"Demographics is Destiny" when it comes to forecasting long term capital flows.
This is the World Bank's data on current population growth - by and large, the countries with the fastest growing populations are also emerging markets - the more advanced countries aren't growing at all. There are a couple of wrinkles in the data - rich Islamic countries also have fast growing populations, and many of the former Soviet countries have falling populations.
Population growth is a good thing - people are after all a factor of production, just like materials and technology, so the more of them you have, the greater your potential GDP. And even better, once you have paid this factor of production, they go out and buy your output! So the greater the population, the greater the addressable market size, and so the greater potential for corporate growth. This why no one who is interested in economic growth should oppose immigration.
Here's a link to a full database of age dependency ratios. Again, the emerging markets do better here, so resources are not being siphoned off to pay for the upkeep of a large nonworking population, and this means that they can be addressed to more productive purposes. I'm not sure if the countries which report a zero dependency ratio really have no pensioners at all, or if the numbers are negligible relative to the working age population, or if they just didn't report data. They are all quite small countries, and not really investible, so I've left them off the graph below.
As with population growth, it's the older more mature countries that have a high pensions burden, and African and Islamic countries that don't. Now, for some of the African countries, this reflects low life expectancy, so not many people survive to pensions age, implying that the economy has different problems to deal with. And one shouldn't be too static about the analysis - it seems inevitable that the pensions age will rise in the mature economies, which will simultaneously boost the working age population and reduce the retired population, so that fraction will come down.
Having a high dependency ratio is not necessarily a bad thing - it's a mark of success in that you have created the conditions to have lots of people survive beyond working age. But it creates imbalances - either you're funding those pensions via taxes, which is a drag on the economy, or you're funding it with savings, which can distort your allocation of investment - capital is too cheap when the pensioners are accumulating retirement funds, and it gets too expensive when they start spending their savings.
Also, there's another aspect of pensioners and economics. Larry Summers co-wrote a seminal and prophetic paper back in 1990, which used a generational model to show that trade imbalances could develop when you had an ageing population, which was spending its savings to fund retirement. This would mean that unless the younger generation was saving to match them, then it must lead to a persistent current account deficit. So funds get transferred from the old country to the younger, exporting one, as has happened between the US and China.
This has created an imbalance, because China has chosen not to let its currency float accordingly, and the same sort of thing is happening in the Eurozone, because exchange rates are fixed between countries. But that means that if one country is a net dis-saver, because its older population is spending its retirement savings, then it must run a current account deficit with younger countries, whose workforce is accumulating savings for retirement. With fixed exchange rates, this takes a generation to reverse, which is generally longer than capital markets are willing to wait.
The key thing to bear in mind, though, from the point of view of a macro EM investor, is that you want to be on the side of the country that is supplying the goods to the retired population. You get demand growth for the country's output (especially in the consumer goods sector), and there's an upward bias in the currency. These types of long term trends are what enable you to sleep soundly with long positions through turbulence. So seek out countries with population growth and low dependency ratios.
This is the World Bank's data on current population growth - by and large, the countries with the fastest growing populations are also emerging markets - the more advanced countries aren't growing at all. There are a couple of wrinkles in the data - rich Islamic countries also have fast growing populations, and many of the former Soviet countries have falling populations.
Population growth is a good thing - people are after all a factor of production, just like materials and technology, so the more of them you have, the greater your potential GDP. And even better, once you have paid this factor of production, they go out and buy your output! So the greater the population, the greater the addressable market size, and so the greater potential for corporate growth. This why no one who is interested in economic growth should oppose immigration.
Here's a link to a full database of age dependency ratios. Again, the emerging markets do better here, so resources are not being siphoned off to pay for the upkeep of a large nonworking population, and this means that they can be addressed to more productive purposes. I'm not sure if the countries which report a zero dependency ratio really have no pensioners at all, or if the numbers are negligible relative to the working age population, or if they just didn't report data. They are all quite small countries, and not really investible, so I've left them off the graph below.
As with population growth, it's the older more mature countries that have a high pensions burden, and African and Islamic countries that don't. Now, for some of the African countries, this reflects low life expectancy, so not many people survive to pensions age, implying that the economy has different problems to deal with. And one shouldn't be too static about the analysis - it seems inevitable that the pensions age will rise in the mature economies, which will simultaneously boost the working age population and reduce the retired population, so that fraction will come down.
Having a high dependency ratio is not necessarily a bad thing - it's a mark of success in that you have created the conditions to have lots of people survive beyond working age. But it creates imbalances - either you're funding those pensions via taxes, which is a drag on the economy, or you're funding it with savings, which can distort your allocation of investment - capital is too cheap when the pensioners are accumulating retirement funds, and it gets too expensive when they start spending their savings.
Also, there's another aspect of pensioners and economics. Larry Summers co-wrote a seminal and prophetic paper back in 1990, which used a generational model to show that trade imbalances could develop when you had an ageing population, which was spending its savings to fund retirement. This would mean that unless the younger generation was saving to match them, then it must lead to a persistent current account deficit. So funds get transferred from the old country to the younger, exporting one, as has happened between the US and China.
This has created an imbalance, because China has chosen not to let its currency float accordingly, and the same sort of thing is happening in the Eurozone, because exchange rates are fixed between countries. But that means that if one country is a net dis-saver, because its older population is spending its retirement savings, then it must run a current account deficit with younger countries, whose workforce is accumulating savings for retirement. With fixed exchange rates, this takes a generation to reverse, which is generally longer than capital markets are willing to wait.
The key thing to bear in mind, though, from the point of view of a macro EM investor, is that you want to be on the side of the country that is supplying the goods to the retired population. You get demand growth for the country's output (especially in the consumer goods sector), and there's an upward bias in the currency. These types of long term trends are what enable you to sleep soundly with long positions through turbulence. So seek out countries with population growth and low dependency ratios.
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