Managing GDP Growth
By Max Rudolph
Risks & Rewards, December 2024
Editor’s Note: This article is partly based on a Society of Actuaries Research Institute research report, “Demographics and Productivity: Drivers of Economic Growth (2023).”
Demographics and Productivity
Economic growth is the historical measure of financial success, and growth in gross domestic product (GDP) is the metric of choice. GDP growth can be broken into its components: The percentage change in the population and the percentage change in productivity. These add up to the percentage growth in GDP.
Many builders of economic scenario sets expect GDP growth this century to be lower globally by about half of recent growth rates.[1] Decreases in relative levels of GDP reduce demand and lower asset returns from previous levels.
There are several obstacles to future GDP growth. Demographics will be a key challenge as populations age, fertility rates remain below sustainable levels and economic inequality remains high. Older populations have been shown to lower asset returns and GDP growth.[2] Some regions, especially sub-Saharan Africa, counter some of these demographic challenges with expected strong population growth and a younger population.[3]
Fostering productivity growth among lower socioeconomic groups and those historically discriminated against may offer an opportunity to improve economic performance while also reducing inequality. Economic downturns typically impact members of these groups first.[4]
Resiliency needs to be developed against headwinds to growth. For instance, there are economists who believe that high levels of debt as a percentage of GDP as well as government stimulus can slow growth as it is unwound. This is consistent with Keynesian thought that loose fiscal and monetary policy stimulates the economy—if one action adds to growth it makes sense that the opposite action would slow growth. Further inhibiting growth are threat multipliers that potentially interact with other risks negatively including climate change, regional conflicts, lack of access to fresh water, spillover diseases and technology. Overall, methods that manage growth by improving productivity and optimizing population distributions ultimately can improve outcomes.
Demographic Projections
Past and projected future global population distributions by age are shown in Figure 1. The global population is expected to grow from 2.5 billion in 1950 to 10.3 billion in 2100. Lower fertility rates and greater longevity result in a higher percentage of elderly persons in the total population as the century progresses. Specifically, note that the curve for 2100 is below the 2050 curve before age 40. UN population projections have limitations but provide a reasonable place to start a discussion about demographics and productivity growth.
Figure 1
Past and Projected Demographics of the World Population from 1950 to 2100 (Thousands)5
Growing population levels, especially in the primary working ages of 15–64, generate GDP growth even when productivity is stagnant. China’s population, the largest for a country today, has already peaked. Nigeria is representative of countries with a rapidly growing population. The United States population is expected to continue to rise at a steady rate, but this growth is reliant on immigration.
The U.S. is in a better position than other developed countries but faces similar demographic shifts impacting the ratio of the younger population to retirees. The complex interaction surrounding population growth, tied to fertility, migration, improved medical treatments and even the move to a service economy, is constantly evolving. Challenges come from increasing social safety net costs for the elderly compounded by government debt and increasing induced costs from threat multipliers like climate change.[6]
Today’s growth strategies need to consider how population is expected to evolve (see Figure 2). Asia has had the largest population since before 1950, but the population size gap between Africa and Asia is projected to significantly narrow by the end of the current century. Asia contains two behemoths whose populations are expected to diverge soon. China’s population is forecast to shrink while India’s is forecasted to grow for another generation.[7] Contracting populations with low fertility have high old-age dependence ratios. Africa, led by the sub-Saharan countries, will drive population growth in this century. It is notable that the remaining regions are relatively unimportant to global totals, with none reaching one billion during this century.
Figure 2
Global Population Projections by Region (Thousands)[8]
To support a sustainable population the average number of births per woman over her lifetime (fertility rate) must be at least 2.1. The U.S. fertility rate has been below this for over 10 years. Some countries currently have a fertility rate below 1.0, which will have large ramifications in the future. Fertility rate decreases have been occurring globally, as shown in Figure 3.
Population is a complex system with many interacting drivers. For example, a practice known to reduce fertility rates while also improving economic metrics is to invest in the education of females. Historically this has increased living standards and GDP per capita and might offset the economic headwinds generated by fewer workers per elderly.
Figure 3
Global Fertility Rates (Births Per Woman) in Selected Countries Since 1950[9]
Of growing importance in many countries during this century is the old-age dependency ratio. Figure 4 breaks down total U.S. population by age group from 1950 with projections to 2100. The number of young and working age groups are predicted to be relatively stable over the period from now to 2100, but the 65+ group is projected to more than double in size. It is easy to see why social safety nets for the elderly will be an increasing drag on economic growth.
Figure 4
Historical and Projected U.S. Population by Age Groups[10]
Figure 5 shows the United States as a country with an old-age dependency ratio that has begun a slow but inevitable increase. From a current ratio of 25, the U.S. is expected to reach 55 elderly per 100 persons of working age by 2100. The U.S. lags many developed countries that are farther along the aging process, including Japan and much of Europe.
China is a large, aging country that will impact global economics for many years. Lasting effects from the one-child policy and other government programs have impacted its demographic trends. The old-age dependency ratio is projected to grow from 20 per 100 in the work-force today to nearly 90 at its peak about 2085. Some of the UN scenarios indicate a peak of nearly 150 elderly per 100 working, which would have uncertain ramifications to society. It is hard to imagine having more people retired than working or how that could be supported. This may trigger global economic and geopolitical discontinuities.
It is not until 2060 that the old-age dependency ratio in Nigeria is projected to begin to materially rise from a current level below six and would not reach 25 prior to 2100. Similar countries have an advantage over those with higher old-age dependency ratios as older populations can slow economic growth and require more health care.
Figure 5
Historical and Projected Old-Age Dependency Ratios Per 100 Workers (Ages 15–64) for Select Countries, 1950–2100[11]
Prior to a blip caused by COVID-19 and the ongoing opioid crisis, populations globally were living longer due to improved medical knowledge and treatments, reduced poverty at older ages due to social safety nets like Social Security and Medicaid in the U.S., and reduced childhood mortality due to sanitation and immunization.
Productivity
While the population component of GDP can be measured directly, productivity is typically solved for (GDP/Population = Productivity). This can be measured in some industries (e.g., cost per widget produced) but is more difficult for non-manufacturing sectors that provide services or interact with technology.
The underlying differentiators of productivity reflect, to a certain extent, unequal access to various advantages. The highest socioeconomic classes have the greatest access to education, financial resources and healthy living conditions, while those less fortunate may start out disadvantaged and be left behind. Improving access to such resources for all can be beneficial and help make the American dream attainable.
Previous attempts to develop financially sound infrastructures in certain Black/African American local communities in the U.S. included the creation of dedicated banks to serve these communities. An example often cited is the Dunbar National Bank that was created by John D. Rockefeller in 1928 and survived only 10 years. Local customers placed their savings and used other banking services at the banks serving the Black/African American communities. Some of these banks loaned their assets to areas outside of the local community, eliminating the money multiplier effect benefits of a well-functioning bank.[12] This extended preexisting financial challenges within the bank’s local community, inhibited building better opportunities, and increased inequity.[13] FinTech, which applies technology in creative ways to improve financial services, may offer solutions to systemically address these challenges through greater access to services and more sophisticated means to direct bank investments.
As was described in the full research report that this article is partially based on, “Productivity typically grows through interactions between technology, education and resources. The marketplace has traditionally led to priorities on what is desirable and what needs to be done. The potential solutions provided here should be considered nudges against imperfect marketplace solutions.”[14]
Conclusions
Demographic trend projections can be found from UN population reports and other sources. This information can aid in planning productivity strategies and assessing the reasonability of economic scenarios. An example of such a strategy might be to develop relationships with sub-Saharan nations that may lead to greater economic opportunities and mutually beneficial outcomes.
Programs have attempted in the past to reduce inequality.[15] Some of these programs have revealed inherent identifiable challenges that require restructuring in order to achieve their intended goals. Fixing such problems can best be addressed by the involvement of, I believe, all impacted stakeholders across socioeconomic groups to ensure full representation from idea generation to implementation. Solutions designed to help lower socioeconomic classes may have greater success if they are represented in the planning and implementation phases. Such efforts have the worthy goal of optimizing and improving lives throughout this century.
Potential Solutions
The following thoughts are the author’s alone. These potential solutions go beyond what was published in the SOA research report. Some would take years to implement while others could be developed and implemented quickly.
Can GDP growth continue even after a country’s population peaks? How can tools used to grow GDP also benefit lower socioeconomic classes and groups that have been historically discriminated against? Solutions were tried in periods after the Civil War and during the Civil Rights movement. In my opinion, they involved underlying components that could potentially be used as contemporary building blocks to develop present-day approaches. The approaches that work could be expanded. Those that do not should be discarded.
The following are my suggestions to grow GDP utilizing aspects of demographics, productivity and combinations of the two.
Demographics
The GDP per capita metric tends to be a better measure for goal-setting than GDP alone when demographic trends are changing or volatile. An overriding concern is the impact on the environment of 10 billion people, with each having needs for food, shelter and income. Proactive constraints can discourage the use of limited natural resources and generation of pollution and greenhouse gases. In my opinion, some strategies to manage demographics globally could include:
- Manage global migration based on where people are needed, both within a country and internationally. Encourage countries with more people than can be fed and supported economically above a poverty level to provide options to citizens through trade policy and aid. Expand education systems to include multilingual training and technical expertise.
- Proactively identify climate havens to better protect populations, including some initial opportunities within countries and longer-term solutions for both within and between countries. Communities with less well-developed infrastructures tend to disproportionately affect disadvantaged populations. Look for cross-benefits between climate solutions and improving the health of low socioeconomic communities.[16] This includes projects that add green space to reduce the heat island effect and pollution (low-income housing is often downwind of manufacturing plants or near other undesirable locations). Manufacturing hubs could be moved to a new site with help given for groups (e.g., climate refugees from U.S. coast or Middle East) to transition to the new location.
Productivity
In my opinion, positive changes in productivity will require collaborative political and social forces.
- Communities with limited banking options, employment opportunities and access to services may be empowered, in my view, through programs providing subsidies for the development of banks and businesses owned and managed by community members. Cities like Tulsa and Durham have used this model in the past, but their description as Black Wall Street received pushback as exhibited by the Tulsa race riots of 1921.[17]
- Challenges to Civil rights and the forces of inequality may be driven, to a certain extent, by economics and productivity. Inequality can slow economic growth while, at the same time, many of the social safety net costs persist and may rise. This can have financial implications. Furthering the understanding that growing the economy is a win for all groups, big-picture-aligned incentives could potentially reduce inequality. This includes representation among community police forces and schools for historically disadvantaged groups and a reduction in services and banking deserts.
- Considering how to better equalize a disadvantaged community’s tax base with potential state or federal subsidies could potentially enhance infrastructure and community services such as police, schools, roads, banking and retail. Efforts to bring pride to a community and improving its image may bring both positive attitude changes and economic benefits.
- Businesses ideally would mirror the community that they call home. In the author’s view, businesses located in a disadvantaged community are best served when management and owners who come from that community are included in ownership and decision-making. Encouraging employees to build ownership in their workplace could instill pride in the work product and help incent creativity.
- It is hard to move up the socioeconomic ladder if financial or credentialing requirements create unnecessary barriers to entry. It would be beneficial to review local licensing requirements for various jobs to ensure there are appropriate processes that align with job duties.
Combination
Some other potential solutions I wish to propose might reach across both population and productivity considerations to increase economic growth and reduce inequality.
- Focusing on improvements in health care, childcare and education can level the economic playing field in which those disadvantaged communities need to engage.
- Improving diets through education, subsidies, nudges, and other incentives can raise community health and lead to further growth. One way to accomplish this is by improving infrastructure resilience. Another might be addressing “food deserts” so that full-service grocery stores are available for access to healthy foods.
- Social Security benefits are based on earned income throughout a career and the age at which benefits are filed. Other factors for the determination of benefits could be explored for the future to lead to improved outcomes and fairness for those who have been historically disadvantaged. These could include typical insurance factors like sex and health status, but also revisit the benefit formula to ensure an income that covers the basic necessities of food and shelter.
Statements of fact and opinions expressed herein are those of the author and are not necessarily those of the Society of Actuaries, the newsletter editors, or the respective authors’ employers.
Max Rudolph, FSA, CFA, CERA, MAAA, is principal of Rudolph Financial Consulting, LLC and can be reached at max.rudolph@rudolph-financial.com.
Endnotes
[1] Alberts, Mark and Rudolph, Max. “A Low-Growth World: Implications for the Insurance Industry and Pension Plans.” Society of Actuaries. June 2019. https://www.soa.org/resources/research-reports/2019/low-growth-world/
[2] Rudolph, Max. “Demographics and Productivity: Drivers of Economic Growth.” Society of Actuaries. November 2023. Page 13. https://www.soa.org/resources/research-reports/2023/demographics-productivity-drivers-econgrowth/
[5] United Nations, Department of Economic and Social Affairs, Population Division (2022). World Population Prospects 2022: Data Sources. (UN DESA/POP/2022/DC/NO. 9).
[6] Rudolph, Max. “Demographics and Productivity: Drivers of Economic Growth.” Society of Actuaries. November 2023. Page 8. https://www.soa.org/resources/research-reports/2023/demographics-productivity-drivers-econgrowth/
[7] United Nations, Department of Economic and Social Affairs, Population Division (2022). World Population Prospects 2022: Data Sources. (UN DESA/POP/2022/DC/NO. 9).
[12] Rudolph, Max. “Demographics and Productivity: Drivers of Economic Growth. Society of Actuaries.” November 2023. Page 11. https://www.soa.org/resources/research-reports/2023/demographics-productivity-drivers-econgrowth/
[13] Baradaran, Mehrsa. “Color of Money: Black Banks and the Racial Wealth Gap.” 2017. The Belknap Press.
[14] Rudolph, Max. “Demographics and Productivity: Drivers of Economic Growth.” Society of Actuaries. November 2023. Page 32. https://www.soa.org/resources/research-reports/2023/demographics-productivity-drivers-econgrowth/
[17] Baradaran, Mehrsa. “Color of Money: Black Banks and the Racial Wealth Gap.” 2017. The Belknap Press.