Wednesday Briefs – 5 May 2021

THIS WEEK: Drug Legalization; Cigarette Prohibition; Demographics and Destiny.

Drug Legalization

The question of drug legalization has been hotly debated for decades but legalization itself made little headway until recent years. The District of Columbia and an increasing number of states have legalized cannabis (marijuana) for medicinal and recreational use. A number of other states allow it only for medicinal purposes. See this map for current status of legalization.

From the perspective of health and public safety, we may rue or approve this trend a few years from now. With time, we will be able to look back and measure the impact of legalization. But from the perspective of the economy and geopolitics, legalization will result in some clear benefits.

Prohibition of marijuana and of other drugs has been detrimental to the US economy and destructive to a number of other countries. All across the globe, nations with weak institutions and small economies have had to contend with the rise of drug lords and terrorists financed by drug money. They are Colombia, Afghanistan, Mexico and many others.

Legalization has three immediate or quasi-immediate effects: 1) it moves tens or hundreds of billions of dollars from the black economy into the real economy, 2) it reduces the amount of money spent on drugs and diverts those dollars to other consumables or to savings, 3) it takes money out of the hands of domestic criminals and gangs, and 4) it cuts off the lifelines of nefarious actors overseas.

Cigarette Prohibition

This trend towards drug legalization is concurrent with another trend, which is to add new prohibitions on cigarette smoking. Some of the politicians who are cannabis-friendly are fierce crusaders against cigarettes. The public health consequences of cigarette smoking are well known but they should not in themselves constitute a pretext or reason for prohibition because prohibition is also destructive. The consumption of sugar and of fatty substances is arguably worse than smoking. But there is as of now no serious effort to curtail the consumption of sugar, notwithstanding the high incidence of obesity, diabetes and cardiovascular disease.

Awareness campaigns have been effective in reducing cigarette smoking in the United States and other developed countries. The rumored new government action is to reduce the level of nicotine to non-addictive levels. Leaving aside the intrusion of the state in a personal matter (is anything personal in a Medicare world?), we need to consider whether the proposed new measure could backfire. Nicotine is addictive but it is not as harmful as the other ingredients in a cigarette. If smokers have to light up a larger number of cigarettes in order to obtain their previous dose of nicotine, they will be ingesting a far greater amount of those harmful chemicals.

Prohibition would also create a black market and another source of profit for crime syndicates. Perhaps, the best way forward is to continue with what has been proven to work so far: health awareness campaigns that still allow people to make their own choices.

Demographics and Destiny

A common adage is that demographics are destiny. So let us look at the chart below which shows the size of the working age population in several major countries and regions. More details and numbers are provided in this post published yesterday.

A person who believes that demographics are destiny may deem from this chart that China, India and Europe must then be economically and geopolitically stronger than the United States. He/she would look at the BRIC countries and surmise that their combined power far exceeded that of the US for the past several decades. He would also project that the weight of sub-Saharan Africa will exceed that of China around 2035, fifteen short years away.

If none of this is true, it is obviously because demographics are not destiny. They are one of several important parts of destiny but are insufficient on their own to determine the course of a country. The other important parts are the pace of innovation, the state of productivity, the quality of governance and the depth of institutions. If the US economy still leads the world, it is because it has been able to combine all of the necessary vectors of growth while other major nations only have two or one or none.

The future is not preordained however. The order could change if some countries acquire more of these vectors and other countries lose them.

More reliably noteworthy in the chart are the expected growth of the working age population in sub-Saharan Africa and India, and simultaneously the decline of the equivalent population in Europe and China. More on this here.

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Update: Working Age Population Around the World 1960-2050

This is an update of a similar post from 2015. The UN projections have changed but only by small numbers. The main observations are the same as six years ago (click table to enlarge in a new tab).

The working age population (WAP, those aged 15 to 64) of sub-Saharan Africa continues to grow rapidly. It has more than doubled since 1990 from 252 million to 609 million, and is expected to more than double again by 2050 to 1.3 billion. If the reality turns out to be anywhere near these projections, it will be a significant challenge for African economies to absorb and to employ productively this enormous amount of new human energy.

India faces a similar challenge with its WAP growing from 928 million now to 1.1 billion in 2050. Though daunting, this represents a slowdown in the rate of growth from the previous thirty-year span 1990-2020.

The WAP of Europe, China and Japan have already peaked and will be declining for the rest of the century, per UN projections. Europe’s decline from near 500 million in 2005 to a projected 407 million by 2050 is mainly due to eastern and southern Europe. The WAP of France and the United Kingdom will flatline to 2050 while those of Germany and Russia decline.

In the United States, the steady growth in the WAP between 1960 and 2005 combined with a falling dependency ratio to fuel strong economic conditions. Growth in the WAP is expected to be more muted in the decades ahead.

Compared to the late 20th century and the first decades of this century, the future growth in the WAP will taper off or even turn negative in several regions and countries. Sub-Saharan Africa stands out as the exception that will maintain strong WAP momentum through at least 2050.

De-Politicizing Climate Activism

Or how Greta Thunberg can create more converts.

“Nature is not a temple. It is a workshop, and a human being is the worker in it.”                               _                                                                                                         Ivan Turgenev

Item 1: The outbreak of coronavirus that threatens to create a global pandemic and the tragic sudden death of basketball star Kobe Bryant both remind us that the unexpected can happen quickly and that we humans live in an environment that can at times be ruthlessly hostile.

Nature, fate, providence, or whatever one chooses to call it, works in inscrutable ways. The virus will spread and endanger millions, if humans do not stop it. It has no will or conscience and would inexorably destroy those who are dearest to us, in a matter of days. And, before downing Bryant’s helicopter and killing him, his young daughter and seven others, fate or gravity did not pause for a millisecond to ponder the sadness that it would inflict on hundreds of millions all over the world through such a senseless death.

Modern society is generally free of deadly viruses and helicopters are generally safe to fly. But it took centuries of human progress to get there in both instances. And it will take more human progress and ingenuity to seal the cracks in our vigilance that allowed the coronavirus to emerge and spread, and the helicopter to crash .

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CDC photo by Dr. Fred Murphy.

Item 2: Last week in Davos, US Treasury Secretary Steven Mnuchin volunteered that climate activist Greta Thunberg ought to get an economics degree before preaching her message to grown-up policy makers. That is more confidence in university economics departments than most of Miss Thunberg’s critics would be willing to concede. It is true that Miss Thunberg’s message is incomplete, but that is not for lack of economic pedigree. The building blocks that are glaringly missing from her campaign are 1) a better understanding of Turgenev’s aphorism on nature and man, and 2) a trip or two to China, India or other fast developing countries.

Read more

Fertility and Literacy in India’s States

Higher female literacy is a reliable predictor of lower fertility and improved prosperity.

In a previous article, we highlighted a clear connection in sub-Saharan Africa between a country’s total fertility rate (TFR = average number of children per woman) and its young female literacy rate. The data showed that higher literacy may set off a chain reaction that results progressively in lower infant mortality, improved health for women, and lower fertility. While literacy rises to 90%, fertility falls gradually. Above 90%, it falls precipitously.

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End of the year exams in Mahatma Gandhi Seva Ashram, Jaura, India. © Yann Forget / Wikimedia Commons.

In turn, this lower fertility can, under the right conditions, open a window of opportunity for the economy to realize a demographic dividend. Read more

Future Hubs of Africa and Asia

On UN projections between 2015 and 2050, the world population will grow by nearly 2.38 billion people, from 7.35 billion to 9.73 billion. Although this 32% growth is a big increase, it marks a slowdown from the 66% growth rate recorded in the preceding 35 years (1980-2015). Total Fertility Rates (TFRs) have come down all over the world and are expected to continue falling.
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About half of the 2.38 billion increase will take place in sub-Saharan Africa and nearly 40% in Asia. India is the biggest contributor with a net addition of 394 million, followed by Nigeria (216m), Pakistan (120m), DR Congo (118m) and Ethiopia (89m). By 2050, all of these countries will feature in the top 10 populations by size, a list that will include the United States (expected to rank fourth) but not one European country. Outside of Africa and Asia ex-China, regional populations will be growing slowly (the Americas), stagnating (China, Europe), or receding (Japan, Eastern Europe). Read more

The Economics of Dependency

This article first appeared at Foreign Affairs.

How countries hit the demographic sweet spot.

Demographics are among the most important influences on a country’s overall economic performance, but compared with other contributors, such as the quality of governance or institutions, their impact is underappreciated. Demographic factors, such as the age structure of a population, can determine whether a given economy will grow or stagnate to an even greater extent than can more obvious causes such as government policy.

One of the most consequential aspects of demographics as they relate to the economy is a phenomenon known as the “demographic dividend,” which refers to the boost to economic growth that occurs when a decline in total fertility, and subsequent entry of women into the work force, increases the number of workers (and thus decreases the number of dependents) relative to the total population. The demographic dividend has contributed to some of the greatest success stories of the twentieth century, and countries’ ability to understand and capture this dividend will continue to shape their economic prospects well into the future. Continue reading at Foreign Affairs >>>

The Futility of Annual Top 10 Predictions

In every recent year, a black swan event has made top 10 lists appear quaintly naive and unimaginative. Our list is probably no better.

This time of year, top 10 predictions are all the rage. These lists can be interesting and entertaining but how useful are they really?

This question goes to the heart of forecasting. How futile or how useful is an attempt to forecast the economy, or technology, or world events for the next twelve months? There are three answers. Read more

India’s Disruptive Gamble

by Ravi Srinivasan

(Ravi discussed this post at the BreakingBank$ podcast. His segment starts at 20:10.)

Modi’s demonetization was the other November 8th global earthquake.

A thorough historical record will show that not one but two man-made events shook the world on 8 November 2016. One was of course the election of Donald Trump to the US Presidency against the predictions of nearly all polls and pundits. The other was the Indian government’s shock and awe decision to withdraw from circulation all ₹500 ($7.3) and ₹1,000 ($14.6) rupee bank notes, equivalent to 85% of the country’s paper money. Although the first event dominated the headlines, the second will have a greater impact on over a billion people in India and elsewhere.

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500 rupee banknote, an endangered species since 8 November 2016.

This process known as demonetization is the latest in a series of initiatives by the Modi government to modernize Indian society and to increase financial inclusion and digitalization. Along the same lines in the past two years, other government efforts have included the ambitious and unprecedented Aadhaar national identification system started in 2012, the Aadhaar-based remittance system offered by the National Payments Corporation of India in 2013, and the Jan Dhan Yojana drive to bring financial services to lower-income segments of society. Some private players such as Paytm, Citrus Pay, Mobikwik and Freecharge have also moved in lockstep with public initiatives. Read more