The role demographics play in fast-growing countries

Jonathan Lemco, a senior investment strategist, and Andrew Patterson, a senior economist, in Vanguard’s Investment Strategy Group discuss how demographics can kick-start economies, especially in fast-growing countries in Asia.


Global macro matters

Lara DeLaIglesia

Lara de la Iglesia: I want to now talk about demographics in terms of developed to emerging-market economies, if we can. Jonathan, when it comes to measuring economic growth on a country-by-country basis, how does demographics factor in, in regard to the pace of that growth?

Jonathan Lemco: We know it’s an important factor. There’s any number of factors that go into economic growth as a whole. But, certainly, population change is one of those factors, along with productivity change.

Jonathan Lemco

So, the developing world is expected to have three-quarters of the births in the world going forward over the next 20-odd years or so, 20 to 30 years—three-quarters of them. And many of these will be in Asia in particular—the fastest growth in terms of population is going to be in countries like India first, such that within a few years it is expected to overtake China. But China itself is growing in population now that it’s ended its one-child policy. Indonesia, again, the fourth most populous country in the world today, growing very rapidly in terms of population growth, too. Asia as a whole is leading the world in population growth, and that doesn’t tell us necessarily that in the short run, at least, that productivity from Asia will be that much more rapid than it is in the industrialized West. In fact, as we speak today, we’re told by economists that, approximately, by a ratio of 5 to1, we are more productive in the industrialized world than in the developing world. But nonetheless, that difference is closing and over time will continue to close further, more rapidly.

Andrew Patterson
Andrew Patterson

Andrew Patterson: And a lot of that has to do with technology, technological adoption.

Jonathan Lemco: Absolutely.

Andrew Patterson: Different countries, be it developed or emerging markets, their place in the global value chain.

Lara de la Iglesia: And I would think that it would also probably spur innovation, right? That that’s just going to beget that more positive cycle in terms of technology and the impact on growth in the workforce, correct?

Jonathan Lemco: Absolutely.

Lara de la Iglesia: So, Jonathan, if you could, can you maybe do a bit of a case study, a deep dive on a country that has experienced a significant shift in population? What are the impacts that that’s had on the country’s economic growth?

Jonathan Lemco: One country that just jumps out at me is Japan. This is one of the richest countries in the world. It is among the healthiest countries in the world, where people have amazing diets but live as long as anywhere. But as a consequence, growth has been really negligible, relative to many other industrialized countries.

Japan starts at such a high base, it can afford to falter for years and years. But that’s exactly what is happening, as there’s so little population growth, even at times negative population growth. Immigration is also negligible. It’s very tough to immigrate to Japan.

So as a result, to the extent that economic growth is based in part on the growth of population or on immigration, those are mostly absent in the case of Japan. As a result, as well, older people, who do need more health care and so on, put a big, big strain on the national budgets of Japan.

One of the consequences of that is looking at their public debt to GDP ratio, which at about 247% is virtually off the charts. Within large industrialized countries, it is by far the highest. The United States is somewhere around 100.

Lara de la Iglesia: So, some of this is very interesting, to say the least. I don’t want to say alarming, by any means. It’s interesting. What does it mean for investors, really? How do we boil this down?

Andrew Patterson: So, I would say in terms of investors and their chances for investment success, it is just that. It’s interesting. To be making portfolio allocation decisions or investment decisions based on demographics, I find it very difficult to make a case for that. Demographics, for all the economic fundamentals, tend to be very slow-moving in nature and relatively easy to predict. No one has a crystal ball, but demographics provide one that’s about as close as you’re going to get.

Lara de la Iglesia: So that means it’s priced in, when you say that?

Andrew Patterson: Exactly, exactly. So just because we’ve been talking here about slowing population growth in Japan, that’s been known for quite some time; and the expectation is for it to continue to do so. So markets, being reasonably efficient, we believe that that’s factored in. So, to go out and over-/underweight Japan based on that type of information, investors may be a bit late to the game in that regard.

So, I would say put more of your focus on your own demographics, your own personal situation. What are your goals, what’s your investment horizon? Have there been any big changes in your situation? Those are the factors that tend to have significantly more impact on your own individual success rather than focusing on things like demographics.

Lara de la Iglesia: Great, thank you guys very much.

Andrew Patterson: Thank you.

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