The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival

by Charles Goodhart

First, the global environment is materially different in two ways. The decline in nominal and real interest rates during (and caused to no small extent by) China’s ascent created benign conditions at home in the AEs so that the ascent of China was not seen as a zero-sum game.

Second, the demographic goalposts have shifted. There won’t be another ‘China’ for a long time, if ever.

It is not just China’s mobilisation but its grand history of dominating the global economy for most of the last few millennia that were an instrumental part of the equation. Over time, such global dominance inevitably creates at grass-roots level a system of entrepreneurship, production and efficiency. Economies like those in Africa that have had less sophisticated and highly disaggregated systems of small firms will have to build such systems as they progress.

India has had a rich history of trading over the centuries, aided by empires that stretched over the bulk of its mass, but its disjointed social structure has often been a hi...

And given the size of the demographic challenge, we might need not ...

Third and most important, India will be able to attract global capital to its shores, but the lack of administrative capital and its system of democratic checks and balances will not allow a singl...

India’s administrative capital is starting off from an extremely weak level and internal collisions within its multi-party system as well as between the states and the federal government make...

It is entirely possible that India can build on its successes and use of technology to sustain momentum, but we think this will remain harder to achieve when it comes to change that requires broad participation.

The political friction on even mundane issues suggests a very low probability of devising and abiding by a national strategy to direct financial and physical resources towards a China-esque mobilisation.

Inevitably, that means the private sector is to be the vehicle that drives India’s growth. In turn, it is the extent to which the private sector is able and willing to grow that will determine the path of India’s growth.

Unlike the growth of SOEs under state patronage, the private sector needs an effective and level playing field to thrive. Thus, a lot depends on how quickly and efficiently India’s adm...

If it is to offset the headwinds from global demography, India will need help from Africa. However, mobilising Africa across its varied geographic, economic and political landscape is likely to be signi...

First, they are a fragmented set of economies which implies a very low probability of a coordinated approach to creating a manufacturing complex that can rival China.

Second, and more importantly, they lack the quantum of human capital that India enjoys as well as the deep-rooted and widespread system of apprenticeships, guilds and efficiency that has been honed over the centuries in China.

Africa’s population in 2019 stands at approximately 1.32 billion, almost identical to India’s 1.37 billion residents, but it hosts that population over an area that is almost ten times the size of India’s 3.2 million square kilometres of territory. Over that area, Africa is made up of 54 countries. A key problem that Africa faces, therefore, is its fragmentation. Fifty-four national policies, each with their own domestic frictions like India’s, will mean a much greater problem when it comes to coordinating policies for grow...

The geographical fragmentation interacts with demography in a meaningful way. India’s demography can be looked upon as unitary thanks to the freedom of movement inside its borders. Labour can move to areas of rapid growth fairly rapidly and hen...

However, Africa’s borders are less porous than open India’s state lines, and its economies are at very different stages of demographic transformation. Labour in economies with abundant capital and low economic efficiency cannot thus move as seamlessly across national borde...

Sub-Saharan Africa (SSA) is only just embarking on its period of demographic tailwinds, but many parts of Africa that are quite advanced in terms of the demographic dividend are the ones that are also adv...

Unfortunately, governance scores in the demographically rich SSA and in Africa as a region have generally deteriorated over the last two decades despite significant economic growth ...

In Africa, political stability and lower violence are only evident among economies that are already on a relatively stable path, but it has deteriorated further in the ones that were politically fragile at the start. In the...

This doesn’t mean that there cannot be improvements. The abundance of labour is likely to attract capital, which in turn could force the economies to take steps to stay ahead of their ...

Like India, though, Africa is unlikely to use their labour force to the extent that it offsets the demographic he...

Besides governance, the second key hurdle to rapid growth in Africa ...

On the World Bank’s Human Capital Index for 2019, India ranks in the third quartile. Only half a dozen or so economies in Africa share this ranking. Most of Africa r...

One could argue that country-level data can be misleading when it comes to beginnings. At the early stages of the build-up of a manufacturing base, the most talented pool of labour is usually attra...

This is where the fragmentation of Africa creates a problem. While India’s massive population in an area the tenth of the size of Africa makes it an attractive market for goods aided by a mobile population,...

The population density is obviously much lower than India’s so that choosing a manufacturing base still means exporting across over 50 countries and large distances. Human capital availability is limited to a f...

Others will have to import it from others or build it up slowly in their own economies by developing education systems. That will remain a serious impediment to the ability to transform incoming c...

In summary, neither India nor Africa have the ability to replicate China’s ascent despite their vast and relat...

Their own progress is likely to be solid, and at times spectacular, but it will most likely fall short of the kind of momentum ...

An influential and impressive paper by Desmet et al. (2018) argues forcefully in favour of a third conduit for such a convergence.

The transfer of technology, they argue, to today’s low-productivity, high-population density regions will lead to a ‘productivity reversal’ that favours parts of Asia and Africa, unless international and internal migration is stepped up.

The intuition in the model stems from the high correlation between population density and GDP per capita that the authors find across different regions of the world, and even within economies thanks to th...

Under today’s status quo, their model suggests that ‘many of today’s high-density, low-productivity regions in sub-Saharan Africa, South Asia, and East Asia becoming high-density, high-productivity regions, and North America and Europ...

Their model, however, suffers from one key shortcoming—the absence of a role for admi...

The main hindrance to development among emerging economies lies in their ability to execute a complex, coordinated and long-term economic strategy. We would go so far as to say that emerging economies that cannot transform themselves into advanced economies fail not because of the so-called middle-income trap but because of an administrative trap. The predictions of Desmet et al., while inspirin...

Debt ratios of (non-financial) corporates rose substantially across EMEs, especially in China. China’s state-owned enterprises (SOEs) borrowed heavily from government-owned banks.

The resulting surge in growth combined with falling interest rates led to a sharp pickup in commodity prices, capital inflows into EMEs and a pickup in corporate leverage in many key economies.

Besides China’s SOEs, the borrowing was dominated by commodity and construction companies. The severe leverage problems that PEMEX, Petrobras and Eskom have faced are the result of the exces...

Across commodity-importing EMEs, such as Korea, Malaysia, Thailand, India and Turkey, leverage increased rapidly, partly because of t...

The cause of rising debt ratios in such advanced economies has, instead, been a switch from equity finance to debt finance. To some considerable extent this has been, especially in the USA, and to a lesser extent in other Anglo-phone countries, caused by the increasing incidence of buy-backs; data on the USA in Diagram 11.2.

Hoisting leverage by such buy-backs is the simplest method of raising RoE. Also

Moreover, an increasing chunk of such corporate debt has been in lesser quality debt, levered loans and BBB debt issue. See Diagrams 11.3 and 11.4.1

Fundamentally, a regime of low and falling interest rates makes default on fixed income obligations less likely even if revenue growth slows down.

Financially, the low risk of default makes the purchase of high-yielding securities far more attractive when the ‘search for yield’ dominates investment strategies.

A combination of the two naturally led to the rapid growth of the issuance of rela...

In the household sector, wealth has been increasing faster than debt. In the corporate sector, the buoyancy of profits and falling/low interest rates has kept their debt service ratio low.

Similarly, in the public sector the rise in debt levels has been, almost entirely, offset by falling interest rates, leaving debt service ratios nearly constant, even in Japan, over the last couple of decades, as shown in Diagram 11.5.