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14 The Economist June 3rd 2023 Briefing Ageing and innovation “Adam is a special child,” says the voice­over, as the camera pans across abandoned classrooms and deserted ma- ternity wards. “He’s the last child born in Italy.” The short film made for Plasmon, an Italian brand of baby food owned by Kraft- Heinz, a giant American firm, is set in 2050. It imagines an Italy where babies are a thing of the past. It is exaggerating for ef- fect, of course, but not by as much as you might imagine. The number of births in It- aly peaked at 1m in 1964; by 2050, the UN projects, it will have shrunk by almost two- thirds, to 346,000. Plasmon knows what side its fortified biscuits are buttered: a shortage of babies is not good for sales of baby food. But the rapid ageing of many countries around the world will be bad not just for certain indus- tries, or for governments whose costs rise as their revenues decline. The falling num- ber of educated young workers entering the labour market will also reduce innova- tion, sapping economic growth across the board. Over time, this effect may prove the most economically damaging result of the greying of the rich world, eclipsing grow- ing bills for pensions and health care. Italy and Japan, in particular, are the poster pensioners for demographic de- cline and its economic consequences. In both countries the fertility rate (the num- ber of children a typical woman will have over her lifetime) fell below 2.1 in the 1970s. That level is known as the replacement rate, since it keeps a population stable over time. Anything lower will eventually lead to a declining population, something both Italy and Japan have suffered for about a decade. The median Italian is now 47; the median Japanese 49. Earlier this year, Kishida Fumio, Japan’s prime minister, warned that the country is “on the brink of being unable to maintain social functions” because of its baby bust. But Italy and Japan are no longer the most extreme examples of demographic decline. In 2022 South Korea had a fertility rate of just 0.8. A rate below one means that the next generation will be less than half the size of its parents’. As recently as 2012 the UN projected that South Korea’s popu- lation would shrink by only a fifth or so by the end of the century, from 52m today to 41m by 2100. More recent forecasts, how- ever, suggest that the population will fall by more than half over the same period, to just 24m (see chart 1 on next page). South Korea may be an exceptional case, but demographic decline is becoming commonplace. In 2010 98 countries and territories recorded fertility rates below 2.1. By 2021 the number had grown to 124, more than half of the places for which the UN collects data (see map on next page). By 2030 it expects the tally to reach 136. Matthias Doepke, an economist who studies the financial causes and effects of changes in fertility, notes that falling birth rates are no longer limited to richer coun- tries or to wealthier families within a given country. “There’s a global convergence in women’s aspirations for careers and family life,” says Mr Doepke. Fertility rates for women with fewer years of formal educa- tion have fallen towards the levels of their more educated peers. In fact, women in America with exactly 16 years of schooling (mostly those with undergraduate degrees) have marginally fewer children on average than those with more schooling. By the same token, low fertility rates have spread from rich countries such as It- aly and Japan to middle­income ones such as Thailand (1.3) and Brazil (1.6). Even more notably, India’s fertility rate recently fell below 2.1 and is expected to keep falling. Since it accounts for a fifth of the world’s population, that will have global repercus- sions. The 15 biggest economies in the world, including Brazil, China, India and Mexico, all have fertility rates below 2.1. In 2021 there were 782m people aged be- tween 21 and 30 in countries where fertility is below the replacement rate. By 2050 this group, in effect the potential number of home­grown entrants to the workforce, is expected to have dropped by a fifth, to 619m. This fall is not some subjective and SINGAPORE Ageing economies will suffer not just fiscal problems, but also a dearth of new ideas The old and the zestless 012
The Economist June 3rd 2023 Briefing Ageing and innovation 15 questionable forecast: most members of that generation have already been born, and fertility rates do not tend to change rapidly. In countries in which the fertility rate is below 1.5, which includes almost all of East Asia and much of Europe, the de- cline will be more extreme, with the same cohort contracting by 37%. Instead of a population structure shaped like a pyramid, with each new gen- eration bigger than the one that preceded it, or even a pillar, with all generations sim- ilar in size, these countries will become in- verted pyramids, with older generations replaced by smaller and smaller cohorts. In parts of the world this has already hap- pened: the number of Chinese aged be- tween 21 and 30 has already fallen from 232m at its peak in 2012 to 181m in 2021. The decline will accelerate rapidly in the 2040s, leaving China with fewer than 100m people in the same pool in the mid­2050s. The population of Europe in the same age category will fall from around 85m to be- low 60m over the same period. The obvious way to compensate for dwindling birth rates is immigration, which is on the rise in much of the rich world, despite the political tensions it has generated in recent years (see Finance sec- tion). But as demographic decline affects more and more countries, educated mi- grants will become harder to find, even as the shrinking of the native­born popula- tion accelerates in many rich countries. For China, with a population of some 1.4bn, the notion that enough immigrants could be found to reverse the effects of dwindling birth rates is fanciful. Although India’s population is still growing, it will peak in the 2060s, if not sooner. Sub­Saha- ran Africa is the only region of the world that seems likely to be a big source of po- tential migrants for many years to come. But even there, birth rates are falling more quickly than past projections predicted. Although immigration will continue to temper demographic decline in many countries for decades, in the long run, it cannot fully compensate for the baby bust in big economies. Some of the consequences of these de- mographic shifts are well known. An ever greyer population will mean higher spend- ing on public pensions and health care, but there will be fewer people of working age to pay the taxes required. The rich world currently has around three people between 20 and 64 years old for every one over 65. By 2050 this ratio will shrink to less than two to one. That will necessitate later re- tirement ages, higher taxes or both. The economic consequences of demo- graphic decline are not only fiscal, how- ever. Labour is one of the three main deter- minants of growth, along with capital and the efficiency with which both are used (productivity). Shrinking workforces, other things being equal, automatically lead to lower economic growth. But demo- graphic decline also has knock­on effects on capital and productivity that are much less well understood. Many economists believe that a smaller working population will push down inter- est rates in real terms (meaning, after ac- counting for inflation), because there will be fewer investment opportunities and a large stock of savings accumulated by those in or near retirement. But others, such as Charles Goodhart, a former official at the Bank of England, believe the effect will be the opposite. As more people enter retirement and so stop saving but continue to consume, there will be less funding for investment, pushing real interest rates up. Both sides agree that an ageing popula- tion will reduce both savings and invest- ment, but disagree about which will de- cline more quickly. But the balance of evi- dence points towards lower real interest rates: many developing economies still have decades of savings accumulation ahead of them, and retirees often cling to their savings rather than running them down. Either way, demographic changes will have huge implications for markets. Broadly speaking, low real interest rates are good for those who have already accu- mulated assets but bad for those still trying to save, including the increasing numbers of workers approaching retirement with inadequate nest eggs. But it is on productivity that demo- graphic decline may have the most trou- bling effect. Younger people have more of what psychologists call “fluid intelli- gence”, meaning the ability to solve new problems and engage with new ideas. Old- er people have more “crystallised intelli- gence”—a stock of knowledge about how things work built up over time. There are no precise cut­offs, but most studies sug- gest that fluid intelligence tends to peak in early adulthood and to begin to decline in people’s 30s. Both types of intelligence are useful: companies, industries and econo- mies need both youngsters able to respond to new challenges and seasoned veterans with a detailed understanding of their trade. But the two are not of equivalent val- ue when it comes to innovation. In research published in 2021, Mary Kal- tenberg and Adam Jaffe, both economists, and Margie Lachman, a psychologist, used a database of 3m patents filed over more than 40 years to explore the relationship between innovation and age. Depending on the scientific discipline, the authors note that patenting rates peak in a re- searcher’s late 30s and early 40s. The rates of patenting then decline only gradually through their 40s and 50s. But for disruptive innovations, which fundamentally change a scientific field, the picture is very different. The research- ers used a measure of disruptiveness based on the number of citations of a given in- vention in future patents. If a particular patent is cited by subsequent inventors, but that patent’s technological predeces- sors are not, it is categorised as a disruptive Six shades of grey Population estimates, January 1st 2000=100 Source: UN Population Division 1 150 125 100 75 50 FORECAST 210020 40 60 802000 United States South Korea Japan Italy China Brazil Hungary Germany Poland France Britain Singapore Thailand Japan South Korea China Australia Brazil Mexico United States Canada Congo Italy Nigeria India 12 456 3 Source: UN Population Division Where have all the babies gone? Total fertility rate, live births per woman 2023 forecast 012