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Labors Decline and Filling the Void

Everyone grows old and slows down. Global growth is no different. As the developed world struggles to achieve growth rates that it enjoyed before the Great Recession, the emperors of economics talk of secular stagnation arriving with the three horsemen of our economic apocalypse: low productivity, excess debt, and demographics. In a time of technological change and debt service at generational lows, the first two are not apparent inhibitors of growth. Economics provides a simple answer that supports demographics as a primary factor: demand. More people working brings more people spending. As past leaders becomes laggards, workforce growth is slowing or is negative in the leading economies of the world and foretells a future different from the past.

A closer look reveals that growth was slowing before the financial crisis in 2008. In America, speculative construction in housing augmented growth, emerging economies elevated American exports, and commodities prices rose in their recurring cycle. Europe also enjoyed (and suffered) similar outcomes, while commodity exporters enjoyed their return to the spotlight and subsequent banishment from the stage. With the passing of the demographic dividend, the growth will need to find another location or this time will, indeed, need to be different for technology.

Trading places. Over the last fifteen years, the growth of emerging country workforces, particularly from China, offset slowing workforce growth in developed countries. Investment in manufacturing and infrastructure pulled the rural workers into the city and lifted untold millions out of poverty. The entry of China into the World Trade Organization enabled this mass of humanity to toil as the manufacturing base for the world. In doing so, their consumption expanded. More capital investment, more exports, more workers, more consumption.

The world is now overburdened with excess capacity in many industries as China's industrial build-out has created capacity that lacks domestic demand. As investment slows, so does the need to pull more workers into the fold. Slowing growth in China's principal export markets magnified this outcome. Europe is heading down the same path as Japan, where growth slows, and technology enables excess supply to pressure prices lower. The American workforce is not in as precarious a position as Europe and will not reach Japan's desperate outcome; however, workforce growth will eventually reach zero before rebounding. Thus, the prospects for increased investment or export demand are not high.

Most significant is the change occurring in China's workforce. This year China will join Europe and Japan with a shrinking workforce. While China is following a similar path as Japan, the difference is the sheer scale of the change: China has a population nearly ten times larger. The workforce growth will go from adding over twelve million to subtracting two million people each year. Without the tailwind of workforce growth, productivity will carry an increasing burden to lift growth, unless someone can fill the void.

Filling the void. The world is not without the potential for workforce growth. India provides a literate workforce that speaks the lingua franca, while African workforce growth could generate enough people to fill the void of both Europe and China combined. The opportunity certainly exists: their GDP per capita is materially lower than the rest of the world and thus provides a great avenue for economic growth that would help achieve the UN's goals of eradicating poverty. Unfortunately, most of the reduction in poverty in the last decades occurred in China, while India and Africa languished. In fact, China did not join the UN resolution of poverty reduction and instead moved ahead with its internal agenda to the benefit of the UN's goals. Whether India and Africa can achieve a similar outcome is vital to future world growth.