ON LINE  opinion  - Australia's e-journal of social and political debate

The downward spiral of hasty population growth

By Jane O'Sullivan
Posted Monday, 8 March 2010

Charles Berger’s valuable piece “If Norway can prosper with a stable population, why can’t Australia?” (On Line Opinion, February 22, 2010) highlighted the lack of evidence supporting the supposition that population growth stimulates economic prosperity. He revealed that no correlation exists between population growth rate and per capita GDP growth among OECD countries. The 2010 Intergenerational Report (PDF 1.02MB) contrived to imply such a correlation by selecting only the “basket cases” of Japan and Italy to compare with Australia. Why not contrast ourselves with Norway or Slovenia, he asked.

However, his discussion perpetuates the vacillation about the economic costs and benefits of population growth, by citing the so-called “economies and diseconomies of scale”. This is the wrong framing of the question. It was wrong when the National Population Council cited it in 1992, and this wrong-headedness is why our understanding has moved so little since then.

Instead of focusing on scale, we should be looking to a far greater extent at the economies and diseconomies of growth rate.

At issue is not a comparison of 2009 with 22 million people versus 2049 with 36 million. It is the comparison of 2009 with 2.1 per cent annual population growth with 1999 at 1 per cent, or perhaps with a hypothetical 2030 with zero growth.

Don’t get me wrong. The “diseconomies of scale” are both real and serious. It’s just that there are no credible arguments for economies of scale, to counter the obvious negatives. The reasons put forward for high immigration and birth rates are to sustain growth, not to achieve a larger population. They are concerned with the economics of here-and-now, while the negatives of scale are mainly future environmental and social impacts. Triple bottom lines never did have clout: there’s only one bottom line that speaks on Capital Hill.

It is argued primarily that we must have an expanding population, in order to maintain “labour supply”, and to counter demographic ageing. These are related but subtly different goals. A third goal, not so publicly acknowledged but the driver for the largest single source of political donations, is to maintain the inflation of property values.

I don’t intend to go into a detailed analysis of the case for each of these, as I want to focus instead on the neglected diseconomies of growth. Suffice to say that all three goals of growth are examples of Ponzi scheme economics, not contributing significantly to the common good but rather shifting wealth from the many to the few, from the younger to the older, and from future people to current people.

Of course, when one is used to being the beneficiary of a Ponzi scheme, weaning oneself off can be an unattractive proposition. Luckily, for most of us the impact would be more than off-set by the dividends of population stabilisation. It turns out that the diseconomies of growth rate far outweigh the benefits.

To explain how these diseconomies work, I’m going to use some plausible ball-park figures. These are not precise costings - they are only illustrating a rationale by which the costing could be done. My point is that Treasury has not done such analyses, and this omission is unleashing a disaster on Australia.

Let’s start with infrastructure. In a stable population, our infrastructure needs would include replacing worn-out facilities and modernising items whose technology or design has been superseded. Different items of infrastructure have differing useful lifespans, but a cost-weighted average must surely be at least 50 years, once we remove growth as a reason for facilities being rendered obsolete. That would imply the need to replace no more than 2 per cent of all infrastructure annually.

If population is growing at 2 per cent, we need to expand the capacity of our entire stock of infrastructure by 2 per cent per annum, or else we start building up an infrastructure deficit, and service access and quality declines. That means doubling the annual requirement for creating infrastructure, compared with a stable population: 2 per cent replacement plus 2 per cent additional. Given that the useful life of much existing infrastructure is reduced by growth outstripping its capacity, the rate of replacement must increase on top of the requirement for addition.

Based on this conservative estimate, we can see that the Howard and Rudd governments have imposed a 33 per cent or greater hike in infrastructure requirement by doubling our population growth within a decade. No wonder local governments are squealing. Evidently, they have not actually increased spending by that much, and this is why we are all suddenly feeling the infrastructure stress.

How much does this actually cost? Estimates vary, but they are in the hundreds of thousands of dollars per added person. Using USA data, MIT economist Lester Thurow estimated that it requires 12.5 per cent of GDP to expand capacity at 1 per cent per year. For the developed world this was over $200,000 per person of net population growth. Australian estimates would suggest that figure is right in our ball-park too.

So, if we’re currently growing at 2 per cent per year, then 25 per cent of our GDP is currently being used to expand capacity to accommodate the people who are not yet here (or will have to be spent eventually to catch up). This means that the GDP available per capita to serve current residents is 25 per cent less than the advertised per capita GDP.

Against this burden, the 2010 Intergenerational Report’s estimate of 4.1 per cent of GDP needed for extra health care and aged care by 2050 pales into insignificance. Not to mention that only 40 per cent of this is attributable to ageing, and less than half of that could be deflected by immigration.

Does it make sense that we’re incurring a 25 per cent of GDP cost to avoid less than 0.8 per cent of GDP cost?

Interestingly, providing skilled personnel through training is a lot like providing infrastructure, as we have to spend the money up front before their working life begins. Their working life may be less than that of bridges and school buildings, but even if the average were only 25 years, we would need to be graduating trained people equal to 4 per cent of the total workforce in their trade or profession, in order to replace retirees. If population is growing at 2 per cent, we need to add 2 per cent to that workforce to maintain the same level of service to the larger population. So we should then be graduating 6 per cent of the skilled workforce. That’s a 50 per cent increase in training requirement, to accommodate a 2 per cent growth in population.

Instead of training them, we can import them. But, while each immigrant accountant or hairdresser may reduce the skills shortage in their own profession, they increase the demand for all other categories of skills. It’s not immediately obvious whether the net effect on the skills shortage is negative or positive. However, if we acknowledge that the training requirements for different skills vary greatly, and that the skilled immigration program has been dominated by applicants with the shortest and cheapest qualifications to meet entry requirements, the extent to which they reduce Australia’s training burden is unlikely to exceed the extent to which they increase demand for skills. If we further discount those who are actually trained in Australia using Australian training capacity, and all those who do not find or sustain work in the skill category on which they entered, as well as the family members of skilled immigrants who also enter under the skilled migration program, the net effect of skilled immigration is almost certainly to exacerbate skills shortages.

So we started with a skills shortage due to reduced government spending on post-secondary education, and tried to fix it by importing skills, but only succeeded in magnifying the problem.

We must restore training expenditure, to attack this problem at its source. But stabilising population would make by far the most cost-effective contribution to aligning training capacity with training needs.

It is interesting to reflect on the contrasting rhetoric around growth and ageing. Ageing is touted as the greatest economic challenge facing Australia, and therefore to be minimised by whatever means we have. Conversely, we are told that growth merely requires planning and management (as if the infrastructure magically appears by virtue of having been planned). In fact, the exact opposite is true.

Growth is a virtually insurmountable challenge, becoming ever more costly as resources are spread thinner, pushing an ever increasing burden on future generations, while diluting their wealth base and inflating their living costs.

Ageing, in contrast, is a modest and limited shift, back towards the sort of dependency ratio we had in the 1960s, but with much higher workforce participation than then.

So we have immigration to reduce the fiscal gap anticipated to be caused by ageing, but causing a fiscal black hole. And we have skilled immigration to solve the skills shortage but actually increasing it. And we have a baby bonus requiring a school-building program comparable to the current debt-financed economic stimulus package repeated annually to accommodate the extra 50,000 kids per year moving through the system. And, just when we should be encouraging extra saving for retirement, instead we have orchestrated oversupply of labour suppressing wages and increasing casualisation and underemployment, combined with the orchestrated housing affordability crisis, having a devastating effect on national savings. I haven’t even started on environmental outcomes or greenhouse gas emissions.

Can we really be so stupid?

It’s not as if Australia is exploring uncharted waters here. The globe is replete with examples to demonstrate the effects I’ve been describing. Back in 1986, Lester Thurow concluded that no nation could move forward economically with population growth greater than 2 per cent. Deliberate (but not coercive) fertility reduction was the primary enabler of economic development in the Asian Tigers, boosting workforce participation and allowing government efforts to move from quantity to quality of services. In contrast, Argentina famously fell back from first-world to third-world status, with the most plausible explanation (PDf 1.39MB) being that its growth outstripped its ability to maintain quality of life. A disgruntled population and unmanageable public debt are not conducive to maintaining good stable democracies. Political turmoil soon fuels the downward spiral.

Could Australia enter such a downward spiral? We already have many of the symptoms: widening inequality between rich and poor, declining national savings and expanding current account deficit, the selling of public assets to balance budgets, welfare systems falling behind the cost of living, intractable queues for medical services, increasing youth unemployment, fracturing social tensions erupting in ethnic violence … the question is, will we wake up in time to arrest it?

Jane O'Sullivan is a research fellow at the School of Land Crop and Food Sciences at The University of Queensland.

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