Monday, October 09, 2006

Demography is destiny

The Economist has a survey on "Talent"- the "world's most sought-after commodity".

Two facts struck me:

the picture in much of the developed world is haunted by demography. By 2025 the number of people aged 15-64 is projected to fall by 7% in Germany, 9% in Italy and 14% in Japan.


RHR International, a consultancy, claims that America's 500 biggest companies will lose half their senior managers in the next five years or so, when the next generation of potential leaders has already been decimated by the re-engineering and downsizing of the past few decades. At the top of the civil service the attrition rate will be even higher.

Wealthy westerners wish to retire, while continuing to live the good life. Countries like India, which have relatively young populations, need to increase output and employment. One natural response would be for the former to invest in the latter, and then use the returns from their investments to purchase goods for consumption in their dotage. Will this happen?

Probably not. As the same article puts it "How can India talk about its IT economy lifting the country out of poverty when 40% of its population cannot read?" India and other pretender economies will be hobbled by their failure to invest in human capital, which can take far longer to accumulate than the physical infrastruture which we are known to lack. In this post, Jane Galt discusses the role of Human Capital in the post-war recoveries of Germany and Japan. In the article mentioned above, the Economist reports

Both India and China are suffering from acute skills shortages at the more sophisticated end of their economies. Wage inflation in Bangalore is close to 20%, and job turnover is double that (“Trespassers will be recruited” reads a sign in one office). The few elite institutions, such as India's Institutes of Technology, cannot meet demand.

So what now? The recent period of high profits is likely to pass as wage bills grow. As profits shrink, marginal businesses will go bust. Older Europeans and Americans will be encouraged, by higher salaries and changed labor laws, to stay on at work for longer than planned. Companies will adapt in many ways: 1. some will simply try to outcompete their rivals on wages. Not a good idea, as it continue to be difficult to distinguish between the ones who are truly worth the new wages, and the marginal employees 2. Others will try and use innovative salary structures to try and ensure that their wages get results 3. In some lines of business, changed organizational structures may become common.

Overall, though, I am sure we will see more of the same- at least as far as Economics is concerned. How the decline and aging of the west will affect global politics is a different matter.

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