Wednesday, March 24, 2010

The More, The Better

Wall Street Journal book review "The More, The Better" (March 24th, 2010) discusses the book "The Next Hundred Million", by Joel Kotkin. It gives Kotkin's hypothesis, that come 2050, the U.S. will be vastly better off than its European and Asian counterparts, both of whom are aging or projected to age greatly while the U.S. stays relatively young.

For Mr. Kotkin, population growth translates into economic vitality—the capacity to create wealth, raise the standard of living and meet the burdens of future commitments. Thus a country with a youthful demographic, in relative terms, enjoys a big advantage over its global counterparts. In the next four decades, Mr. Kotkin observes, "most of the developed countries in both Europe and Asia will become veritable old-age homes" because of stagnant population growth. And the economies of these countries, already devoted to a vast welfare-state apparatus, will face crushing pension obligations—but without the young workers to defray the cost.

Corrections largely sees Mr. Kotkin as correct about the implications for the welfare states of Europe and a mis-formed age structure in China due to its one-child policy. However, Corrections does not see youth and population as the driver of economic vitality, but only a relatively small portion of it. What matters for international comparisons, Corrections conjectures, is human capital. In the world today, there are relatively few technological state secrets that allow one state to be wealthier than another. Natural resources and human capital, instead, are the drivers of per-capita wealth.

As displayed graphically below, Corrections has used Robert Barro and Jong-Wha Lee's dataset from "International Data on Educational Attainment: Updates and Implications" (WP 2000) to construct a graph of the populations and educational trends of four different regions of the world: Advanced Countries, East Asia/Pacific, South Asia, and Transitional Economies. The data can be found here. Note that a drop in population for Transitional Economies is due to the exit of several countries of the Soviet Union and a move of East Germany from transitional to Advanced after German reunification.

The phenomenon Corrections wishes to point out is the difference between population, (click to enlarge) proportion of population at an educational level (click to enlarge), and total population with a given education (click to enlarge). A discussion of the graphs follows their display.

Corrections suggests that while the population of the West and advanced economies has slowed in growth and has been shrinking, the total population with higher education has been rising. Insofar as population shrinkage hampers specialization, then Corrections can recognize the process through which population shrinkage suggests a declining GDP. However, in the case of advanced economies, we expect per capita GDP to grow dramatically, as institutions (such as Universities) shrink less quickly than population, and human capital per capita rises. Corrections could see Europe as being subjected to these forces positively.

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