Sat, Jan 08, 2011 - Page 9 News List

Demographics lie at the heart of the ‘Japan myth’

By Daniel Gros

Looking to the decade ahead, this analysis suggests that one can predict the rich countries’ relative growth rates based on the growth pattern of their working-age populations, which one already knows today, given that anybody starting to work over the next two decades has already been born.

On this basis, Japan’s relative decline as a major economic power will continue, as its working-age population will continue to shrink by about 1 percent per year. Germany and Italy increasingly show Japanese patterns of decline in their working-age populations, and are thus likely to grow very little as well.

In the case of Germany, one observes an interesting kink in its demography: From 2005 to 2015, the working-age population is temporarily stabilized. However, this will be followed by an accelerating decline as the working age population declines even faster than in Japan.

The current strength of the German economy is also partly because of this temporary demographic stabilization. However, a Japanese-style scenario seems inevitable after 2015. By contrast, the US, the UK and France are likely to grow faster for the simple reason that their working-age populations are continuing to grow, even if at a relatively slow pace.

Two lessons emerge from this consideration of the influence of demographic factors on economic growth. First, the idea of a Japanese-style “lost decade” is misleading — even when applied to Japan. Slow growth in Japan over the last decade was caused not by insufficiently aggressive macroeconomic policies, but by an unfavorable demographic trend.

Second, a further slowdown in rich countries’ growth rates appears inevitable, given that even in the more dynamic countries the growth rates of the working-age population are declining. In the less dynamic ones, like Japan, Germany and Italy, near-stagnation seems inevitable.

Daniel Gros is director of the Center for European Policy Studies.

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