The cause of the next global recession

Last year, I wrote an article that said a big population was good for the economy. As it turned out, the big domestic market size, healthy purchasing power and a tendency to save that kept the big economies of Brazil, China, India and Indonesia from sinking, at least for now.
When another great crash hits the world again, these same economies might also sink if they do nothing to reverse the declining trend of population growth.
When the recession started in the United States, signs of a contagious global economic recession suddenly became imminent.


The wreckage of the US financial ship sent a profound effect to the rest of the world economy: Bankers and financiers are the ones to blame.
However, if we look at the market fundamentals more carefully, we realize that bankers are not the only cause of the global econo-mic crisis; also to blame are the ordinary people who do not believe in the future and have few or no children.
The United Nations published a report last year drawing attention to the problems being created due to a rapidly aging world population and declining birth rate.
Among the main findings of the report were: The current rate of aging is unprecedented in history. By 2045, the population over 60 is expected to outnumber that under the age of 15.
The current median age for the world is 28 years, with half the world's population above that age and half below it. By 2050, the median age will likely reach 38 years.
Aging is affecting nearly all countries of the world and will have a major impact on economic growth, savings, investment, labor markets and taxation.
Because fertility levels are unlikely to rise again to the high levels of the past population, aging is irreversible and the number of young people is likely to shrink throughout the 21st century.
Worldwide there are about nine people of working age to support each older person. By 2050, this will drop to four, with serious implications for pension schemes.
The Western world's population growth rate is virtually 0 percent now, and this has led to a profound change in the structure of society.
Russia's population will continue to shrink due to its high abortion rate. It has fallen by 6.6 million since 1993 and could lose a further 11 million people by 2025. In 2007, Russia had the world's ninth-largest population. By 2050, the UN estimates, Russia will be at No. 15 on the list, with a population less than that of Vietnam.
While Vietnam may be set to surpass Russia, there too sex-selective abortion is causing severe problems. Normally the sex ratio at birth (the number of boys born per 100 girls), is between 104:100 and 106:100.
In Vietnam, the sex ratio at birth for 2006 stood at 110:100, and may cross the 115 mark in a few years from now. If this trend is not reversed, by 2025 Vietnam will have a significant surplus male population, which will have many implications for the country.
The "missing girls" phenomenon is also an issue in China, where a recent report confirmed the continuing practice of sex-selective abortion.
The Chinese Academy of Social Sciences says there could be more than 24 million men (equivalent to Malaysia's entire population) unable to find a bride by the end of this decade.
The report blamed the sex-ratio imbalance on China's one-child policy. It has also started to cause a so-called "little emperors" social problem wherein a child gets used to receiving full attention and being spoiled by six adults (their own parents and grandparents).
These "little emperors" are reportedly growing up to be the most individualistic and antisocial people, creating many other social problems.
In Japan, meanwhile, the population continues to shrink. In 2009, it decreased by 75,000, or 1.46 times the decrease marked in 2008. It is estimated Japan's population of around 128 million now will dip below 100 million in 2046, and then below 90 million in 2055.
With the decline in births, there are fewer young people productively entering the working world. And there are many more elderly people leave the system of production and becoming a cost for the collective. The consequences of such a reduction will obviously be labor shortages, an aging population and slower economic growth.
In practice, the fixed costs of this economic and social structure - health and social costs - will increase. How dramatically they increase depends on how evidently unbalanced the structure of the population is and how much wealth it has. When this happens, taxes can no longer be reduced.
Another phenomenon impacting the economy due to the stagnation of the population is a decline in savings. This lack of savings will then reduce the capacity of the economy to grow as the blood to be pumped by the heart of the economy is limited; the banking sector will eventually have difficulty breathing.
A decline in development due to a lack of population growth in Western countries is worrying. An effort has been made to compensate for this decline in development with financial activities and delocalization.
As a result, many businesses have started to move all production activities to Asia to bring the goods back to a lower cost, and with greater productivity, as well as to tap the strong and young market of Asia.
But productivity is not without limit, as the trend of declining fertility and an aging population has also spread throughout countries with large populations in Asia, thus threatening global economic stability.
In practice, the highly indebted US economy due exclusively to the consumerism of debt of American households and declining propensity to save was actually the origin of the crisis, which eventually led to the so-called "sub-prime" excesses. The financial instrument of debt leverage - the expansion of credit -was used to compensate for the lack of growth in the economy caused by the 0 percent birthrate.
The origin of the crisis is therefore not in the banking or finance sector per se. Banks and financial firms helped aggravate the crisis, trying to compensate for problems that were already there, namely, the decline in economic development, which some tried to camouflage through financial instruments.
Not to repeat the same fault, the Indonesian economic development path must come in line with a healthy population growth without any government intervention as in the form of family planning or population control. The population growth must come in a natural way as the economy progresses.
Hence, government leaders are more responsible than bankers to ensure that credit expansion is pushed, supported and justified to sustain a growth rate that is based on a strong, productive and sustainable domestic market. This is the foundation to rebuild the economic-financial balance and withstand the next global economic whirlwind.  

Stefan S. Handoyo, The writer is vice president and senior business economist at PT Asia Select Indonesia and PT AGIndo Research Group. The opinions expressed are his own.

Opini The Jakarta Post 1 Maret 2010