Poorer countries will find it harder to get richer
FOR THE BILLIONS of people around the world who live in countries that are not yet fully economically developed, I have some disturbing news: The very last chance for their nations to reach developed status might come in this generation.
And I do mean “very last chance.” Economists used to write about “convergence” — the idea that the gap between poorer countries and richer ones is narrowing — and indeed a lot of convergence has occurred, in such places as South Korea, Ireland, and parts of China. But the conditions for such growth are more and more rare. It is already the case that poorer countries are not growing more rapidly than wealthier countries, contrary to trends in the 1990s.
The main culprit could be the fertility crisis. In Latin America, for instance, fertility rates are coming in much lower than had been expected. Uruguay, Costa Rica, Chile, Jamaica, and Cuba all have fertility rates of about 1.3. In one decade, Mexico had a 24% drop in births. Brazil, by far the region’s most populous nation, has a fertility rate of about 1.65, and those are likely to fall further. The UN had predicted Brazil’s population to be 216 million this year, but it turns out to be only 203 million. Over time, most Latin
American countries can expect shrinking populations.
Most middle-income countries are seeing similar drops in the birth rate, so it is not being driven by cultural or contingent forces. The core causes seem to be reliable birth control and the emancipation of women around much of the developing world, factors which probably will not — and, to be clear, should not — be reversed.
The upshot, to put it in macroeconomic lingo, is that most underdeveloped countries will be seeing simultaneous contractions in aggregate demand and aggregate supply. That is bad news for economic growth. A national economy can deal with a smaller population, but a continuously shrinking population is very difficult.
More concretely, there will be no demographic dividend to help drive economic growth. Instead, caring for the elderly will become a major economic activity. The taxes and transfers necessary to support retirements will be an additional burden on already weak economies, which in turn may help to keep fertility rates low. Children will not become easier to afford. There could be a low-fertility trap, or even a vicious downward circle. As the young spend more time caring for their aging parents, that too may lower the number of children women wish to have.
Countries with falling populations will produce fewer inventors and entrepreneurs. Smaller domestic markets will make it harder to crack export markets. Toyota succeeded, for instance, because it first did well in Japan (a relatively populous country), and then refined the quality of its products and competed overseas. When the home market is smaller, economies of scale are more difficult and it is harder for companies to gain purchase.
Populations in these once-emerging economies may be hit harder than birth rates will indicate. After all, North America, Western Europe, Japan, and South Korea have falling birth rates, too. Many of these countries will find it economically necessary to take in more immigrants, if only to pay for their retirement systems or to work as caregivers. That could be a further drain on populations in the less wealthy countries. Japan is already preparing its immigration plans.
None of this may feel like a sudden jolt or crisis. Just as the poorer economies gradually stopped catching up to the wealthier ones, they might slip into slower and slower growth rates, including for per capita incomes.
It won’t be all bad: Poorer countries, like wealthier ones, will benefit from biomedical advances. And as societies age, their crime rates may fall. Yet while life in many of these countries may feel more secure, they won’t be able to follow the dynamic paths of Japan and South Korea, or even those of Greece or Portugal. Memories of radical economic growth may begin to fade, which may make it harder to reboot growth.
The coming years and decades will bring other challenges to developing countries, of course — climate change and war, to name two. In addition, AI may make it harder for low-wage economies to perform basic services, such as call centers. It’s not just low birth rates that endanger faster growth.
I still expect most of the world to be better off several decades from now. But the era of radical transformation through domestic economic growth may already be behind us.