New Zealand's Demographic Decline and Economic Growth

The Institute for Economic Research predicts that New Zealand's GDP growth will inevitably decline due to the aging population.
  • To solve this by immigration, New Zealand would need to attract between 30 - 40 000 immigrants every year.
  • Retirement savings, if invested in New Zealand will yield a poor return.
  • New Zealand will be competing with the United States and Europe for immigrants.
  • An aging population puts severe strains on government budgets.
  • Population aging also depresses the growth of government revenues.
Economic forecasters comment on the implications of New Zealand's declining birthrate.

The  Institute for Economic Research stated in it's April 2002 report: "An older, less productive population will be a principle cause of a downward trend in economic growth."

The Institute concluded that the rate of GDP growth will inevitably decline over the next 30 years, constrained by the next 30 years, constrained by the slow growth in the labour force.

New Zealand's population is ageing and hence running down its holdings of wealth. The only consolation is that: "other countries are also in this situation and facing a similar outlook for growth."

The New Zealand Herald's Economics Editor, Brian Fallows wrote "Growth's daunting arithmetic" on May 22, 2002:

"So where are those 40,000 people to come from? It would seem, then, that neither unemployment nor workforce participation offers more than a partial answer to our 40,000 - year problem."

Brian Fallows referred to Treasury economist, Dr Frederic Sautet, who argues for a policy goal of doubling the population over the next 20 years, as a way of addressing the problems.

"But a target of doubling the population over the next 20 years would mean a population expanding by 3.5 percent a year, five times the current rate. Is that degree of immigration socially and politically acceptable?

Populate or languish
Future New Zealand governments need to attract around 30-40,000 immigrants each year. In July 1999, Wolfgang Kasper, Senior Research Fellow at the Centre for Independent Studies in Australia, wrote a paper "Populate or Languish," which was distributed by the New Zealand Business Round Table.
Many people saving now for their old age, may find that their won't be enough workers and customers around in future decades to make their investments pay.

"People who now save for their old age implicitly hope that sufficient workers and customers will be around to make their investments pay in 30 years' time. With a declining population, many will be disappointed."

"Should the population decline, they will discover that their savings capital, if invested in New Zealand, has a low productivity and a poor return. And they make this discovery only when they are old and can no longer cope well with such disappointments."

"The limits to population growth are not primarily physical, but rather cultural and social, depending on the speed of social change that people are prepared to accept."

"It is also hard to predict long-term natural population movements under an expansionist immigration policy, because new settlers may again prove to have a higher fertility than the inhabitants of long-standing and because émigré New Zealanders may return."

"But one may speculate that an annual addition of around 1% of the population by stepped-up immigration would be compatible with overall population growth of around 1.7%. (This may be compared with New Zealand's historical average population growth of 2% per annum.)"

"A target of 1% population growth from immigration would at present seem to amount to an annual net intake of 30-40,000 people."

With immigration, there is the problem of supply as other countries compete for the pool of suitable immigrants.
Constraints on immigration
Apart from domestic popular opposition to relatively large-scale immigration, there is the problem of supply as other countries compete for the pool of suitable immigrants.

Phillip Longman, writing on "The Global Baby Bust" in Foreign Affairs (June 1, 2004) observes:

"Birthrates, having already fallen well below replacement levels in Europe and Asia, are now plummeting throughout Latin America as well, which suggests that the United States' last major source of imported labour will dry up."

"Sub-Saharan Africa still produces many potential immigrants to the United States, as do the Middle East and parts of South Asia. But to attract immigrants from these regions, the United States will have to compete with Europe which is geographically closer and currently has more acute need for imported labour. Europe also offers higher wages for unskilled work, more generous social benefits, and large, already established populations of immigrants from these areas."

"Even if the United States could compete with Europe for immigrants, it is by no means clear how many potential immigrants these regions will produce in the future. Birthrates are falling in sub-Saharan Africa as well as in the rest of the world. War and disease have made mortality rates there extraordinarily high."

Sub-Saharan Africa is facing falling birth-rates and it is estimated that AIDS and related diseases could kill as many as a quarter of the region's inhabitants by 2010.
"U.N. projections for the continent as a whole, show fertility declining to 2.4 children per woman by mid-century, which may be below replacement levels if mortality doesn't dramatically improve. Although the course of the AIDS epidemic through sub-Saharan Africa remains uncertain, the CIA projects that AIDS and related diseases could kill as many as a quarter of the region's inhabitants by 2010."

Government Revenue
"Largely because of this imbalance, population aging, once it begins creating more seniors than workers, puts severe strains on government budgets.

"In Germany for example, public spending on pensions, even after accounting for a reduction in future benefits written into current law, is expected to swell from an already staggering 10.3 percent of GDP to 15.4 percent by 2040 - even as the number of workers available to support each retiree shrinks from 2.6 to 1.4.

"Meanwhile the cost of government health-care benefits for the elderly is expected to rise from today's 3.8 percent of GDP, to 8.4 percent by 2040.

More people create more demand for the products capitalists sells, and more supply of the labour capitalists buy.
"Population aging also depresses the growth of government revenues. Population growth is a major source of economic growth. More people create more demand for the products capitalists sells, and more supply of the labour capitalists buy.

"Economists may be able to construct models of how economies could grow amid a shrinking population, but in the real world, it has never happened. A nation's GDP is literally the sum of its labour force times average output per worker.

"Thus a decline in the number of workers implies a decline in an economy's growth potential. When the size of the work force falls, economic growth can occur only if productivity increases enough to compensate. And these increases would have to be substantial to offset the impact of aging."

See also:The Economic Cost of Abortion-Consequences of the Falling Birth Rate