The growth rate for the year ended July 1, 2020 is expected to be 1.05%/annum, meaning that the global population will increase by an estimated 81.3 million people this year (source: Worldometres.info). Based on various data sources regarding fertility and mortality rates / 1,000 people, around 141 million people will be born this year and 60 million people will die. According to 2019 data from the United Nations, the average life expectancy for men at birth is 70.2 years and for women at birth is 75.0 years, and this varies by country.


It is also interesting to look at population growth from a different perspective, which is by examining how many years it has taken for the world’s population to double historically. As you can see in the graph below, the population growth rate plateaued in the late 1960s (as mentioned above), and is now declining.

Where the world’s population is located Two of the most important population facts you should remember “for the dinner table” are in the table below. The first is the total population of the world (nearly 7.8 billion), and the second is that over 35% of the world’s population live in only two countries - China and India.

Interestingly, you can see in the table above that the U.S. is the world’s third largest country by population, although it has less than one-quarter of the population of the world’s second largest country, India.  The table also shows that the population of the EU-27 collectively is 35% larger than that of the United States, reflecting the strength of the E.U. as a bloc as far as global trade.  Since I discussed the GDP of the state of California in my previous DTE article about GDP, you can see that with a population of over 39 million people (around 12% of the U.S. population), it would (if it were a country) rank as the 36th most populous country in the world (and, as you might recall, the 5th largest economy in the world when measured by GDP).  

The table to the left shows the concentration of global population of countries in bands of 10 countries, for the top 40 countries in the world. For reference, there are 193 countries recognised by the U.N. (data from Worldometer). As the table illustrates, 70% of the world’s population resides in the top 20 countries of the world by population size (and China and India together account for half of that). The 40 most populous countries in the world contain nearly 83% of the global population, leaving the remaining 17% spread across 153 nations.

How rich are the developed economies?

From a wealth perspective, the G7 countries collectively account for $39.6 trillion of the world’s GDP, or 45.7% of circa $86.6 trillion of global GDP, whilst representing only 9.9% of the world’s population. China, the world’s most populous country, is the second largest country as far as GDP with $14.1 trillion (16.3%). As the table below showing GDP/Capita illustrates, this means that China has around one-third of the GDP of the G7 countries collectively but twice the population, resulting in a GDP/capita that is only around 20% that of the G7 countries. The good news for China is that its economy remains one of the fastest growing economies in the world, and ensuring continued growth will ensure further improvement in the standard of living of its population rapidly. A more challenging story involves the world’s second most populous country, India. India has 1.36 billion people (17.5% of the world’s population), but GDP of only $2.7 trillion (3.1% of global GDP).


GDP/capita, a much more important statistic than absolute GDP, was discussed in the first “Dinner Table Economics” article in emorningcoffee.com regarding GDP, which you can findhere.The table below provides some insights into the wealth of people (as measured by GDP/capita) in the G7 countries, the EU-27, the Eurozone (19 countries that share the Euro), and the world’s two most populous countries, China and India.  

Demographics (briefly) The median age of the world’s population is now 30.9 years old, having increased from a median age of 21.5 years in 1970. The increase in median age means that the world’s population is getting older, one of the many interesting trends about which you can read more in Our World in Data.

Although the world is getting older on average, the median age varies rather significantly country-by-country. The two tables below illustrate the 10 countries that have the oldest and youngest populations based on median age.

As you might surmise from studying these tables, Africa is the continent that has the youngest population (median age of 19.8 years), and Europe is the continent that has the oldest (42.7 years). Asia and South America both have a median age of around 32 years, between younger Africa and older Europe. In general, the countries and regions with the youngest populations tend to be those growing the fastest, although they are often also the poorest countries reflecting the fact that countries with older median-age populations have had more collective time to generate wealth.

The table to the right contains the median age for the world’s most developed countries (the G7), and also – to contrast – the world’s most populous nations, China and India.  The drivers of population growth - and the demographics associated with such growth over time - are fertility, mortality (i.e. life expectancy) and migration patterns.

The population is often divided into three buckets: 15 years or younger (too young to work), 16-64 years old (the workers), and over 65 (retired, not working). The graph below from Statista shows the non-working segments of each continent and the world, i.e. the 15 and under bracket and the 65 and older bracket.

As the graph illustrates, Africa has the highest percentage of population under 15 years old and the lowest percentage over 65, not surprising given the comments earlier about median age of people on this continent.  Europe is at the other end of the spectrum, with a slightly higher percentage of people 65 or older than people that are 15 or younger. Those countries with a larger percentage of their population 15 and under will realise a “demographic dividend” as their younger population moves into the worker category, a stage that most developed countries have already realised.


Naturally, the higher the number of non-workers (i.e. 15 and under or 65 and over) to workers, the greater the burden on workers to support the non-working segments of the population that are economically dependent upon the workers. This ratio is referred to as the “dependency ratio”, which for the world according to the CIA World Factbook, is currently 53.3. The countries and regions with the youngest populations in the world have the highest dependency ratios. In fact, the 25 countries with the highest such ratios are all in Africa, whilst – interestingly – six of the 10 lowest dependency ratios are the GCC states. A second important ratio - the “potential support ratio” - looks at the ratio of the number of workers (ages 16 to 64) for every one person over age 65, ignoring the non-working population under age 16. The lower the ratio, the greater the burden falling on each worker to support the elderly in its society. Currently, this ratio globally is 7.0, meaning that for every person in the world over age 65, there are seven workers. Not surprisingly, the lowest such ratios belong to countries with the oldest populations, led by Japan and Italy. To put these ratios more into context, let’s look at the dependency ratio and the potential support ratio of a few of the most populous countries. Note that the global population ranking is the left-most column, but each table is ordered by the relevant ratio that appears in the right-most column. 

Nigeria, the world’s seventh most populous country, has the highest dependency ratio because of the country’s large young population, i.e. those 15 years and younger.  Japan, the world’s 11th most populous nation, ranks second but for a different reason, which is because it is the world's oldest country with a large number of people over age 65. As far as number of workers per retiree (ignoring those under age 16), Nigeria has the highest such ratio because it has the smallest percentage of retirees.  Perhaps more revealing, the table on the right shows that many developed economies are in fact the ones with the lowest number of workers / retiree, and these also happen to be countries which have lower fertility rates. This means that over time in these countries, the burden will be increasingly heavier on its working citizens to support the retired people as the number of retired people increase and - if current trends continue - the life expectancy of retirees continues to increase.

Migration

Migration is too complicated of a topic for me to cover in detail in this article. However, you should note that immigration plays a critical role in countries where there is production capacity, but not enough workers (perhaps because the population is aging) to maximise GDP.  The U.S. has been one of the countries most dependent on immigrants over its history, enabling the country to develop into the largest and most prosperous country in the world. There is also a darker side of migration, when war, civil unrest or other domestic crises cause large portions of the population to emigrate to safety. Unlike a measured influx of immigrants to assist a country that has indigenous shortfalls of workers, an influx of refugees can cut the other way, straining an economy which does not have the capacity to support the immigrants. Also, the immigrants might simply lack the skills to be gainfully employed, causing them to become a burden on the existing population that must now support them.

Why does all this matter?

The average age and distribution of ages in countries matters for two reasons.  Firstly, there is a natural replacement rate that requires a population to be able to replace workers as they leave the workforce so as to support economic stability and ideally modest growth.  Of course, productivity and other things also play a role, but natural replacement is important too.  This feeds into a collateral issue that is very sensitive in many countries – immigration - which as I mentioned above is a complex topic that’s best left for another day. Secondly, many countries have state-supported pension schemes for their population post-retirement. Social security is an example in the U.S.  These are typically “pay as you go” schemes, meaning that they are unfunded.  Therefore, retirees depend on contributions from those people still working to finance their retirement, and similarly, this generation of future retirees will then be beholden to the next generation of workers, and so on.   This has far-reaching effects on the viability of state pension systems as you might imagine, because the ratio of workers to retirees must be maintained so as to ensure that future retirees can receive the pension to which they are entitled.  Other factors also play a role, including the official retirement age (meaning when you are entitled to collect your pension), the rate of inflation and average lifespan of the population. These factors both suggest that population needs to remain young and vibrant for an economy to grow, but the fact is that a population that is growing too quickly can raise issues at the other end of the spectrum, especially in emerging market countries which already struggle to support their existing populations. Conclusion Population matters in economics, but peeling back the onion another layer raises a lot of issues about demographics that have far reaching effects on the well-being of a country.  

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