Population and economic growth

In HSBC’s “The World in 2050,” one of the factors considered to greatly contribute to making the Philippines the star performer from now until 2050 is our big population. This, of course, included the fact that our annual population growth rate is still one of the highest in the world, which also guarantees a rapidly growing labor force. To support its contention of population being an aid to faster economic growth, the HSBC also highlighted the case of Japan where it showed that the declining ability of Japan to grow economically in the last three decades or so coincided with its declining growth in working force.

For me, however, the decline in the economic growth of Japan during the time when its working force was also declining only prove one thing—that Japan’s growth this time mainly depended on increase input of labor, which is not necessarily the best way to grow because unless labor productivity also grows, an increase in labor supply only increases the total output or GDP of the country but not the welfare or material well-being of its individual citizens.

Historically, Japan, which like Thailand did not fall victim to the western powers, was already highly populated in the 19th century. Being close from foreign contacts, however, did not help Japan very much. It was just as poor as its neighbors under control of foreign powers. It did not remain long. After forcibly opened to world trade by the Americans in the middle of the 19th century, Japan realized the folly of remaining closed. By sending their best minds abroad to learn modern science and technology and applying them locally, the Japanese soon became the first Asian nation to join the developed industrial nations of the west toward the end of the 19th century—ready to defeat Russia in a navy war and conquer Manchuria, Korea and Taiwan. That was achieved not so much because of its big population base or rapid population growth but due largely to the increase in labor productivity that came with modern science and technology that they copied from abroad and pasted locally for use by their industries.

In a graph shown in the HSBC report, Japan experienced rapid growth in its working-age group in the sixties and seventies. Like in the US, that too was the product of the post-war baby boom. This soon stopped though because like the western countries after advancing economically, it also had to experience falling birth rates as their lifestyle changes. Unlike the US, however, Japan did not encourage in-migration, hence the slow growth of its labor force that finally resulted in slower economic growth.

One good way to grow an economy, which is usually followed by many countries wanting to industrialize, is through high savings and investment rates. Lacking these, labor is constrained from producing more. Manual labor is not enough. With more investments, a country can buy more machineries and equipment that complement labor, resulting in more output per worker. But this approach has its own limit too because a bigger capital based also means bigger depreciation that will have to be covered by more investments. At certain point also, more savings and investments today, like what the Chinese are doing now, may deprive them with the much-needed room for consumption, thus lowering their overall well-being in their lifetime. On the other hand, lower savings and investment rates that allow higher rates of consumption today in relation to GDP, like what we do in the Philippines, also means sacrificing the welfare of our future generations because of lower future output that comes with lower savings and investments today.

As I said in one of my columns last month, I do not exactly know what the right savings and investment rates are but that presently we obviously are saving and investing too little of our GDP. This in part is why our economic growth is very slow compared with our high-performing neighbors in Asia in the second half of the last century until the last decade.

In the final analysis, the best way to grow really is, in addition to having an appropriate or respectable savings and investment rates that balance the welfare of our people today and the future, to raise our productivity. This is achieved through the use not just of more capital with the same quality but of the modern ones that allow every worker to produce more in a big way or in raising the level of education and skills of our workers that will make them more productive even with the use of the same amount or quality of capital. The first, the acquisition of modern capital, we have not done because of our low savings and investment rates. We also failed in the second, because of our failure to inculcate our work force with more knowledge in science and technology.

I look at the 2011-2012 Global Competitiveness Report prepared by the Doha-based World Economic Forum and it says that the competitiveness ranking of the Philippine improved ten notches from 85 to 75 out of 142 countries studied. It did mainly because of the recent improvement in our institutional and macroeconomic stability under the new President, two of the 12 pillars of competitiveness measured by WEF. We are still very weak in the other pillars though, like infrastructure and in basic education and health, which together with institutions and macroeconomic stability comprised the first four pillars that the WEF believes have to be provided first before a country can start raising its level of competitiveness. WEF defines competitiveness as the set of institutions, policies and factors that determine the level of productivity of a country.