The small Australia nightmare

Published in Business Spectator (Melbourne), 7 October 2010

Australia’s population debate has become less shrill since the end of the election campaign. However, for as long as the population keeps growing at under 2 per cent per year, dealing with growth remains an issue.

Even the proponents of a ‘big Australia’ wouldn’t dispute that a growing population presents numerous challenges. Houses, roads, schools, and hospitals have to be built; capital for such infrastructure projects has to be raised; and the resident population has to support all of this.

It may seem like a daunting task for Australia to cater for millions more people over the next decade. No wonder that population campaigners like Dick Smith, Bob Carr or Kelvin Thomson believe that curbing migration is the preferable option.

But a quick look abroad shows why this is the wrong alternative.

Deutschland schafft sich ab (‘Germany abolishes itself‘) is the provocative title of a book which caused a stir when it was published in late August. Written by former Berlin state treasurer and Bundesbank board member, Thilo Sarrazin, a social democrat, it quickly sold more than 650,000 copies – a new record for a non-fiction book in post-war Germany.

The book touched many raw nerves, particularly for its blunt assessment of Germany’s failed migration and integration policies (see Baking a recipe for migration, August 5). Politicians of all parties, including Chancellor Angela Merkel and the leader of Sarrazin’s own Social Democrats, were quick to condemn it as inflammatory and ‘not helpful’. And that was prior to its publication, before anyone had had a chance to read it.

The theatrical outrage prevented politicians from actually dealing with Sarrazin’s careful and evidence-backed analysis of demographic and social change in Germany. His critics also failed to engage with the author’s modelling of future economic growth rates under a slow population decline. It is this part of the book which makes for interesting reading in the context of Australia’s ongoing population debate.

Sarrazin, who holds a PhD in economics, presents an economic growth model for Germany over the next 40 years. He assumes a continuation of Germany’s current low net-migration intake combined with a low fertility rate, moderately improving life expectancy and low but stable productivity growth. It is a plausible, if not even slightly optimistic, scenario for Germany.

Apart from the fertility rate, which is considerably higher in Australia than in Germany (but still below replacement level), Sarrazin’s model resembles the dream scenario of ‘small Australia’ campaigners. But as the data show, their dream is actually a nightmare.

Demographic changes are happening at a snail’s pace, but when they materialise their impact is huge. In Sarrazin’s scenario, Germany’s GDP would peak around the year 2020 and then start to go into perpetual decline. Negative trend growth is something that developed economies are not used to, but for countries in a demographic tailspin this could soon become the normal state of affairs.

Worse still, the age pyramid is turned upside down. Whereas today there are 0.46 pensioners for every working adult in Germany, by the middle of the century the two groups would be about equal in size. By then, the workforce would be about a third smaller than today.

Sarrazin calculates in detail what this means for social security, health care and pensions. To sum it up, the picture does not look pretty for Germany. What is most depressing about it, though, is the fact that it is not based on gloomy assumptions – this is business as usual. The numbers at least justify the book’s title: On this trajectory, Germany is indeed about to abolish itself.

Germany is by no means alone in its demographic decline. Most other developed economies are facing a similar cocktail of below replacement-level fertility and population ageing. It is a development that is most pronounced in countries like Japan, Italy and Germany, but present elsewhere as well. What this means globally is that we can expect to see skilled labour shortages appear in OECD countries before too long. Countries facing the double whammy of population ageing and decline will be competing hard for qualified migrants to stabilise their economies.

What conclusions can we draw for Australia’s population debate then? At the moment, Australia is in a fortunate position in more than one respect. Population ageing has not progressed as far here as it has in Europe. The difference between Australia’s and central Europe’s median age is about six to seven years.

Australia is also lucky because it is still seen as a good destination for qualified migrants from around the world. The quality of life Australia has to offer combined with its economic prospects and English as its language makes it possible for Australia to attract the migrants it needs.

Seen from this angle, Australia has the opportunity to avoid many of the problems currently faced by countries like Germany. While Australia will not be immune to some pressures resulting from population ageing, the combination of its relatively high fertility rate and a high net-migration intake will help to moderate the effect.

Under Australia’s business-as-usual scenario, the dependency ratio will deteriorate somewhat until 2050 (probably to around 0.65 from today’s level of 0.48), but it will not nearly be as dramatic as in Europe or Japan, where it could be above 1 by then.

So far, Australia has its population debate the wrong way around. It is not population growth that will be the developed world’s biggest worry over the coming decades, but population decline.

As one of the very few rich countries that still has a young and growing population, Australia should embrace this opportunity and continue to grow. Other countries may well abolish themselves but Australia should not.