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Nov 1, 2011 | 08:46 GMT

8 mins read

The Earth at Population 7 Billion

It can be difficult to separate the important from unimportant on any given day. Reflections mean to do exactly that — by thinking about what happened today, we can consider what might happen tomorrow.

The United Nations Population Fund estimates that the world's 7 billionth person was born Oct. 31. Understanding demography is a core part of STRATFOR's work, as it colors a great many factors, from whether a state can balance its budget to whether a state will be capable of defending itself.

Conventional wisdom tells us that the increase in population is putting pressure on the global ecosystem and threatening the balance of power in the world. As the story goes, the poorer states are breeding so rapidly that within a few generations they will overwhelm the West and Japan — assuming the environment survives the rising tide of people.

That thinking obscures a far more complex reality. Four factors help properly analyze the impact of population growth. First, populations are indeed cresting in the developed world — and appear already to have done so in Germany and Japan. Because of large gains in life expectancy, these cresting populations are first aging. Third, while a senior citizen and an infant both count as a single person from a census point of view, only one of them can one day have children — in other words, aging is the last step before a population begins declining. The developed world is moving into an era of shrinking populations. And before anyone thinks that the masses of the developing world are about to take over, the demographic profiles of the major developing states are only three decades behind the developed world.

So while the absolute population of the developed world will crest within the next generation, that of the world as a whole will level out and begin to decline sometime in the next two to three generations.

This trend of aging, followed by shrinking populations, is already rewriting the geopolitical environment. A normal population structure is tilted toward the young: there are many babies, fewer children, still fewer young adults, and so on. Young adults support children, but they are at the low ebb of their earning potential. Young adults' large numbers plus low earning power combine with their high living costs to make them debtors. Older adults have finished raising children, and their earning power is at its zenith: They are a society’s creditors. A typical population structure features fewer mature adults than young adults, which leads to weak capital supply but strong capital demand. Loans are expensive, borrowing is difficult and cost efficiency is of crucial importance. This was the normal state of affairs globally in the 1960s, 1970s and 1980s.

The modern era's trend of aging-but-not-yet-declining populations has changed all of these calculations. There are many more mature adults in all developing countries than there are young adults. Capital supply is robust as those mature workers save for their retirement and pay more taxes than when they were younger (or both). But there are fewer young families to absorb the available capital. In such a capital-rich environment, borrowing costs plummet, leaving substantial room to lower taxes. Economic growth greatly increases when money management becomes a booming industry as every saver looks for ways to earn returns on investments. Sectors become overinvested and bubbles form; volatility and financial crashes become more common.

Demography drove economies to this condition in the 1990s, when credit (and thus growth) increased. In the 2000s, mature workers produced a good deal of excess capital. The 2010s find the global economy correcting itself after 20 years of excess-capital-driven growth — at the same time as mature workers are retiring and leaving their capital-supplying role.

A darker period is likely to dawn by the 2020s. Most of those high-wage earners will have retired — they will no longer supply capital and instead will depend on the state to issue their pensions. The cost of capital will invert strongly. The generation born between 1964 and 1979 — characterized by its low numbers — will be responsible for supplying capital. Not only will they have to fund the younger generations, they also will have to support the pensions and geriatric-support programs created by their predecessors. Since the developing world's aging process lags about 30 years behind that of the developed world, this same generation will act as the primary capital suppliers to the entire world.

The developing world started to age too late. Its countries will lack enough mature workers to generate the capital needed to replace that which can no longer be imported from the developed world. The developing world will experience the financial challenges of the developed world, without having built up the infrastructure and industrial base the developed world has had for three generations. Such capital scarcity threatens to halt growth across the poorer parts of the planet. It will also make for strange bedfellows: The only hope the developed world’s ’64-’79 generation will have to meet their bills is to import more taxpayers. Perhaps the most unexpected outcome of population patterns is that the developed world will have a massive interest in attracting immigrants.

The aforementioned analysis is what the picture will look like on a global scale — but with demography, every country and region in many ways constitutes a unique reality. The trends that shape demography are affected by geography and culture. The overarching trend is of a shrinking global population, but there are dozens of standalone stories where that trend is either bucked, magnified or otherwise interpreted through the lens of the locality. Here are five examples:

Russia’s population started shrinking some 20 years ago due to the influence of alcoholism, drug abuse and communicable diseases rather than due to having achieved affluence. That difference in causality whittled away the morale of Russia’s potential young parents so deeply that Russia now has more citizens in their 20s, 30s, even their 60s, than it has teenagers. Russian power may well be in sharp ascendance currently, but it is entirely likely that in about 10 years time, the Russians will lack the people they need to man a sizable army, or perhaps even to maintain a modern society.

India is the only major developing state that is still experiencing a normal population profile (in which there are more babies than children and more children than young adults, etc.). This could make India the world's workforce, but the country probably will soon be the target of huge citizen-recruitment programs from the rest of the world. Unless India can make a significant leap in the quality of its mass education, the coming brain drain will deplete the country's skilled labor.

China's population stands at more than a billion, but after thirty years of the one-child policy and of population movements from rural to urban areas, the Chinese birthrate has fallen dramatically. Only Japan is aging faster than China. Even if STRATFOR is wrong and the Chinese economy does not collapse over the next few years, it will struggle mightily to survive the 2020s, when China faces sharp qualitative labor shortages. China's economy depends on attractive labor costs — the looming bottoming out of the cheap, low-skilled labor pool could be a deathblow.

Brazil may not turn out as capital-starved as much of the developing world. The country's demographic has not inverted, but merely slowed: its number of 20- and 30-year-olds is similar to its number of teenagers and children. In two decades, Brazil may have a population structure that makes it relatively capital rich (by the standards of the world in 2040). It could well become the only major developing state that can generate its own capital and not depend on the developed world's shrinking capital supplies. And thanks to the local opportunities that local capital can create, it might avoid losing too much of its skilled labor to foreign recruitment.

The United States is the only developed state that still can claim a positive demographic profile, and this is before factoring in immigration. In the developed world, only New Zealand is younger than the United States, and the United States is the only developed state that has a young generation strong in numbers — those born between 1980 and 1999 are second in number only to the baby boomers, who are currently in the process of retiring. As such, the United States not only faces the least severe shift from capital excess to capital scarcity, it is also the only developed state that can hope to grow out of the current demographic period in anything less than sixty years. In the 2020s, the United States will have a good number of citizens in their 30s, who are capable of having children. Across Europe, the dominant generation at that time will consist of people in their 50s and 60s. America’s adjustment will still be difficult, but it alone among the major powers will still have excess capital and a younger generation capable of supporting its economic systems.

STRATFOR would like to extend its thanks to the fine people at the U.S. Census Bureau who collect, organize and share their statistics on global population. You can access their data here.

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