demographics, aging populations, and China

I first learned about the importance of demographics from the stock market from an economist at Donaldson Lufkin & Jenrette (which was ultimately acquired by Credit Suisse) in the mid-1980s.

He used to say that you can’t just manufacture a whole bunch of 30-year olds out of thin air–in other words, that a country’s population profile can have a profound influence on consumption patterns for a very long time.  Yet, in the rough and tumble of everyday trading on Wall Street, demographics is often forgotten.

At that time, his main point was the enduring influence on consumption of the post-WWII Baby Boom.  The sheer size of the cohort was important.  But not only that, but so too was its aging–and the resulting age-related shift in their buying habits.  Today, I imagine he would be stressing the age-related fading of the Baby Boom’s influence on consumption, as well as the issues surrounding the cohort’s longevity in retirement.

There are already two examples of aging advanced economies where the work force is significantly older than in the US.  They’re Japan, whose workforce is the oldest in the world and which has already been shrinking for many years due to age; and the EU, whose workforce age is about midway between the US and Japan.

I’ve written often about the social/cultural basis for Japan’s protracted economic decline.  I think this is the main reason, both for that country’s quarter-century of stagnation and why Abenomics won’t work.  But sometimes I wonder how much of Japan’s troubles are simply demographic–and therefore a harbinger of what may be in store for the US at some point.  It doesn’t help my mood that the next-oldest area in the world, the EU, is exhibiting many of the same symptoms that Japan did in the 1990s.

Although I’m not sure how well-known it is, China is, despite all its current economic dynamism, the other important aging country–thanks in large part of the policies of Chairman Mao.  Stratfor (a service I don’t subscribe to but which has competent analyses of world affairs) has just published a good summary of the situation.  The prose is a little too breathless, in my view, but the facts are basically correct.  China is facing workforce retirement issues comparable to those in the US.  Its industrial base is relatively unstable,  It’s in the early stages of transformation from labor-intensive, export-oriented manufacturing, to higher value-added production.

It seems to me that the new Chinese administration is well aware of its demographic problem and is taking sensible steps to redirect its economy to cope.  In fact, Beijing appears to be acting as if its aging workers are its principal long-term issue   …which I think it is.  That would also explain why China is so willing to sacrifice short-term economic growth in order to establish a more advanced, and more stable industrial base.  It would suggest, as well, that investing in basic industry in China–no matter how cheap the companies look–would be (to my mind, anyway) a big mistake.

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