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<<<< PEOPLE POWER RINGS CHANGES
Christopher Smallwood
The economist John Maynard Keynes was fond of remarking that we tend to assume the future will be like the past -- despite constant evidence to the contrary. Such an assumption would be particularly wide of the mark today because we are about to enter a period of huge changes in the balance of economic -- and hence political -- power in the world.
During the next few decades demographic trends will transform the economic importance of different areas of the world. American power will be vastly enhanced at the expense of Europe. In the east, India will overtake China. In our own part of the globe, the economic weight of different European countries will change markedly --with Germany, Italy and Spain shrinking in importance relative to Britain and France.
It is surprising that prospective developments on this scale have not attracted more attention. People know that the population is ageing across much of the developed world, and that the associated strains are likely to be especially acute in continental Europe and Japan. But policy-makers have focused on the budgetary problems that are likely to arise as more elderly people have to be supported by shrinking numbers at work.
What has yet to sink in is the economic impact of the huge shifts in relative populations. And this despite the wealth of analysis that has been done by international agencies -- the United Nations, the World Bank and most recently the European Commission -- all of which have come to similar conclusions.
Some of the most dramatic conclusions concern the long-term prospects for Europe (defined as the current 15 members of the EU), compared with the United States. Life expectancy is similar in both areas, but fertility rates differ substantially and have done for years. The American birth rate is more than two per woman and rising, compared with less than 1.5 in Europe. In some European countries -- Spain, Italy and Greece -- the birth rate has fallen as low as 1.1.
These differences are reinforced by immigration trends. The US Census Bureau has forecast that between 2000 and 2050 the American population will increase by 130m, of which 50m will be immigrants. This compares with a predicted 30m immigrants for Europe. Taking birth and immigration rates together, the difference in prospects is stark. Today, Europe's population is more than 100m larger than America's, but the American population is set to overtake it before 2040, and exceed it by some 40m 10 years later.
The economic implications of these population projections are far-reaching. A country's long-term growth rate is determined by the increase in its working population and the rise in productivity (output per head of working population). The working population of the EU is broadly expected to mark time until 2010 and then to decline sharply. These, however, are average figures -- the working populations of Britain and France will not fall at all, whereas those of Germany, Italy and Spain are forecast to drop by as much as a third in coming decades.
By contrast, America's working population will grow continuously, and the rate will accelerate after 2025. As a result, the European Commission calculates that the US economy will grow twice as fast as Europe for decades to come -- averaging 2.5% a year compared with less than 1.5% a year in Europe.
The result will be a growing economic imbalance between America and Europe, as illustrated by the second chart. In 2000, the United States accounted for 23% of global GDP, compared with Europe's 18%. By 2050, on the commission's projections, the US share will be up to 26%, while Europe's will have shrunk to only 10%. The American economy is currently about 20% bigger than the EU, but by the middle of this century it will be two-and-a-half times the size.
Need Europe's economic future be as depressed as these forecasts suggest? Not necessarily. In theory, faster productivity growth could come to the rescue. Productivity growth in Europe has averaged less than 1.5% a year over the past 20 years and the projections assume this rate persists. Europe could follow the example of America, where productivity growth has accelerated because of the spread of new technologies. But there is little sign of this. R&D spending is lower in Europe than in America, and strong unions, muted competition and extensive regulation conspire against rapid change.
Measures widely recognised as necessary to improve the EU's economic performance -- more flexible labour markets, more competition, more incentivising tax systems -- will have to be implemented before new technologies can be developed and diffused at the rate achieved by America. Nothing less than a cultural revolution in European social and economic traditions is necessary before Europe's economy can become as dynamic as America's, let alone surpass it.
Could immigration come to the rescue? Unlikely. The forecasts already assume a continuation of immigration at present rates. In order to keep the working population growing at the rates of the 1990s, the present rate of immigration would have to triple at least. Apart from Britain, the present members of the EU have refused to accept increased immigration even from the other European countries joining next year. They are even less likely to accept immigrants from the countries near Europe that have excess youthful populations -- in North Africa and the Middle East.
The conclusion is that future growth in Europe will indeed be dominated by the downturn in working population and that the picture emerging from the charts of steady decline against America is the best view of the future we have.
In this case, fundamental questions need to be re-examined. A paper on Demographic Trends and Economic Growth, just published by Andrew Jones and myself (details below), examines the long-term position of leading British companies and shows that, in terms of profits and turnover, British companies rely almost as much on the EU as on the US. The question is whether this is desirable, when most of the growth in the developed world in coming decades is likely to occur in North America.
At the political level, the issue is whether it is sensible to integrate our economy ever more thoroughly into Europe's -- perhaps even adopting Europe's currency -- when, as far ahead as we can see, Europe is going to be one of the more subdued areas of the world. It would be more rational to orientate the British economy towards areas of rapid growth.
Christopher Smallwood is economic adviser to Barclays. This column is a personal view. Demographic Trends and Economic Growth: Positioning Companies for the Long Term, by Christopher Smallwood and Andrew Jones, is available from Makinson Cowell.
Sunday Times 10 August 2003 <<<<<
Keith Hudson, 6 Upper Camden Place, Bath, England
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