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By Root 1569 0

of savings available to lend to the American and British governments lie for the most part in developing economies, especially China. It seems inherently problematic to use money from relatively poor Chinese savers to support the relatively generous pensions paid to elderly Americans, or bailouts to investment bankers. At some point, too, this flow of savings will be directed to better uses paying higher returns, such as investment in Chinese enterprises; it could dry up quickly. There is a geopolitical dimension too, with the flow of funds so large that it makes diplomatic relations between the two countries harder—witness the row over the level of the dollar-renminbi exchange rate—and fuels U.S. insecurity about whether China is overtaking it as the world’s major power.

Does it matter? Yes, because these rich countries have reached a stage of crisis that will unfold more slowly than the financial crisis but is if anything more severe. The amount of spending implied by existing patterns of entitlement such as how much pension the state will pay and at what retirement age, what medical payments the government will cover, what benefits are received by the long-term sick, and so on is on the point of rising sharply. Pensions and health care (as older people need more treatment for longer) are the main culprits. Western societies (and some others) are aging rapidly. The ratio of old people to young ones is rising, and ultimately populations will start to shrink. A long-heralded demographic time bomb is exploding and taking government finances up with it.

THE DEMOGRAPHIC IMPLOSION

The human population started growing rapidly about two hundred and fifty years ago, when the dawn of the capitalist economy permitted an escape from the “Malthusian” trap of food production limiting the increase of the population. For the first time since then, there are many countries whose birthrates are well below the replacement level, and whose populations are aging and will soon start shrinking.

This might seem surprising as so much attention has been paid to the headline global numbers, which are climbing in a slightly scary way: the world’s population is above 6.5 billion in 2009 and is expected to peak around 9 billion, and we rightly worry about the environmental impacts globally. Much of this expected growth will occur in poor countries. Yet in fact, population growth has already declined in many developing countries too. The key seems to be the education of women, along with their participation in the work force, as much as the well-known “demographic transition” of a high enough level of income that it is no longer necessary to have many children as an investment for one’s old age.7 And there is not one of the rich countries with a birthrate above replacement level. Those such as the United States and United Kingdom whose populations are growing are attracting enough immigrants to offset declining “native” birthrates. In some cases, including Germany, Italy, Japan, and a number of eastern European countries, the demographic change under way is startling. Italy’s population, for example, is expected to shrink by a quarter between now and 2040, while the average age is likely to rise from 44 to 54. Among poorer countries, China faces the same unknown waters of demographic transition due to its strict one-child policy under authoritarian communism: two parent couples producing one child each makes for a rapidly shrinking population, and a disproportionately male one as so many baby girls have been aborted or killed in early infancy to ensure the sole permitted child is a son.8

Figure 5. Just one child.

Certainly in these countries people who are working will have to devote an increasing amount of their income to supporting older people who have stopped working, and—if nothing changes—a lot of this support will take place through the tax system. This has nothing to do with the financial structures of pension systems and whether they are “funded” or not (that is, whether or not there is already a pot of investments earmarked