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Demographics is at the heart of economics

Demographics is the single most important factor that nobody pays attention to, and when they do pay attention, they miss the point.

Each spring, the guns fall silent in Afghanistan. US soldiers breathe a little easier. The children come out to play.

It is the time when the poppy fields need to be harvested, so young Afghan males lay down their arms and get to work.

Around 30% of Afghan GDP derives from the export of opium and much of the money goes to the insurgency, as well as farmers and drivers. The rest of the economy is shot to pieces. There is no other way to keep busy, or make money.

There is a lesson in all this for Credit Suisse head of global demographics and pensions research, Amian Roy, who argues demographics and employment are key to the development of economies. You need a surfeit of young workers to make progress but you also need to find them jobs and so they can find their place in society.

We overlook the importance of demography because its impact is long term, while personal time horizons are short. Roy likes to quote US management consultant Peter Drucker: “Demographics is the single most important factor that nobody pays attention to, and when they do pay attention, they miss the point.”

Roy cites Japan as a perfect illustration of what can go right, and what can go wrong. After the war, the country had an army of young workers. Family businesses and conglomerates took advantage of the pool of labour, leveraging their efforts through the use of modern technology.

Increased productivity in Japan drove annual GDP growth of 8.9% between 1951 and 1973. Increasingly prosperous savers invested eagerly in equities and bonds, lowering the cost of corporate capital and powering the 1980s stock market boom.

But the boom led to a slump that has led to 22 years of stagnation. Even including the boom years, average growth in Japan since 1974 has only been 2.21%.

The problem follows promises made during the boom years, as companies and governments agreed to provide generous benefits to workers and their families. They sought to buy their loyalty - or their votes - but all they did was store up liabilities for the future, as longevity went up. Worse, the supply of workers has fallen, because people (particularly women) do not want to put their careers at risk by bringing up a large number of children. Where once they looked to the family to support them in old age, they look to the state.

The iron law of demographics suggest that those who expect Japan to recover are whistling in the dark. The same may ultimately be true in the US, which is currently nursing a $1.4 trillion budget deficit to protect its citizens from the credit crisis. Health care promises and pension payments were undermining prospects for corporations long before the credit crisis.

A break down of social benefits paid in the European Union in 2005 suggests that 45.9% of the total goes to retired people and their dependents. A further 36.5% is spent on sickness and health care – mainly for the elderly. Political paralysis is spreading from Japan, to the US and Europe, as politicians shrink from cutting into welfare. Immigration may yet show a way forward, but sluggish economies tend to become awfully xenophobic.

In contrast, China is moving into top gear thanks to its access to young workers, technology and the international debt markets. Wages and benefits are starting to fuel a consumer economy. Minimum wages in China soared last year. Beijing, for example, saw a 20% increase. Hainan saw 37%. Welfare payments are not, as yet, generous, although they will surely develop, with youth unemployment in parts of China as low as 9%.

Other populous regions with young workforces and improved employment opportunities – Mexico, Brazil, Turkey and India – are also moving ahead. Consumption is pushing up the price of natural resources, giving the West - and Japan - something new to worry about.

However, Roy points outs the Middle East and North Africa, at 24.9% and 23.4% respectively, have the highest rates of youth unemployment in the world, but few employment opportunities. The local dictators, and military rulers, have proved to be inept at fostering local employment opportunities. Street protest is being facilitated by social networking and online news.

The unrest in Europe is less raw than in the Middle East, because youth unemployment is lower at 17.4%. The region also has better social contracts between governments and workers. But cuts that go too deep would lead to violence.

No wonder the politicians are paralysed.

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