In 2023 it was confirmed by the UN that India had overtaken China as the most populous country in the world. The significance of this lies in the extent to which India can become a global consumption and production base, but also the extent to which other countries, such as SA, with younger populations and high population growth could benefit from this. A similar story is developing in Africa more broadly, as the continent’s population is expected to grow materially over the coming decades, and as such can play a critical role in the global economy.
The first key point relates to population growth trends in developing economies, which indicate that emerging economy populations are growing faster than developed markets in aggregate. Compared with developed markets, the major emerging economies are mostly growing at above the global average population growth. China is the only major emerging economy behaving in a similar way to developed economies, mostly below the global median. Remember, human capital is an important input for productivity, and as such population growth is an important input for future productivity.
The second point relates to age trends. Median ages in emerging economies are similarly below the global median while median ages in developed economies are mostly above the global median. This is an important issue when we consider potential productivity and consumption timing. From a consumption timing perspective, younger people have a greater propensity to spend and defer saving for the future (given future economic opportunity), which comes with a relatively greater capacity to borrow.
By contrast, an older population is typically gearing up for retirement, and the capacity to spend is lower. But importantly, a younger population has more impetus to be productive but also space to take risks. This implies a greater opportunity set for economic activity in emerging markets (both in terms of production and consumption). We’ve seen some multinationals shifting production from China to India for example (remember China’s population is ageing and population growth is slowing). SA can benefit too — our population is younger AND is growing.
From a productivity perspective, the question to answer is the extent to which population growth has impacted the marginal productivity of labour across a sample of emerging and developed market economies. Between 1990 and 2022, the US, Australia, China, India, Nigeria and South Korea stand out. In these economies, the multiplier effect of an additional unit of labour has translated into at least two times more economic output over time. For Germany, France and the UK, the result was between one and two times more economic output — which may imply a lower productivity gain from human capital than the others. For SA and Brazil, the multiplier effect has been one-for-one.
One challenge that emerging economies perhaps face, from a productivity perspective, is the extent of growth in gross fixed capital formation (fixed infrastructure investment). Across most emerging economies, gross fixed capital formation (GFCF) has been consistently falling as a percentage of GDP over the last 60 years or so. SA faces the same challenge despite being the most industrialised economy on the African continent. Weak infrastructure investment will likely have a material impact on the extent to which Africa and SA can take advantage of shifting global population dynamics. Investment in transport networks such as roads and rail, as well as ports, will be among the key determinants of Africa’s competitiveness in global trade. The calibre of our human capital will similarly play a role. SA (and Africa) must focus on all aspects of productivity to ensure better economic outcomes.
We have a young population, and a population that is growing. If any lessons must be learned from India, it is the economic opportunity that may come with changing global demographics. With SA firmly on the correct side of the changing demographics, we must ensure that the productive elements of the economy improve.
The positive knock-on effect of a focus on the productive areas of the economy will be seen for many years ahead. It is not just about the impact of changing demographics but also specific human capital, technology and fixed infrastructure development that impact the relative efficacies embedded in the economy.
Paraphrasing aspects of my last article regarding investments — it is a self-fulfilling prophecy where investment in education, innovation, and fixed infrastructure results in better economic outcomes, which in turn increases the scope for attracting investment and SA’s capacity to invest (assuming higher productivity equals higher tax revenues), boosting competitiveness, and again better economic outcomes, and so the virtuous cycle continues.
• Mazwai is an investment strategist at Investec Wealth & Investment SA.
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