The X Factor

The state of the universe we know today came into existence because of series of a multi-stage development process which continues to evolve in its natural status. Similarly, humans grow and age, which affects the size of the population of the country that they live in, the state of the nation they tend to build, and their respective economic expansion and contraction cycles.

In this case, economic cycles, the process of growth is influenced by multiple factors, such as the accessibility to natural resources, technological innovation, the availability of a  robust political, judicial, financial, and educational system, and a factor that most economic and financial gurus tend not to shed too much light on: demographics, which if examined closely could help nation’s economists and policy makers to identify the weaknesses that they face economically and work on improving it.

Examining a country’s demographics, through identifying the statistical characteristics of a human population such as age and income, can help determine the causes of lack of growth in the global economy. In that case, Japan stands out as a vital example. Though it lacks the availability of natural resources, and after thousands of causalities during the Second World War, Japan emerged as an economic miracle in the decades following the global conflict, by building an economy that heavily rely on industry, providing the capital needed to prompt economic growth, investing in infrastructure, implementing the required governmental policies to enhance commercial activity, and liberalizing trade, Japan ranked as the second largest economy in the world with an  average annual GDP growth of 5.2% between 1967 and 1990. After the boom came the huge bust of the real estate sector, and the continuous deflation of prices since 2000 which induced the Bank of Japan to follow unorthodox monetary policies that failed to inspire growth.

But a closer look at the Japanese demographics during its meteoric rise and bust will prove worthy. According to the World Bank Group, the ratio of old-dependent people as of working population in 1970 was at 10%, a figure associated with 64% of the population between the age of 15 and 64. Compared to 2015, the first criteria shoots to 43%, while the second declines to 61%, these figures are accompanied by a decline in annual GDP growth to 1.2% during 2015, and contraction of the birth rate from 18% to 8%. Such figures clearly show that senior Japanese citizens make a huge part of the Japanese society in our present time, which is affiliated with higher social and healthcare costs, as the government invests heavily in its healthcare and social security system while the productivity of its senior citizens is at their lowest levels, resulting in lower spending habits, whether in buying real estate, and/or durable goods (home appliances, automobiles, etc.), which leads to decline in domestic demand and consumption. Combine that with a real estate bust, and the outcome is one of the world’s stagnant economies. On the other hand, and compared to Japan, the United States is a country that continues to rank as a developed nation after the Second World War, and examining its population structure shows that seniors make 43% of the working age population during 2015, compared to 16% during 1970. In addition, the birth rate and annual GDP growth rate declined from 18.4% to 12.4% and from 3.2% to 2.6% respectively, not to forget the major financial crisis during 2000 and 2008, which severely affected the living standards of the average American family and economic growth globally. As for the mathematics savvy, the correlation computed between the Japanese annual GDP growth rate and the percentage of senior citizens’ growth is (-0.56), and the correlation between the annual GDP growth rate and birth rate decline is (0.59). In the case of the U.S.A., the correlation is (-0.173) and (0.174) respectively, for the period extending from 1967 till 2015. This proves that as the number senior citizens increase and the number of birth rate decrease the annual growth of the GDP decline.

As a conclusion, in a world with economic growth at its lowest levels, and as global leaders search for the reason(s) behind the lack of economic growth, a closer inspection of each economy demographics prove viable to identify the major problems in any state though it might rank among the world most developed nations and poses all the required tools to grow. Demographics can be truly described as the new X Factor during our present time.

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