The demographic headwinds of rapidly aging populations in the United States, Western Europe, and Japan and the potential negative implications for economic growth and asset prices, have been widely studied. This article discusses the demographic transformations of the four largest emerging economies: Brazil, Russia, India, and China. The twentieth century saw the global population nearly quadruple to 6 billion, and instead of Malthusian chaos the world saw tremendously rising prosperity. How will demography influence the BRIC economies in the remainder of the 21st century?
Of the four BRIC economies, India is best positioned to benefit from demographic tailwinds. Projections have India becoming the world's most populated country some time between 2025 and 2030. Its labor force will also remain relatively youthful as compared to the aging western economies. By 2020, the average age of an Indian is projected to be just 29 years. The United Nations Population Division estimates that the country's 20-49 year old cohort will grow by 130 million people over the next fifteen years, creating additional surplus labor that will drive economic growth. The growth of the youth population of any country presents both a tremendous opportunity and daunting challenge. India's ability to educate its expanding labor force will determine the magnitude of this opportunity. As seen below, India is just entering the "demographic window", the period of time when the proportion of the country's youth under the age of 15 falls below 30% and the proportion of the country's elderly over 65 is still below 15%.
Source: Goldman Sachs "Brics Monthly - May 2011"; United Nations
Over the trailing five years, the S&P CNX Nifty, a free float market capitalization index of large companies on the National Stock Exchange of India, has returned roughly equal returns in dollar terms as the S&P 500 (SPY, IVV); however, over the trailing ten years, the Indian market in dollar terms has strongly outperformed (graphed below). The largest Indian ETF's include WisdomTree India Earnings Fund (EPI), iPath MSCI India Index ETN (INP), PowerShares India Portfolio (PIN) and iShares S&P India Nifty 50 Index Fund (INDY).
South America's largest economy boosts the second best demographic profile of the four BRIC countries. Brazil is roughly one-third of the way through its demographic window, and should still feel the tailwinds generated from a large workforce aged population for two more decades. The Bovespa, replicated roughly through iShares MSCI Brazil Index Fund (EWZ), has outperformed the S&P 500 in dollar terms by nearly ten percent per annum over the last twenty years. With the country's economy poised to continue to outperform its developed world brethren, this relative outperformance could persist.
Of course, demographic advantages can not be realized without proper institutional frameworks. Over the last decade, Brazil has transitioned itself into an investment grade sovereign credit while the financial profile of the world's traditional economic powers has slipped. Ten years ago, the country's sovereign debt was rated B2/B+. After a multitude of upgrades the debt is now rated Baa2/BBB, given its strong economic performance. Developing countries must have enough political stability to develop the social institutions and capital markets necessary to maximize the opportunity provided by its demographic makeup. The country now is aided by the ability to manage through recessions with accommodative monetary policy instead of needing to increase interest rates to keep capital from flowing from the country, a direct benefit of the country's economic progress over the last decade.
China faces two unique demographic headwinds. The country's slowing birth rate due to the 1978 implementation of the "One Child Policy" and is now roughly a third less than its replacement rate. The United States Census Bureau predicted in late 2009 that China's population would peak in 2026, a half a generation from now. This study also suggested that new entrants to the labor force have already peaked, and that the low fertility rate in China (half a birth per woman less than in the United States) will over time shrink the low cost labor force that has been at the forefront of the country's economic prowess. China is younger than the U.S., Japan, and the Western European economies, but none of these developed world countries experienced the type of rapid aging that China is set to experience. The graph below shows that projected change in the young workforce (age 15-29) from 2010-2030.
Source: American Enterprise Institute, U.S. Census Bureau
In addition to a shrinking labor force and a rapidly aging population, the country's family planning policy has caused a demographic anomaly. Due to the one-child mandate and selective abortion, male births outnumber female births by roughly 1.2:1. The implications of this disproportionate growth of the male population will undoubtedly have a profound effect on society, but since we have never seen this type of change in human history the future is decidedly uncertain. The bearish outcomes includes male flight from the country, increased crime and lessened social cohesion, or a larger standing military. Of course, competitiveness for a smaller pool of mates could drive Chinese men to new heights in academic achievement, increase savings rates, or foster innovation to win over the affections of a member of the fairer sex.
While these suppositions regarding the impact of the One Child Policy are nothing more than imprecise guesswork, a smaller labor force and a doubling of the country's elderly population over the next generation are immutable truths. The growth miracle in China over the past thirty years may slow like its past birth rate.
How important is demography to the newly formed Russian government? Newly elected president Vladimir Putin encouraged Russians to bear more children as part of this recent campaign, promising cash payments to women who have their third children. The company's demographic shift has been brought to the forefront of the political landscape as there have been 13 million more Russian deaths than births since the fall of the Soviet Union. From 1990-2010 the median global life expectancy increased from 64 to 68 according to the World Health Organization. Russia, Belarus, and Montenegro were the only non-African countries that saw lower life expectancy over this time period. Lower fertility rates have coupled with increased mortality rates as the country's life expectancy at birth has slipped back to its 1960's level driven by markedly poor health habits.
While the resource-rich country is seen as a potential global growth engine as its markets continue to liberalize, the country faces demographic headwinds that could lessen the country's potential. Falling birth rates and increased mortality rates of young and middle-aged adults will lower the country's working age population by twenty percent between now and 2030. The country will need to become much more productive to offset this sizeable headwind if its wishes to consistently expand economic output.
The only certainty in financial markets over very short-time intervals is uncertainty. Over short time intervals, demographics are invariably certain. Today's teenagers will become the next decade's young workers. Much academic literature has attempted to tie financial market returns, economic growth, and demography because of our gaps in understanding what drives investment returns and our certainty in what drives future demographic changes.
While the BRIC's are often lumped together, their demographic profiles could not be more different. India will see the greatest benefit from its growing working age population, but will need to implement regulatory reforms and improve the country's educational and social institutions to maximize this opportunity. Brazil has several decades of demographic tailwinds to continue to drive the country's economic power. China's tremendous demographic advantage is coming to end. Given the country's family planning policy, China is about to age quicker than any of the western superpowers, but will do so without the advantage of growing wealthy on a per capita basis beforehand. The world has never seen a gender imbalance like what we are witnessing in China, and the impacts on the country and the globe are entirely uncertain. In Russia, demography is an outright impediment. While this resource rich country could still witness solid economic growth, the country needs to recognize and confront its sliding population and declining physical health before they begin to affect the country's wealth.
Disclosure: I am long SPY.