(MENAFN- Gulf Times) Demography
is not destiny, at least not entirely. Over centuries, policy can
affect fertility decisions, and migration can transform a country, as
the experience of the United States shows. Over shorter time horizons,
however, demographic trends must be taken as given, and can have a
profound impact on growth. Yet demographic factors are often neglected
in economic reporting, leading to significant distortions in assessments
of countries' performance. Nowhere is this more apparent than in Japan.
With
real output the key measure of economic performance having risen by
only about 15% since 2000, or less than 1% per year, Japan easily seems
the least dynamic of the worlds' major economies. But given Japan's
demographics the country's working-age population has been shrinking
by almost 1% per year since the start of this century this result is
remarkable.
In fact, Japan's growth rate per working-age person was
close to 2% much higher than in the US or in Europe. Though the US
economy grew more than 35% since 2000, its working-age population also
grew markedly, leaving the annual growth rate per working-age person at
only about 1%.
That indicator growth rate per working-age person
is not widely used by economists, who instead focus on GDP per capita.
By that measure, Japan is doing about as well as Europe and the US. But,
while per capita indicators are useful for assessing a country's
consumption potential, they do not provide an adequate picture of growth
potential, because they include the elderly and the young, who do not
contribute to production. Even in Japan, with its high life expectancy,
those over the age of 70 do not contribute much to output.
So, given
its rapidly declining potential, Japan has been extraordinarily
successful. A key reason is that it has put a growing proportion of its
working-age population to work: unemployment is today at a record low of
less than 3%, and almost 80% of those who could work have a job,
compared to about 70% for Europe and the US.
Japan's achievement of
full employment and high job growth over the last two decades is all the
more noteworthy in view of near-permanent deflation during this period
(most prices are still lower today than they were 15-20 years ago). This
should give food for thought to those who maintain that deflation
imposes unbearable economic costs.
The Japanese experience holds
important lessons for Europe, where the demographic future looks a lot
like Japan's past. The eurozone's working-age population has not grown
at all in recent years, and will soon start to decline at a rate similar
to Japan's over the last generation. It seems unlikely that immigration
will alter the trend. In recent years, Europeans, like Japanese, have
proven to be highly resistant to large-scale immigration, which is what
would be required to offset demographic decline.
Moreover, the
eurozone has now settled on a current-account surplus of around 3% of
GDP. That is similar to the level long seen in Japan (except for the
short period in the aftermath of the 2011 Fukushima Daiichi nuclear
meltdown).
A first lesson of Japan's experience is that, despite the
eurozone's difficulty generating inflation in an ageing society
characterised by excess savings, growth is not necessarily out of reach.
Rather, given Japan's record of growth without inflation, the European
Central Bank should recognise that its target of 'close to 2% inflation
might not be so important after all. In any case, the particularities
of the eurozone's structure mean that the ECB will have no choice but to
halt its bond-buying operations in a year or so. This means that the
ECB will not be able to follow in the footsteps of the Bank of Japan,
which continues to purchase large volumes of government bonds, without
any visible pick-up in inflation.
Another lesson from Japan is that a
country with a large savings surplus can handle a large public debt,
because it can be financed internally. That does not necessarily mean
that it is desirable to run up the debt. Japan's debt-to-GDP ratio now
exceeds 150% of GDP (taking into account the large financial assets of
the government-owned savings institutions), and continues to rise, owing
to large fiscal deficits.
This brings us to a final key lesson from
Japan: in a low-growth economy, the debt-to-GDP ratio can quickly spin
of out control. Fortunately, it seems that this lesson already has been
learned, with the average deficit in the eurozone now amounting to only
around 2% of GDP. The deficit cap imposed by the Stability and Growth
Pact (3% of GDP) seems to have had at least some impact in terms of
stabilising the debt ratio.
The structure of the eurozone imposes
limits on the use of both fiscal and monetary policy. This should
prevent the excessive build-up of debt, ultimately making it easier for
the eurozone to manage a future in which the only way to sustain growth
is to capitalise fully on the economy's declining demographic potential.
Project Syndicate
* Daniel Gros is director of the Centre for European Policy Studies.
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