By Rodney Sullivan, CFA
Despite a deep-seated bias toward pessimism that pervades much of intellectual thought throughout history, the human condition - physical and economic - has steadily improved for at least two centuries and will continue to do so in the future. In contrast to the past 200 years, however, future economic growth will be accompanied by population stabilization as fertility rates decline in developing countries even more quickly than they declined in developed countries in past decades. In other words, the population explosion is almost over. A "greener" environment will be a consequence of the leveling off of world population and increasing affluence as more resources are devoted to conservation, pollution control, and environmental remediation.
As a population becomes richer, there is a change in the trade-off facing a couple deciding how many children to have. Children become expensive and provide fewer benefits (e.g., you cannot put them to work on the farm if you are not engaged in farming). As a result, the fertility rate declines. A decline in fertility rates was observed long ago in developed countries, but the decline has become nearly universal today, with such countries as Brazil, Turkey, and Iran approaching First World fertility rates. The UN Population Division's projections reflect these trends, with the world's population reaching 10 billion to 11 billion late in this century before stabilizing or possibly declining. This population outlook is very favorable for addressing such environmental concerns as natural-resource usage, overcrowding, and pollution (including greenhouse gas emissions) and is consistent with projections of continued rapid economic growth, especially in the developing world.
Everyone knows that the world is becoming dramatically richer, yet at the same time, many people seem to believe that economic conditions are worse than in the "good old days." In the last five years, there has been some deterioration, but economic setbacks have always occurred and have usually been followed by rebounds to new heights of prosperity. The facts are that developed-country per capita GDP has been rising at a remarkably steady annual rate of 1.8% for two centuries and developing-country per capita GDP has been rising even faster, though over a shorter period. "Peak inequality" between developing and developed countries occurred around 1950, and the developing world has been catching up ever since, while inequality in developed-world economies has edged upward. The forecast is for more of the same, with developing economies leading the way.
Perhaps the most difficult forecast for readers to accept is that this richer world of fewer people will also be greener, more environmentally sound. A proposition called the environmental Kuznets curve (EKC) asserts that as an economy begins to develop, the environment becomes "dirtier" because of industrial pollution and higher population densities. As the society becomes more affluent, however, people can afford a cleaner environment and can attain it through a mix of private and public action. The argument is essentially that environmental quality is a luxury good. The EKC theory is borne out for most industrial pollutants but not for all environmental indicators; for example, wild fisheries have continued to deteriorate in developed countries even as air and water have become dramatically cleaner.
A related question is whether the high cost of increasingly scarce natural resources will limit economic growth. Economic history suggests strongly that it will not, in part because the high price of a given resource causes substitutes to be developed. However, some resources are in essentially fixed supply, and one should be careful about extrapolating consumption growth rates in such circumstances.
A growing world economy should favor equities at the expense of fixed income. Active managers hoping to profit from a greener world of fewer, richer people should focus on food and agri-technology, water, traditional and alternative energy, minerals and other natural resources, infrastructure, environmental remediation, and human capital.
The above is a summary of Laurence B. Siegel's article "Fewer, Richer, Greener: The End of the Population Explosion and the Future for Investors." Download the full article, which originally appeared in the November/December 2012 issue of the Financial Analysts Journal.
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