Cross-country

American’s $800B investment in corporate R&D, venture-capital investment, and government funding/subsidies represents 3.8% of GDP, maintaining an edge over China’s $660B (2.7% of GDP)

“…The Economist has totted up corporate spending on R&D, venture-capital investment, direct government funding and, for advanced technologies, implicit funding through subsidies, and subtracted the overlap among these categories. This calculation confirms that America maintains a slight edge, spending about $800bn or 3.8% of GDP in 2020. That compares to about $660bn in China after adjusting for differences in the cost of living, or 2.7% of GDP….”

Economist Staff, "China and the West are in a race to foster innovation,"The Economist, October 13, 2022, https://www.economist.com/briefing/2022/10/13/china-and-the-west-are-in-a-race-to-foster-innovation

China and the West are in a race to foster innovation

China’s government is planning on winning the ai race, winning future wars and winning the future,” warned Todd Young, an American senator, in July. “At stake” in the West’s technological competition with China, echoed a report from American officials and businessmen in September, “is the future of free societies, open markets, democratic government, and a world order rooted in freedom not coercion.” This week the head of a British intelligence agency joined the chorus, urging “deep investments” in new technology to counter China’s growing prowess.

The anxiety is easy to understand. In 2008 China spent a third as much as America did on research and development (r&d) and about half as much as Europe, after adjusting for differences in the cost of living. By 2014 it had surpassed Europe. By 2020 its spending was 85% of America’s.

The fruits of this investment are becoming apparent: in August a Japanese research institute calculated that China now produces more of the world’s most highly cited academic research than America does. Since 2015 more patents have been issued in China than in America. China’s output of a basket of sophisticated goods including information technology, pharmaceuticals and electronics is expected to surpass America’s this year, according to a report published by the Information Technology and Innovation Foundation, an American think-tank. “China has become a serious competitor in the foundational technologies of the 21st century,” concluded another report last year from the Belfer Centre at Harvard University.

Small wonder, then, that Western countries are embarking on a frantic effort to retain or regain their technological edge. On October 7th America issued fierce new restrictions on exports to China of advanced semiconductors and related equipment. The new rules could be as crippling to the Chinese chip industry as previous American sanctions were to Huawei, a Chinese telecoms firm, says Greg Allen, who used to head the artificial-intelligence (ai) unit at America’s Department of Defence. “It’s a total clamp down, trying to cut off every head of the hydra of China’s chip industry.”

As well as trying to disrupt the flow of technology abroad, America’s government is investing more in innovation. In August Congress approved $370bn of spending on green energy, including lots of money for research. The month before it passed the Chips and Science Act, which provides $52bn over five years for the semiconductor industry, some of which will incentivise private r&d.

The act also revamps the National Science Foundation (nsf) to put more emphasis on applied science and technology and potentially doubles its funding. Germany, Japan and South Korea are making multi-billion-dollar investments in computer chips. Last year Britain announced the $1bn Advanced Research and Invention Agency (aria) to supercharge high-risk, high-reward science.

The result of all this is a global boom in investment in innovation. In 2020 the world’s spending on r&d exceeded $2.1trn, over 2.5% of global gdp, a record. The binge has three notable features. The first is the heavy involvement of governments, which are unwilling to leave investment to capital markets and are instead both funding r&d and subsidising production of certain high-tech goods. Both China and the West explicitly link such spending to geopolitical competition. “Technological innovation has become the main battlefield of the international strategic game,” said China’s president, Xi Jinping, in a speech last year to Chinese scientists. “We’re in a multi-generation era-defining competition against the ccp,” rhymes Mr Young, one of the sponsors of the Chips Act.

The second feature of the new era is experimentation with different types of funding that couple industrial policy with efforts to promote risk-taking or private-sector rigour. America and Britain, for instance, are reviving research missions akin to America’s cold-war quest to put a man on the Moon. China, meanwhile, is using “guidance funds”, in which the state takes a stake alongside private investors, to steer money to startups in ai and chips, among other advanced technologies.

Third, governments are trying to ensure their country captures more of the benefits of innovation. That can mean both preventing exports of some goods and using industrial policy to promote domestic production.

But there remain big differences in approach between China and the West—most notably the far more muscular role the state still plays in directing innovation in China to favoured industries. The West, in contrast, relies on a more diffuse network of universities, non-profits and private businesses that have more freedom to set their own priorities. There is little doubt that China’s system has helped it catch up with the West in some existing technologies, but analysts question whether it will be as good at generating future breakthroughs. The answer will determine the outcome of the global battle for technological dominion.

America’s government invested lavishly in innovation during the cold war, through such organisations as the nsf and the Defence Advanced Research Projects Agency (darpa). Its spending peaked at 1.86% of gdp in 1964. But after the fall of the Berlin Wall federal spending on r&d fell well below 1% of gdp. Private investment, meanwhile, doubled from 1% of gdp in 1979 to 2% in 2017. Giant tech firms such as Google, Facebook (now Meta), Amazon and Apple sprouted in America. China spawned similar titans, such as Alibaba, Baidu, JD.com and Tencent.

But on both sides of the Pacific the age of free-flowing private capital left many disappointed. The Communist Party has called the spread of big consumer-tech firms a “disorderly expansion of capital”. It has obliged China’s internet giants to follow its priorities, blocking share sales and issuing abrupt regulations to cow wayward firms. It seems to want less video-gaming and online commerce and more ai, chips and green tech.

Many Americans have similar misgivings. Peter Thiel, a fabled investor, has argued that there has been too much investment in “bits” (software and analytics) and not enough in “atoms” (hardware and manufacturing). “With chips we were caught behind the eight ball,” says Eddie Bernice Johnson, a Democrat from Texas who chairs the committee that drafted the Chips Act, “It was a national security imperative.” Mr Young of Indiana agrees: “The totally free-market theories of Friedman, Hayek—they don’t make sense when you’re facing an existential threat that plays with market forces.”

Buying breakthroughs

To allow a proper comparison of the sums devoted to innovation on the two sides of the Pacific, The Economist has totted up corporate spending on r&d, venture-capital investment, direct government funding and, for advanced technologies, implicit funding through subsidies, and subtracted the overlap among these categories. This calculation confirms that America maintains a slight edge (see chart 1), spending about $800bn or 3.8% of gdp in 2020. That compares to about $660bn in China after adjusting for differences in the cost of living, or 2.7% of gdp.

What is more, juguo tizhi can also lead to misallocation of funds. A paper published in the journal Econometrica in July suggests that Chinese spending on r&d spurs less growth in productivity than that of neighbouring Taiwan. That is in part because the state often supports soes, even if they are less productive. Several studies suggest that corporate r&d in China is about half as productive as in America (although they do not focus exclusively on advanced technology).

America’s expenditure, meanwhile, is much more diffuse. Private businesses account for about 60%, venture capital for nearly 20% and foundations, charities and universities more than 5%. In a recent presentation, Pierre Azoulay, a professor at mit, notes that the “Cambrian explosion of philanthropic funders” is a “silver lining” compared with the perceived sclerosis in government funding. From 2010 to 2019, research funding from non-profits nearly doubled, from $12bn to $22bn. “Our system is unique because its more distributed and bottom-up; not top-down,” says Maria Cantwell, another senator.

America may also be more daring in its investments. The Institute for Progress (ifp), an American think-tank, is helping government agencies distribute grants more effectively, says Caleb Watney, a co-founder. Erwin Gianchandani of the nsf cites “golden tickets” as an example. Rather than the standard consensus-based process to allocate funding, a single reviewer can champion a project.

Michael Lauer, head of extramural research at America’s National Institutes of Health (nih), lists a handful of new programs where labs receive funding with far fewer strings attached than normal. The Other Transactions Authorities, a recent nih program that quickly funds unconventional projects, disbursed over $2bn in 2020 and 2021.

Hunting for lightbulbs

America is also creating more “moonshot” programs in an effort to replicate the success of darpa. Last year it launched the $1bn Advanced Research Projects Agency for Health (arpa-h) to focus on ambitious biomedical research. The total amount of funding in this category increased from about $4bn in 2021 to nearly $6bn in 2022. Tom Kalil of Schmidt Futures, another organisation that aims to shape policy on innovation, says this heralds a shift towards more risk-taking. China lacks any equivalent funding agencies, notes Mr Cao of Nottingham University China.

It is possible to exaggerate the strengths of both the American and Chinese systems. For all the talk of moonshots, notes a former White House official, nih was still slow to fund research on covid-19 at the beginning of the pandemic. And researchers are still often buried in paperwork. The new funding does little to address the administrative burden in the current system—researchers lose about 40% of their time to that, notes Tony Mills of the American Enterprise Institute, another think-tank. By the same token, although thousands of new firms have sprung up in China in favoured industries, such as ai and semiconductors, most of them do not seem to have achieved much.

Neither system has a monopoly on results. According to a report published in September by the Special Competitive Studies Project, a research group organised by Eric Schmidt, a former ceo of Google (and a former member of the board of The Economist), China is dominant in some industries, such as 5g telecoms. It makes some 80% of the world’s lithium batteries. But the West is ahead on biotech, cloud computing and ai. It has been the source of most fundamental advances in these fields, such as crispr (a gene-editing technology) and the transformer architecture that underpins many big ai models.

Although few advanced computer chips are made in America, American firms tend to design them. asml, a Dutch manufacturer of chipmaking equipment, has a monopoly in the advanced lithography needed to make the fanciest ones. And the Chips Act is prompting Intel and tsmc, two of the biggest chipmaking firms, to build new semiconductor fabs in America. Intel is also set to spend nearly $20bn on new chip factories in Germany.

China has built first-rate ai models by throwing money at researchers and firms. Wu Dao, its version of gpt-3, an American ai model that can write like a human, uses ten times more parameters to train itself. Yet the chips used for much of this sort of machine-learning, gpus, were originally developed to generate graphics for video games—one of the industries on which the Chinese government has cracked down most ferociously. By the same token, it was not until September that a Chinese firm developed a vaccine against covid-19 that is as effective as Western ones—a recent high-stakes test of its capacity to innovate. “China does best in products where manufacturing is complex but the science is mature, for example in batteries,” says Dan Wang, an analyst at Gavekal Dragonomics, a research group.

But China is trying to mend some of the failings of its system. It boosted funding for basic research by 16% last year, in an attempt to foster more breakthrough discoveries. It is also trying to reduce centralisation. In July the party announced new rules to increase scientists’ autonomy. “There is evidence that China has recognised the limits of using a blunt metric to evaluate scientists,” adds Mr Wang. “Thus universities are starting to move towards the peer-review system of the West.”

There are some mistakes, however, from which China shows little sign of retreating. Mr Xi’s decision to rein in the tech industry contributed to an 11% contraction in venture-capital investment from the first three quarters of 2019 to the same period in 2022. In America vc investment grew by 70% in that time. China’s stubborn zero-covid policy, meanwhile, is driving foreign capital and talent out of the country. A survey by the German Chamber of Commerce in May found that nearly a third of foreign workers plan to leave.

Such talent is crucial to competitiveness. In the past China benefited from both foreign investment and large cohorts of “sea turtles”, students and researchers who work or study abroad and later return. The share of Chinese students studying abroad who eventually returned home rose from 25% in 2004 to 65% in 2019. And from 2015 to 2019, the number of academic papers published involving co-operation between American and Chinese researchers grew by over 10% a year, according to Nature.

Yet in 2020 this growth in academic collaboration between the two countries abruptly stalled. Less than half as many Chinese received visas to study abroad in the first half of 2022 as in the first half of 2019. This pulling apart is bad for the world, but China may suffer more. It does not have as diverse a pool of researchers as the West. According to data from MacroPolo, a think-tank, although 60% of the world’s best ai researchers work in America, over two-thirds of them are foreign (and over a quarter of them Chinese). In contrast, China draws overwhelmingly on domestic talent: almost all its best ai researchers are Chinese, and 70% of them have studied only in China.

America is not only open to foreign expertise, it also benefits from a big network of alliances with other technologically advanced countries. Collectively, America, Britain, France, Germany, Japan and South Korea spend over twice as much on r&d as China. China, by contrast, has few allies, and none that are powerhouses of research and innovation.

Bulbs blown

American politicians do not seem to understand the advantage conferred by their country’s openness, however. The original draft of the Chips bill included a provision to boost skilled immigration. Although some politicians, including Mr Young, gave it cautious support, it had to be removed to ensure the support of more Republicans, in particular. (America’s allies, happily, are doing better. Britain has devised a scheme to provide visas to graduates of top universities. Australia and Canada, already home to lots of immigrants, are increasing immigration further.)

Whatever the limits to America’s openness, however, China’s growing isolation—both self-imposed and enforced by restrictions like America’s new rules on tech exports—is far more severe. After several years when its technological rise seemed unstoppable, the outlook suddenly seems much less clear. In the coming days Mr Xi will preside over China’s 20th Party Congress. Across the Pacific, America’s Congress will be debating how much money to devote to the Research initiatives at agencies like the nsf. You can be sure each will be on the other’s mind.

Brad Setser, “Brad Sester On Current Accounts Surpluses And FX Reserves,”@Brad_Setser, October 10, 2022, https://twitter.com/Brad_Setser/status/1579659816372666368

“As @BobEUnlimited notes, one big global shift has come from the change in the U.S. petrol balance. I think there has been another: a shift from a world where big current account surpluses show up in fx reserves to one where they don’t. Prior to the global financial crisis — and in the few years after it – reserve growth in China, Saudi Arabia and Russia more or less tracked to their combined current account surplus. That isn’t the case now…”

“… This matters because the global current account surplus today is almost entirely in China (on track for at least $400b), Russia (on track for $250b or so), and the Gulf (on track for $400b or more), and none are showing in any reserve growth. The reasons differ (rate differentials and exporters hoarding dollars for China, sanctions for Russia, the Saudi shift away from SAMA toward a sovereign fund) but the net effect is the same — none are likely to add to their formal reserves in 2022. This matters for financial flows (less demand for bonds, probably less demand for euros too — for strange reasons), but it also simply makes the global flow of funds hard to track. It also has led to a broad misunderstanding about what is driving the big reported fall in global reserves. That fall is mostly from valuation changes – combined with real selling by EM Asian countries other than China. The big surplus countries (China, Russia and Saudi Arabia, which is representative of the Gulf) aren’t selling (unlike in 15), but they also aren’t adding. Their missing accumulation thus is helping to drive the large reported fall in global reserves. Last thought: Russia’s reported current account surplus in the first part of 2022 is almost equal to that of China. That reflects high oil and low Russian oil imports. But it also reflects the big gap between China’s customs surplus and its BoP surplus…”

“…Bottom line: there hasn’t been this kind of surge in the aggregate surplus of the big authoritarian global powers that hasn’t been primarily intermediated through their relatively conservative central banks in recent financial history.”

Inventors in East Asia now file significantly more international patents than their North American counterparts to protect their intellectual property around the world

“…The figure above shows the evolution in the number of foreign patent applications filed by different regions of the world in foreign jurisdictions. By 2003, East Asia (mainland China, Hong Kong, Japan, Macao, Mongolia, South Korea and Taiwan) had surpassed North America.According to this measure of foreign patents, Japan, accounting for 61% of the region’s foreign patent applications from 2010 to 2019. South Korea, China and Taiwan followed, filing 18%, 12% and 7%, respectively. East Asia has risen as the main destination where inventors around the world seek patent protection. Of all the patents filed abroad by applicants in North America during the 2010s, 41% went to East Asia, while just 13% stayed in the region, and 11% went to Western Europe…”

Ana Maria Santacreu and Jesse LaBelle, "East Asia Outpaces Other Regions in International Patenting," Federal Reserve Bank Of St. Louis, October 3, 2022, https://www.stlouisfed.org/on-the-economy/2022/oct/east-asia-outpaces-other-regions-international-patenting

East Asia Outpaces Other Regions in International Patenting

The global need for patent protection has increased substantially over the last couple of decades. Because patents are territorial (they offer protection only in the jurisdiction where they are granted), innovators typically seek patent protection in multiple countries where they are interested in doing business to prevent the theft of ideas or to keep technological competition at bay. That was the case of the United States in Asia during the decades following the formation of the World Trade Organization, as we documented in a December 2021 essay in Economic Synopses.

In this blog post, we document changes in the patterns of patenting across regions around the world. We use data on patent applications filed by 213 jurisdictions, grouped into 14 regions.

The figure below shows the evolution in the number of foreign patent applications filed by different regions of the world in foreign jurisdictions. By 2003, East Asia (mainland China, Hong Kong, Japan, Macao, Mongolia, South Korea and Taiwan) had surpassed North America (Canada, Greenland and the United States) in terms of filing patents in other jurisdictions.

East Asia Rises as a Patent Application Destination

Exploring patenting activity in East Asia further, we found that the main innovator, according to this measure of foreign patents, was Japan, accounting for 61% of the region’s foreign patent applications from 2010 to 2019. South Korea, China and Taiwan followed, filing 18%, 12% and 7%, respectively, of patent applications abroad.

East Asia has risen not only as an innovation hub (i.e., filing patents abroad) but also as the main destination where inventors around the world seek patent protection.

Of all the patents filed abroad by applicants in North America during the 2010s, 41% went to East Asia, while just 13% stayed in the region, and 11% went to Western Europe. Those in Western Europe showed a slight preference for East Asia, with 37% of their patents filed abroad going to the region, compared with 34% filed in North America.

Even East Asian countries have a preference for their own region. Of all the patent applications filed by East Asian countries to other jurisdictions, 43% went to North America, while 36% stayed within the region, and 11% went to Western Europe.

These patterns of international patenting indicate a bias for seeking patent protection in East Asia, not only by countries outside the region but also by intraregional countries. The shift toward Asia has not always been the case. Instead, in the 1980s and early 1990s, the other most innovative regions were filing for patents with one another, while Asia was behind in both the origin and the destination of patent applications.

High-Tech Competition Builds in East Asia

What explains these new trends? There could be several reasons why East Asia has become the main destination where countries around the world seek patent protection.

First, Asia is an important destination of technology-intensive goods imports and foreign direct investment from North America and Western Europe. Hence, inventors in these developed regions may want to protect their exported technologies from theft and misappropriation by competitors in Asian countries.

Second, Asian economies are becoming innovation powerhouses, increasing competition for high-tech goods within the region. For instance, the Japanese and South Korean technology sectors have grown substantially, whereas China and Taiwan have been dominating the manufacturing of semiconductors. This regionally strong growth may have led to a “race to patent,” as each country attempts to become the dominant innovative force in that region and ward off competition.

In summary, foreign patenting has been increasing substantially in recent decades. While the U.S. and Western Europe have historically been seen as innovation powerhouses, East Asia has quickly established itself as both the main origin of innovations and the main destination for patent protection.

Note

This region comprises the Aland Islands, the Channel Islands, Denmark, Estonia, the Faroe Islands, Finland, Iceland, Ireland, the Isle of Man, Latvia, Lithuania, Norway, the Svalbard and Jan Mayen islands, Sweden and the U.K.

As this century progresses, though, it appears that China will be experiencing economic convergence with the US of another, less positive kind. The country’s working-age population of nearly a billion (defined here as those ages 15 through 64) has been essential to its economic rise, enabling it to become the workshop of the world and a vast consumer market. But according to population projections released last week by the United Nations, this cohort will start declining rapidly in the 2030s, and shrink by almost two-thirds by the end of the century. With the US working-age population projected to be about the same size in 2100 as it is now, China’s will go from more than four times larger to less than twice as big. Throw in Canada and Mexico, which aren’t exactly part of the same labor market as the US but do share a free-trade zone, and China’s working-age population is projected to be only 1.2 times bigger....The UN also offers a “low-fertility scenario” in which birth rates stabilize at lower levels in both China and the US. In it, China sees its working-age population drop by more than 80%, and North America’s surpasses it in 2097.

Justin Fox, "China's Economic Engine Is About to Start Shrinking,"Bloomberg, July 18, 2022, https://www.bloomberg.com/opinion/articles/2022-07-18/china-s-working-population-is-about-to-get-much-smaller

China's Economic Engine Is About to Start Shrinking

For a few decades now, China has been converging with the US economically. Depending how you measure it, its gross domestic product has either already passed that of its great global rival or is getting ever closer. Average incomes are still much lower in China, but by another key metric of living standards, life expectancy, China matched the US in the pandemic year of 2020.

As this century progresses, though, it appears that China will be experiencing economic convergence with the US of another, less positive kind. The country’s working-age population of nearly a billion (defined here as those ages 15 through 64) has been essential to its economic rise, enabling it to become the workshop of the world and a vast consumer market. But according to population projections released last week by the United Nations, this cohort will start declining rapidly in the 2030s, and shrink by almost two-thirds by the end of the century. With the US working-age population projected to be about the same size in 2100 as it is now, China’s will go from more than four times larger to less than twice as big. Throw in Canada and Mexico, which aren’t exactly part of the same labor market as the US but do share a free-trade zone, and China’s working-age population is projected to be only 1.2 times bigger.

Also, the UN population forecasts contain other information about future labor supply that may end up being much more important than how China and the US stack up. Africa is projected to be the big gainer, with a working-age population expected to nearly equal Asia’s by the end of the century. (For its continental/regional groupings, the UN puts Mexico in Latin America and defines “Northern America” as the US, Canada, Bermuda, Greenland and St. Pierre and Miquelon.)

By “decline” I don’t necessarily mean something akin to the fall of Rome. Japan remains an affluent, advanced economy despite its quarter century (so far) of working-age population decline. But its share of nominal global GDP has fallen to 5.1% in 2021 from 17.9% in 1994. All wealthy nations have ceded GDP share to make room for China and other emerging markets, but the US declined just to 23.9% from 26.1%, and the European Union share declined to 17.8% from 25.7%.

In 2021, China’s share of global GDP was 18.5% and its share of global working-age population was 19.2%. The latter percentage is projected to fall to 6.1% by century’s end. One way for Chinese leaders to prevent an equivalent decline in GDP would be to make reforms and investments that keep per-capita incomes rising faster than the global norm. But as my fellow Bloomberg Opinion columnist Hal Brands and Tufts University China scholar Michael Beckley argued in Foreign Policy last year, fear of reduced economic clout in the future could also elicit a less-productive, more externally aggressive response: “The most dangerous trajectory in world politics is a long rise followed by the prospect of a sharp decline.”

The US faces no such prospect, at least not for demographic reasons. One can even envisionit returning to population growth through a renewed embrace of immigration, a more supportive environment for parents or both. At a time of great pessimism among Americans, that’s an interesting prospect to contemplate.

The global population grew by less than 1 per cent a year for the first time since the aftermath of the second world war in 2020 and 2021 with Europe’s total population actually falling during the coronavirus pandemic, according to a UN report.The populations of 61 countries are forecast to decrease by at least 1 per cent between 2022 and 2050, and the associated low fertility rates will also combine with better healthcare to accelerate the ageing of societies. Despite the slowing growth, the global population is still poised this year to reach the milestone of 8bn people, while next year India is projected to surpass China as the most populous country. The world population is expected to peak in the 2080s at 10.4bn and will then begin to fall — the first decline to be forecast in the annual UN report.Europe’s population shrank by 744,000 in 2020 and by 1.4mn last year — the largest fall of any continent since records began in 1950, reflecting a surge in deaths, a fall in births and lower net migration linked to the pandemic. Two-thirds of global citizens live in a country where the fertility rate is less than 2.1 births per woman, roughly the level required for populations to remain stable if mortality rates are low. In Asia, Japan’s population has been shrinking since 2010, South Korea’s fell in 2020, and China’s is forecast to do the same this year. China’s population is forecast to decline by about 6mn annually in the mid-2040s and by 12mn a year by the late 2050s — the world’s largest-ever drop. Africa overtook Asia in 2020 to become the main source of population growth. The UN reports that more than half of the projected increase up to 2050 will be concentrated in just eight countries, mostly in Africa, with the rapid growth threatening their development goals. By mid-century Nigeria is projected to be as populous as the US, closing the current 121mn gap between the countries.

Valentina Romei and Alan Smith, "Global population growth hits lowest rate since 1950,"Financial Times, July 11, 2022, https://www.ft.com/content/6b131d91-1834-4243-bb8b-dc49060b1450

Global population growth hits lowest rate since 1950

The global population grew by less than 1 per cent a year for the first time since the aftermath of the second world war in 2020 and 2021 with Europe’s total population actually falling during the coronavirus pandemic, according to a UN report.

The populations of 61 countries are forecast to decrease by at least 1 per cent between 2022 and 2050, and the associated low fertility rates will also combine with better healthcare to accelerate the ageing of societies.

As the figures were released in the UN’s World Population Prospects report, António Guterres, UN secretary-general, focused on the benefits of healthcare rather than declining fertility and hailed the “advancements in health that have extended lifespans and dramatically reduced maternal and child mortality rates”.

However, the rising proportion of older people in many countries is predicted to hit economic growth and public finances and is already posing growing political challenges.

Despite the slowing growth, the global population is still poised this year to reach the milestone of 8bn people, while next year India is projected to surpass China as the most populous country. The world population is expected to peak in the 2080s at 10.4bn and will then begin to fall — the first decline to be forecast in the annual UN report.

Europe’s population shrank by 744,000 in 2020 and by 1.4mn last year — the largest fall of any continent since records began in 1950, reflecting a surge in deaths, a fall in births and lower net migration linked to the pandemic.

Joshua Wilde, research scientist at Germany’s Max Planck Institute for Demographic Research, said that if fertility rates dropped to a rate at which the population declined, “it’s actually great because you have a higher fraction of the population in working-age groups”. But “in the long run”, he pointed out, “all those workers who are providing a boost to income per capita are going to retire and they will need pensions, they will need healthcare”.

Europe’s population is expected to continue to contract until 2100, with Germany and other countries joining a trend already established in eastern and southern European countries such as Poland and Italy.

Two-thirds of global citizens live in a country where the fertility rate is less than 2.1 births per woman, roughly the level required for populations to remain stable if mortality rates are low.

In countries with a falling population “unless you get a productivity miracle, overall economic growth will fall”, said Charles Goodhart, emeritus professor at the London School of Economics and co-author of The Great Demographic Reversal.

In Asia, Japan’s population has been shrinking since 2010, South Korea’s fell in 2020, and China’s is forecast to do the same this year. China’s population is forecast to decline by about 6mn annually in the mid-2040s and by 12mn a year by the late 2050s — the world’s largest-ever drop.

“If you look at a map of the world of countries that are going to decrease in population size, it basically starts in central Europe and goes east all the way to Japan across Russia and China,” said Wilmoth.

More production “could and should” move to Africa, said Goodhart, “because the alternative, of mass emigration into other countries where the population is falling, is politically not going to be viable”.

“It is primarily the ageing and shrinking of the working-age population that affects a country’s economic development,” said Martina Lizarazo López at Bertelsmann Stiftung, a German-based think-tank.

Increased productivity, automation and longer working lives can help reduce the impact of an ageing population, experts said.

Globally more than 1bn people will be aged over 65 in 2030 with 210mn aged over 80, about double the numbers in 2010. Older people already account for about a quarter of the population in many countries including Japan, Italy and Germany.

“…The high cost of bringing up children gobbles up a big share of disposable income in some countries, particularly in Asian countries such as Japan, South Korea and China….”

For all the many rewards that children bring, they are financially draining. They bring economic benefits, but these are not reaped by the parents who bear the brunt of the costs. Boosting the former may require more sharing of the latter.

Countries that provide generous financial support appear to have more births. Nordic countries, noted for their gender equality and generous welfare states, have birth rates that are close to replacement levels. Providing financial support for childcare, making it easier to combine work and parenthood, is particularly effective, according to the OECD.

Sovereign bond investors are increasingly mindful of demographic risks. Rapidly ageing populations increase public spending on health, social care and pensions, while the tax burden is spread over fewer workers. Rating agency Fitch calculates that the impact of ageing costs on sovereign ratings could result in a 10.5-notch downgrade for Slovakia, the most extreme case, by 2070 assuming no policy changes.

But helping parents financially is one obvious way to lower barriers. The high cost of bringing up children gobbles up a big share of disposable income in some countries, particularly in Asian countries such as Japan, South Korea and China.

For equity investors, ageing populations present opportunities as well as risks. Rising demand for healthcare and automation should benefit companies such as Japan’s Fanuc and Germany’s Siemens. Even nappy manufacturers like Japan’s Daio Paper, Nippon Paper and Unicharm can adapt to demographic trends. Sales of adult diapers in Japan have exceeded those for babies since 2011, says Jefferies.

FT Staff, "Fertility: childcare costs exacerbate the demographic drought,"Financial Times, May 15, 2022, https://www.ft.com/content/fcb40906-3f1d-4962-9ae8-4943271af9f5

Fertility: childcare costs exacerbate the demographic drought

The Covid-19 baby bust — marked by falls of up to a fifth in December 2020 birth rates — was shortlived. But a reversion to pre-pandemic trends still leaves about half the world’s population below the replacement rate of fertility. The economic consequences are a big issue for politicians and portfolio managers alike.

A common story about the recent inflation surge in the United States--especially among members of Team Transitory--is that the surge is largely due to global supply shocks, such as rising energy prices, chip shortages, and various bottlenecks in the wake of the worldwide pandemic. Why then do we not see a similar inflation surge in Japan? There, inflation is running at about the same rate as it was pre-pandemic. See below. I am puzzled.

Greg Mankiw, "An Inflation Puzzle,"Greg Mankiw's Blog, May 6, 2022, http://gregmankiw.blogspot.com/2022/05/an-inflation-puzzle.html

A common story about the recent inflation surge in the United States--especially among members of Team Transitory--is that the surge is largely due to global supply shocks, such as rising energy prices, chip shortages, and various bottlenecks in the wake of the worldwide pandemic. Why then do we not see a similar inflation surge in Japan? There, inflation is running at about the same rate as it was pre-pandemic. See below. (Click on image to enlarge.) I am puzzled.