India, China And The Numbers Game

India tops China as the world's most populous country, reminding us that demography does shape destiny.

Image by dcb design from Pixabay

The big news of the week is that India is about to surpass China to become the country with the largest population in the world. This UN announcement has generated wide media coverage: will India be able to leverage its demographic advantage? Is China doomed by its incipient population decline?  

India and China are the two behemoths, but we have also seen a great amount of soul-searching on the demographic fate of other countries, from the shrinking of Japan and Italy to the burgeoning populations across Africa.  The discussion bears on economic growth prospects, social safety nets, and immigration, among others. The question of whether demography is destiny remains as relevant as ever.

Let’s think through it with the help of a few charts. 

The population curse

Let’s start with the obvious: a larger population is no guarantee of higher living standards. The chart below plots population size versus per capita GDP (2022, in Purchasing Power Parity ) for all countries in the IMF database. India and China skew the picture, but what immediately jumps out is that the largest countries are very poor while the richest countries are very small.

Source: IMF, World Economic Outlook database

Take out China and India, and we start seeing a negative correlation between population size and living standards. The United States stands out as an outlier, the only country that ranks close to the top in both population (#3) and per capita income (#8). The countries closest to the US in population (Indonesia, Brazil, Pakistan and Nigeria) have a per capita income between four and twelve times smaller than the US. 

Source: IMF, World Economic Outlook database

Note in passing that none of the three richest countries (in per capita terms) have any natural resources to speak of. 

It seems harder for more populous countries to reach higher living standards — India should not rush to celebrate. It’s a loose correlation, of course; close to the origin of the graph we find many countries that are both very small and very poor.

Small size is no guarantee of success; but a large population size appears to be a challenge. 

Economic might is right

The size of a country’s economy is a main determinant of its geopolitical weight; and a large number of not-so-rich citizens can still sum up to large economy. China is a case in point. The next chart plots population size against the size of the economy measured in current US dollars. China here ranks a strong second, still behind the US but well ahead of anybody else — and five times larger than India.  

Source: IMF, World Economic Outlook database

At these levels, size does matter. China’s expansion gave crucial support to the global economy in the wake of the 2008 Global Financial Crisis. Its larger economic size allows it to project power across the world through trade agreements and investment deals. It also translates into fearsome military might.  On the other hand, it comes with a disproportionate hunger for natural resources, and significant challenges in maintaining social stability. 

The incredible shrinking countries

If your population is shrinking, should you worry? It might depend on how much it’s expected to shrink. Here are a few eye-popping charts.

Italy’s population is projected to shrink by over a third, from 60 million people to less than 40 by the end of this century. Europe’s entire population is projected to shrink by 150 million people, or about one-fifth. 

Over the same time horizon, Japan’s population could fall to nearly one half of its current level.

These are undoubtedly dramatic changes. Are they cause for concern? 

From a geopolitical perspective, in some cases definitely yes. China’s increasingly assertive stance has raised tensions in Asia, leading Japan to reassess its military and defense posture. A sharp population decline could increase Japan’s vulnerability. (It will also continue to feed Japan’s interest in robotics and automation technologies.) 

For Italy, geopolitical concerns are not as pronounced. In principle, Italy could look at Luxembourg, which is sixty times smaller but three times richer, and dream of a better future on a smaller scale.

Ponzi’s Pensions

An important reason why demographic decline becomes problematic is that the population mix skews older, with a declining number of young people having to support a rising number of older retirees through pension and health care expenditures. Many countries have built their pension systems as Ponzi schemes. That worked marvelously when populations grew at a fast pace: every cohort of retirees could be financed by a larger cohort of new workers. Once you can no longer expand the base of the pyramid, however, the structure gets shakier. 

Immigration is often seen as the answer — a way to keep expanding the base of the pyramid. Under the right circumstances, immigration can be a powerful growth engine: for decades the US has stayed at the forefront of innovation and growth by attracting motivated and hard working immigrants of all skill levels into a competitive and largely meritocratic economy. 

But…a Ponzi scheme remains a Ponzi scheme. The answer can’t be simply to find a way to keep it going a bit longer. Regardless of immigration policy, social welfare systems built as Ponzi schemes need to be reformed. 

Under pressure — the radioactive zone

Across a narrow sea from Europe, Africa’s population keeps growing fast: the UN projects it will nearly triple by the end of the century, adding another 2.5 billion people. This has already exerted strong immigration pressure on Europe, with periodic flare ups of tensions and acrimonious debates.

This will continue regardless of whether Europe does anything to stop or reverse its own demographic decline. As we saw above, Europe’s population is projected to decline by 150 million people; that’s a rounding error compared to Africa’s 2.5 billion projected increase. 

With stronger political and economic institutions Africa’s demographic boom could be turned into a tremendous economic benefit. Otherwise, it could become an unprecedented geopolitical nightmare. My concern is that Europe’s institutions and economic systems are completely unprepared to integrate large numbers of immigrants. Consider this: Italy has a youth unemployment rate of about 23% (people aged 15-24); in other words, nearly one young Italian in four is jobless. Bringing in large numbers of young immigrants without fixing the labor market can hardly be expected to make the situation better. 

The discussion on immigration can quickly become radioactive as it touches not just on economics but on culture, religion and politics — the trifecta of third rails…so let’s leave that for another day. 

Demography shapes destiny

The bottomline is that we should keep a closer eye on demographic trends.  A declining population should be no cause for panic; a fast-growing population is more a challenge than a boon. Most importantly, unless countries start tailoring their economic, immigration and social policies to their changing population sizes and makeups, demographic trends will become a major source of tensions and instability in the decades ahead.