Author: SAMI J. KARAM

China After the Dividend

SAMI J. KARAM

This article was first published at Exante Data’s Money Inside and Out.

Will it overcome its demographic decline?

In a recent post, we described China’s unprecedented success at realizing a demographic dividend starting in the 1990s until around 2010. We discussed the confluence of factors that made this dividend possible. In this post, we look at present conditions and try to discern what is in store for the future. We use our usual approach and look at the three main pillars of wealth creation: Demographics & Health, Innovation & Productivity, Society & Governance.

Demographics & Health

The first thing that is evident is that demographics is no longer a positive vector of economic growth. 

The tailwinds created by a falling dependency ratio have died down and are now expected to turn into headwinds (see chart in our first post). The dependency ratio fell between 1970 and 2010 and was a key driver in the country’s GDP acceleration in that it opened a window of opportunity to realize a demographic dividend. China was able to realize that dividend because 1) it had liberalized its economy and opened up to trading with the world, and 2) it had improved its levels of education and infrastructure. As things stand today, the dividend has been fully realized and is behind us. There is instead a risk of a reverse demographic dividend, in which deteriorating demographics create a drag on growth, if China is unable to implement counteracting measures.

This risk is illustrated in the first chart below which shows the Chinese population by age groups. The population aged 15 to 64, aka the working-age population, soared between 1965 and 2015 and is now set to decline, slowly for the next decade but more rapidly thereafter. Meanwhile the population aged 65 and over will more than double between now and 2055. Finally, the youngest group aged 0-14 will taper off for decades to come.

Using the same data, the next chart shows the difference between the number of workers (those aged 15 to 64) and the number of dependents (those aged less than 15 and more than 64). The coming decline is as dramatic as the rise was in past decades. In 2015, there were 636 million more workers than dependents. But by 2055, this figure will fall to 189 million, or about the same as in 1980. Yet during this period, 1980-2055, the total Chinese population will have grown from 1 billion to 1.37 billion. (See in this article how the working-age population of other countries will have evolved between 1960 and 2050).

In addition to the longer term rise in the dependency ratio, China is seeing more recently a decline in its birth rate. China’s total fertility rate (TFR) fell to 1.09 children per woman in 2022, a new low in a recent downtrend that started after 2017. The next chart shows the evolution of the TFR since 1950. Note that it had fallen from over 6.0 to 2.75 before China enacted its one-child policy in 1980. Between 1991 and 2019, the TFR hovered between 1.5 and 2.0 but it fell below 1.5 in 2020 and fell again in 2021 and 2022.

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How China Realized a Demographic Dividend

SAMI J. KARAM

This article was first published at Exante Data’s Money Inside and Out.

China was ready for its historic opportunity.

Although a widely used aphorism, “demographics is destiny” is not strictly true in the modern era. Long gone are the days when troop size could on its own determine the outcome of a war, or when deploying manpower on a massive scale could result in a decisive economic advantage. Brute force just isn’t what it used to be. Today, thanks to advanced technology, small groups can inflict enormous damage in war, and a handful of software programmers can create billions in new wealth.

That said, demographics remains an important part of destiny in combination with other non-demographic factors.

Some of these factors can mitigate, or even completely counteract, a deteriorating demographic picture. Others can multiply the positive effects of demographics. This distinction—between demographics as a leading determinant of national stature vs. demographics as merely one of several components —can be illustrated by the following two opinions.

The first is a view promoted among others by Fareed Zakaria in his book The Post-American World (2008). Here is Zakaria in a 2008 Newsweek column The Rise of the Restrepeating the theme of his book:

It is an accident of history that for the last several centuries, the richest countries in the world have all been very small in terms of population. Denmark has 5.5 million people, the Netherlands has 16.6 million. The United States is the biggest of the bunch and has dominated the advanced industrial world. But the real giants—China, India, Brazil—have been sleeping, unable or unwilling to join the world of functioning economies. Now they are on the move and naturally, given their size, they will have a large footprint on the map of the future.

The second is from Winston Churchill’s speech Fifty Years Hence. It is from 1931 but remains as pertinent as ever:

When we look back beyond a hundred years over the long trails of history, we see immediately why the age we live in differs from all other ages in human annals. Mankind has sometimes traveled forwards and sometimes backwards, or has stood still even for hundreds of years. It remained stationary in India and in China for thousands of years. What is it that has produced this new prodigious speed of man? Science is the cause. Her once feeble vanguards, often trampled down, often perishing in isolation, have now become a vast organized united class-conscious army marching forward upon all the fronts towards objectives none may measure or define. It is a proud, ambitious army which cares nothing for all the laws that men have made; nothing for their most time-honoured customs, or most dearly cherished beliefs, or deepest instincts. It is this power called Science which has laid hold of us, conscripted us into its regiments and batteries, set us to work upon its highways and in its arsenals; rewarded us for our services, healed us when we were wounded, trained us when we were young, pensioned us when we were worn out. None of the generations of men before the last two or three were ever gripped for good or ill and handled like this.

Zakaria was not wrong about the growth of China, India, Brazil and others (he was after all writing in 2008 when that growth was already evident) but he gave demographics more weight than it deserves. Zakaria saw the overwhelming success of the less populous West as an “accident of history” while “the real giants – China, India, Brazil – have been sleeping, unable or unwilling to join the world of functioning economies.”

By contrast, Churchill saw the West’s advance as no accident and as the logical result of scientific progress. Note in the excerpt Churchill’s mention of India and China, to emphasize that demographics had been overtaken by science.

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Demographic Dividend: Which Countries Are Next?

SAMI J. KARAM

Sub-Saharan Africa is nearing a historic opportunity, but most of its nations are not ready.

Published on Africa Day 2023.

The population of India will have surpassed that of China by the end of this year, with each country counting 1.43 to 1.45 billion people. This milestone has led several observers to wonder whether the Indian economy can achieve a demographic dividend in the same way that China did after 1990. There is however widespread misunderstanding around the question of what constitutes a demographic dividend. This recent statement from a leading Indian daily is typical but inaccurate:

“A high population, especially in a younger age cohort, is generally seen as an asset rather than a liability for the economic fortunes of a country. The simple reason for this is that more people also means more working hands.”

The Financial Times similarly published “Can India Unlock the Potential of its Youth?” in which it discussed India’s prospects of deriving a demographic dividend from its youth bulge.

“More people” or a “youth bulge” could in theory mean “more working hands” but only if there is a sufficient number of jobs being created. The fact that tens of millions of new young cohorts will come of age every year and will need to take jobs to make a living does not automatically mean that those jobs will be there for the taking. A benign economic outcome cannot be taken for granted merely because of a shift in demographics. If for example investment is weak or if literacy is low, having more people may result instead in greater poverty and other deteriorating conditions. In addition if there is a too-large “younger age cohort”, there may be new headwinds slowing the economy in cases where the number of dependents (the young and elderly) overwhelms the number of workers. All of this is to say that while the sheer total number of citizens is important, it is less important than the age distribution of the population and other non-demographic factors.

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On Oil and Energy into 2023

SAMI J. KARAM

This post, the second in a series on the energy sector, was first published at Exante Data’s Money: Inside and Out.

In an earlier post we recalled the recovery of the energy sector in 2022. Here we look ahead to prospects for the oil market in 2023. In particular: 

  • Will we see more of the same, upside for energy stocks? 
  • Or will the energy sector subside again? Or mostly flatline? 

In previous times, we could offer some answers to these questions by focusing on market supply and demand for oil and gas products. Today, these market forces are made more complicated by factors that are not solely economic, but also political and geopolitical. 

Let us consider the key variables and some scenarios.

Key Factors to Watch in 2023

  1. Inventories

Inventories of crude oil and of some oil products now stand near historic lows in the US. This decline was exacerbated by the Biden administration’s sale of oil from the Strategic Petroleum Reserve (SPR) at a rate of about one million barrels per day. These sales have depleted the SPR from a total of over 600 million barrels in March to less than 400 million today, the lowest level since the early 1980s when the SPR was being filled. 

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The Great Energy Recovery of 2022

SAMI J. KARAM

This post, the first in a series on the energy sector, was first published at Exante Data’s Money: Inside and Out.

The energy sector outperformed in the past year, and not only because of Russia-Ukraine.

“By the fall of __, it was clear that a nation’s prosperity, even its very survival, depended on securing a safe, abundant supply of cheap oil.” 

When Albert Marrin penned this sentence in his book Black Gold: The Story of Oil in Our Lives, he was looking back nearly a century and referring to the fall of 1918. But we can agree now, looking at the wreckage suffered by the European economy and at severe disruptions elsewhere, that it applies just as well to the fall of 2022. The six months since the start of the Ukraine war have shown like no other recent period that the global economy in the 21st Century is still very much predicated, as it was in the 20th Century, on the story of oil (and natural gas), of nations searching for it, competing for it, trading it or withholding it.

This realization is not quite what we expected. 

On the contrary, rich economies had been for over a decade moving slowly but methodically to reduce their dependence on fossil fuels. As a result of climate change concerns, investors were pouring money into renewables and curtailing fresh outlays to oil, gas and coal projects. Natural gas was previously seen as the cleaner source of energy but it was now deemed as only marginally better than oil. There was a spreading consensus in some quarters that fossil fuels were on their way out, sooner or later but preferably sooner.

University endowments and other large institutions were scrubbing their portfolios free of fossil fuel holdings and were doing so with fanfare and as proof (in their view) of good responsible citizenship and of adherence to ESG standards. Their timing was good because, starting in late 2014, a surge in shale oil production in the United States depressed the price of oil and with it the price of energy stocks. From late 2014 to early 2020, the mere avoidance or diminution of fossil fuel holdings allowed many endowments and funds to deliver significant outperformance vs. the major equity indices. Their returns were further boosted by their generous allocations to the technology sector where stocks rose smartly year after year.

Consider that from its peak in June 2014 to the end of 2019, the XLE energy ETF declined by 40% while, during the same period, the XLK technology ETF rose by 142% and the S&P 500 by 92%. It is easy to see how many “clean” or “green” funds outperformed the S&P 500 in 2014-19, in particular if they overweighted the technology sector.

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