There is often a causal relationship between a country’s demographic composition and its relative economic performance. Ceteris paribus, the greater proportion of working age individuals in a population, the greater capacity a country has for production of goods and services relative to their commitments in terms of schooling, pensions, healthcare &c to the non-working generations. These factors would be most pronounced within states having a strong institutional framework and also often above a certain economic threshold.
Belonging to a large generational cohort as opposed to a small one brings many economic and political advantages. As a modern welfare state is structured around an ‘inter-generational social-contract’ whereby the working age population provides for the younger and older generations, a linear population development pattern is optimal. However human history has rarely afforded such stability, a fairly recent example disrupting social stability is WW2 resulting inter alia in a post-war ‘baby boom’.
Demographic Composition vs GDP per Capita Growth Norway 1845-2010
Whilst undoubtedly bringing much joy to their parents, the large cohorts born after the war put a substantial economic strain upon the contemporary older and smaller generations financing their (largely in the Western World) substantially free education. Upon reaching working age the so-called baby boomers, through sheer weight of numbers, caused arguably a socio-cultural revolution but also an unprecedented level of economic growth. Combined with the entry of women into the workplace and the smaller generations preceding and succeeding them, they also enjoyed relatively low taxation levels as their short-term social financial commitments were accordingly lower. Adding to this was the economic benefit of steadily rising property prices due in large part to this demographic anomaly.
In failing to produce a correspondingly substantial succeeding generation, the baby boomers, whilst enriching themselves when being in the working age stratum, simultaneously sowed the seeds for a potentially impoverished existence as old-age pensioners. This is due to the structure of national pension schemes which are based on a pay-as-you-go principle, as there will be substantially fewer tax payers to finance social commitments in terms of pensions and healthcare over the coming decades.
Historical and Projected Demographic Composition vs Historical GDP per Capita Growth (Norway, 1845-2060)
The political and economic problems affiliated with this marked rise in pensioners is currently at its very beginning in most Western states, with retirement rates set to increase markedly from 2011 onwards. Luckily for the baby boomers they still constitute such a substantial cohort that they retain the political power to effectuate the political reforms needed to maintain their wealth levels, this will however be reduced in tandem with increased death rates over the next 10 to 15 year period. The ways to mitigate the effects of this demographic transition is increased immigration, increased taxation increased fertility rates and increasing the standard retirement age, the latter two being the only sustainable solutions for the long-run. Increased life-expectancy and technological innovation increasing work efficiency are positive factors in this regard, however the Western welfare states will still face the greatest challenges to their continued existence since their inception.
Sources:
GDP Data: Angus Maddison, University of Groningen http://www.ggdc.net/MADDISON/oriindex.htm
Historical Population Data: Statistics Norway http://statbank.ssb.no/statistikkbanken/Default_FR.asp?PXSid=0&nvl=true&PLanguage=0&tilside=selecttable/MenuSelS.asp&SubjectCode=02
Projected Population Development: Statistics Norway, Medium Scenario http://www.ssb.no/folkfram_en/
