An ageing population isn’t the reason for stunted economic growth – austerity is

If a man has his eyes bound, you can encourage him as much as you like to stare through the bandage, but he’ll never see anything.” Kafka, the Castle.

The latest IMF projections for 2015 are unchanged since January.

Global growth is pegged at 3.5 per cent: 2.4 per cent in advanced and 4.3 per cent in emerging and developing economies.

The overall signal from the IMF’s latest World Economic Outlook is that output growth in advanced and emerging markets is weak and will remain so because of an ageing workforce and low capital investment.

This analysis exaggerates the impact of demographic factors on labour participation, downplays the role of productivity growth and fails to address the reason for sluggish investment in capital – the failed outcomes of austerity as standard IMF policy advice since 2010.

In the 2015 World Economic Outlook, for example, the IMF says: “Potential employment growth is expected to decline further in advanced and emerging market economies compared to pre-crisis rates. This is a result of demographic factors negatively affecting both the growth of the working population and trend labour force participation rates.”

But the reality is somewhat different. The IMF analysis is based on 16 countries that excludes more than one billion people from the African continent where half of the population is either 20 years of age or younger.

Even for the 16 countries – mainly European and Anglo-Saxon countries plus some of the big emerging markets – that constitute the IMF universe, the notion that an ageing population is the primary force reducing potential growth is inconsistent with the facts.

According to the ILO’s Key Indicators of the Labour Market (KILM) database, the (un-weighted) average participation rate of the IMF’s 16 countries increased by three percentage points between 1990 and 2007 and only declined after the economic crisis.

The two countries with steady substantial decline in participation rates are China and Turkey, with the former starting at very high rates due to its rural population.

The drop in aggregate labour participation rate in the US is universally viewed as a response to the slow and weak job and wage recovery from the Great Recession of 2007-2008, not as the result of the ageing of Americans.

Disaggregating the data by age and looking at the changes between 1990 and 2007 one finds that falling labour participation is not due to older workers leaving the workforce.

In almost all countries workers between 55 and 65 increased their participation, in some cases by double digit percentage points (Australia, Canada, Germany, and Russia).

Falling labour participation is due to a decline in the participation of the younger generation.

Countries like France, Germany, India, the US, the UK, Russia, Italy, Turkey, and China saw declines in the participation rates of 15-24 year olds by between five percentage points (Germany) and over 20 (China) in the 17 years before the 2007 crisis.

This development in part reflects changes in education, and in some countries migration flows (China, India and Mexico). This has only continued further over the crisis years (2007-2013) as youth unemployment remains high.

Spain experienced a massive 12.8 percentage point drop in the ratio of participation. Why? The answer, which surely the IMF knows full well, is that the weak economic recovery discourages persons, particularly youths, from seeking work.


The Brazil and Mexico experience

The Brazilian and Mexican experiences run counter to the IMF story in a different way.

In those countries, the ratio of the dependent population (which includes children and the elderly) to those of working age declined as large numbers of young people reached working age while birth rates fell.

The only place where an ageing population has had a significant impact on the potential work force is Japan, where the dependent population relative to working age population increased due to ageing.

It is not supply but the demand side factors that the IMF ignores in its ageing work force scenario, and this will dominate employment for the rest of the decade.

The IMF analysis of the role of capital in its gloomy forecast also fails a reality check.

It writes: “The evidence presented in the study suggests that absent policy action to encourage innovation, promote investment in productive capital, and counteract the negative impetus from aging, countries will have to adjust to a new reality of lower speed limits.”

That the world needs more capital investment to grow more rapidly is valid but the lack of investment has nothing to do with the purported negative impetus of ageing.

It has everything to do with the Great Recession and IMF-advocated policies favouring austerity and continuous opposition to wage increases that can raise aggregate demand.

The IMF concludes that “for advanced economies as a whole, private investment during 2008–14 declined by 25 per cent compared with forecasts made in early 2007, before the onset of the crisis,” and agrees that it would be a good thing to “encourage innovation” and “promote investment in productive capital.”

The crisis policies which were supposed to do exactly this failed abysmally. Firms invest when they can anticipate increased demand for their products.

Depressing aggregate demand and reducing consumption spending by workers and their families is not the way to motivate businesses to invest future production.

It’s mind-boggling to think that too few workers will drag down growth and that “counteract[ing] the negative impetus from ageing” should be a priority for the future while the impact of radical IMF-advocated labour reforms and social spending cuts go unmentioned in the assessment of this depressing future growth perspective.

Could it be that blaming slow growth on labour is the preparation of a renewed attack on labour standards and the erosion of pension systems?

Finally, at a time when nearly every analyst and policy-maker (including the head of the IMF) recognises the critical role of an increasingly imbalanced distribution of income on the economic well-being of many countries, the IMF warns us that slow growth due to ageing and modest investment due to lack of innovation promises a dreary future: “These findings imply that living standards may expand more slowly in the future.”

The reality, as Oxfam pointedly reminds us, is that living standards have expanded extraordinarily in recent years – but only for a few privileged.

The IMF is obviously not referring to those people. Analysis of the global economic future based on the “underlying structural bottle-neck” of ageing rather than inadequate demand, failure of austerity programs, and massive inequality makes one wonder what blinds the eyes of the IMF from reality.