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FY360° | Demography and economics: Look past the past


Most of the world is now at the point where the support ratio is becoming adverse, and the growth of the global workforce is slowing.



This column argues that these changes will have profound and negative effects on economic growth. This implies that negative real interest rates are not the new normal, but rather an extreme artefact of a series of trends, several of which are coming to an end. By 2025, real interest rates should have returned to their historical equilibrium value of around 2.5–3%.

Introduction

Our history is our database. When seeking to peer dimly into the future, our normal response is to examine what happened in (similar) past episodes and then to extrapolate those outcomes into the future. This assumption, that the future will mimic the past, is hard-wired into almost all our forecasting exercises, from the most simple to the econometrically and technically most complex.

Yet this assumption, that the future will be like the past, is perhaps more questionable now than for decades, at least in the economic sphere. All around the world we stand on the cusp of a dramatic shift in the structure of our populations, the ageing of our people. Only Japan has yet decisively entered into this difficult new world, and its experience has been affected by some special factors; it coincided with a financial crisis and occurred while its neighbours in Asia were still benefitting from a population ‘sweet spot’, with their ratio of workers to dependents (otherwise known as the ‘support ratio’) rising. So its experience is not necessarily a reliable guide to the future either.
Future demographic changes

In the standard demographic transition process, outlined by Ronald Lee in his paper at this year’s Jackson Hole Conference (Lee 2014), with improving living and medical conditions,...

More:
www.voxeu.org/article/demography-and-economics-look-past-past://
www.voxeu.org/article/demography-and-economics-look-past-past

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Monday, November 17th 2014
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