Treasury's opportunities and threats facing our economy

It shouldn't surprise you that when the secretary to the Treasury, Dr Martin Parkinson, devoted half his major speech this week to "fiscal sustainability" - the tax increases and spending cuts needed to get the budget back on track - the media virtually ignored the other half.

But the budget isn't the economy. And in that other half Parkinson offered a revealing SWOT analysis of the economy, outlining its Strengths and Weaknesses, Opportunities and Threats. So let me tell you what he said (and leave my critique for later).

For people worried about what we do for an encore after the resources boom - about where the jobs will come from - Parko points to three big "waves of opportunity".

The first wave is the mining investment boom, which is ending but not leaving us high and dry. "With the capital stock in the mining and energy sectors now triple what it was a decade ago, additional productive capacity will drive strong growth in resources exports for several years to come," he says, although this will involve employing fewer workers than in the investment phase.

The second opportunity wave flowing from the vast economic shifts in Asia is rising global demand for agricultural produce. The Australian Bureau of Agricultural and Resource Economics and Sciences estimates that China's imports of fruit will treble by 2050. Imports of beef will grow by a factor of 10 while imports of sheep and goat meat increase by a factor of 19. Dairy will increase by a mere 165 per cent.

Asia already takes more than 40 per cent of our food exports. Parko warns, however, that our ability to gain a slice of its rising demand rests on continued productivity gains in our rural sector, supported by the right policy settings.

"Our handling of the concerns raised by foreign ownership of Australian agricultural land (and food manufacturing) in some parts of our community is one dimension of the agricultural policy challenge, along with our approach to trade policy, stimulating investment in on- and off-farm infrastructure and supporting research and development."

The third wave is the opportunities in the services and high-value manufacturing sectors brought about by the steadily increasing growth of the Asian middle class. It's estimated that, by 2030, just under two-thirds of spending by the world's middle class will come from the Asia Pacific region, compared with about a quarter today.

"To capture the benefits of the third wave, we will need to compete on the global stage for Asian demand for services and high-end manufactures on the basis of both cost and quality," he says. "We will also need to compete for foreign direct investment to help put the right export-related infrastructure in the right places."

But get this declaration from the economic rationalist-in-chief: "Contrary to how it is sometimes portrayed in the media, competing on the global stage does not mean driving down wages or trading off our standard of living. Far from it."

Parko says improving Australia's competitiveness in global markets means investing in the skills of our workforce so Australians have the opportunity to move into sustainably higher paid jobs, and investing in infrastructure that has a high economic return.

It means ensuring firms and their employees are freed from unnecessary regulatory burdens, and establishing the right incentives to encourage innovation and competition. "In other words, it means raising Australia's productivity performance," he says.

Which brings us to Parkinson's three big threats to our further economic success. The first is productivity improvement. He says that, even after you allow for temporary factors, there's been a slowdown in "multi-factor" productivity improvement that's broad-based across industries, suggesting that deeper, economy-wide factors are at play.

The second threat arises because, until mid-2011, the effect of this productivity slowdown on the rise in our living standards was masked by the rise in the prices we were receiving for mineral exports. But now the likelihood that these prices will continue falling means a "significant drag on Australia's national income growth" over the rest of this decade.

The third threat to continued strong economic growth comes from the turnaround in the "demographic dividend" delivered by the baby boomers. For about 40 years until 2010, the proportion of the population of working age (here defined as 15 to 64) grew a lot faster than the overall population because of the postwar baby boom, followed by a dramatic fall in the birth rate in the 1960s and '70s. This boosted economic growth.

"Over the next few years, this demographic dividend, which has been fading for some time, will actually reverse. The proportion of the population aged 65 and over is expected to increase to nearly 20 per cent in 2030, from 13.5 per cent in 2010."

As the population ages, the total participation rate - the proportion of people 15 and over participating in the labour market - will fall, despite the increase in the participation rate among older Australians. "This expected decline has already begun and will become more pronounced by the end of the decade," he says.

Productivity is the key long-run driver of income growth, but declining export prices and labour-force participation are expected to subtract from national income growth in future.

If we assume the productivity of labour grows at its long-term average, then income per person would grow over the coming decade by about 0.7 per cent a year, about a third of the rate to which we've become accustomed, he says. To avoid that, we'd need to sustain labour productivity growth of about 3 per cent a year, about double the rate we've achieved so far this century.

If we fail to make the reforms needed to achieve that rate of productivity improvement, by 2024 our income per person will have risen only to $69,000 a year, not $82,000. We'll each be $13,000 a year less affluent than we could have been.

Read more >>

Rise in living standard set to slow

It's a funny thing about the awful truth: people are much more inclined to talk about it after elections than before. And it seems as though, of late, our top economists have done little but tell us our economic future is a lot more "challenging" than was contemplated during the election campaign.

The first sobering message is that getting the budget back to balance won't be as easy as it suited both sides to pretend in the three-year campaign. Indeed, it could be a struggle that goes on for at least a decade - depending on how long it takes us to face up to some tough decisions.

The next soberer is that our material standard of living is likely to improve at a much slower rate in the coming decade than it did in the last one. We got that warning in a speech last week by Dr David Gruen, the top macro-economy manager in Treasury. And we got it again in a speech this week by Dr Philip Lowe, deputy governor of the Reserve Bank.

The simple way to see what's happening to our standard of living is just to take real gross national income and divide it by the population, to give real income per person.

According to Treasury's calculations, this grew at an average rate of about 2 per cent a year during the 1970s, '80s and '90s. Over the 13 years to this year, it grew by 2.3 per cent a year. But over the coming decade to 2023, Treasury's best guess is the rate of real improvement will slow to a bit less than 1 per cent a year.

That's more than a halving in our rate of material advance. What is it that's expected to cause this marked slowdown? Well, that's a long story. Settle back.

The greatest single factor causing our standard of living to rise almost continuously over the years is improvement in the productivity of labour - that is, increased output of goods and services per hour worked. Labour productivity improves when workers are given more machines to work with, when workers' skills improve because of education and training, when improvements in public infrastructure allow firms to operate more efficiently and, particularly, because of technological advance: the invention of new and improved products and production processes.

The next most important contributor to our material standard of living is "labour utilisation": the proportion of the population that's of the right age to be in the labour force (often taken as everyone aged 15 to 64), the proportion of people of working age who actually are in the labour force, the proportion of these who are employed rather than unemployed, and the average hours worked by people employed (many of whom will be only part-time).

The standard story from economists is that the nation's income increases when we produce more goods and services. But it's not quite that simple. It's not just how much we produce, it's also what that is worth when we sell it to foreigners so we can buy what we want from them.

About 10 years ago the world started paying us a lot more for our minerals and energy - we called it the resources boom - and this increased the income we derived from the stuff we were producing. As Lowe puts it, "over time we have been able to buy more and more flat-screen televisions for each tonne of iron ore that we have sold overseas".

Economists call this an improvement in our "terms of trade" - prices we receive for exports relative to the prices we pay for imports. And the main reason our standard of living rose by a high 2.3 per cent over the past 13 years is the big improvement in our terms of trade.

It contributed about 0.8 percentage points of that 2.3 per cent growth, more than making up for a weaker rate of improvement in the productivity of labour.

But, as we all know, the fabulous prices we were getting for our coal and iron ore started falling back a year or two ago, and Treasury expects them to fall a fair bit further. Indeed, it expects the deterioration in our terms of trade to subtract about 0.5 percentage points from the annual growth in real national income per person.

And there's a second factor we'll have going against us. Until recently, we've been enjoying a "demographic dividend" as the population of working age grew faster than the overall population (mainly because of the falling rate of fertility).

Over the 30 years to 2010, the proportion of the population aged 15 to 64 rose from a bit more than 64 per cent to a peak of about 67 per cent. But now, with the continuing retirement of the baby-boomers, it's projected to fall to about 62 per cent over the coming 30 years.

So whereas until now the demographic dividend has contributed to the rate of improvement in our standard of living, over the coming decade demography will subtract from that rate (we'll have fewer producers relative to consumers).

Now, there's nothing we can do to stop world minerals prices falling back and not a lot we can do to delay the retirement of the baby-boomers. So, ready for the commercial message from your friendly econocrats?

Lowe says that "over the next decade or so, if we are to achieve anything like the type of growth in real per capita income that we have become used to, then a substantial increase in productivity growth will be required.

"If this lift in productivity growth does not take place, then we will have to adjust to some combination of slower growth in real wages, slower growth in profits, smaller gains in asset prices and slower growth in government revenues and services."

Read more >>

How demography is affecting us right now

WORKING out what's happening in the jobs market is trickier than you may think - and has just got trickier. On the face of it, this week's figures from the Bureau of Statistics are simple: they show employment grew by a bit more than 10,000 last month and the rate of unemployment was steady at 5.4 per cent.

But it's not that simple. The rate at which people of working age participated in the labour force (either by holding a job or actively seeking one) fell from 65.1 per cent to 65 per cent of the labour force.

At times like these, with the growth in employment slowing and the number of job vacancies falling, a decline in the participation rate is usually taken as a sign the number of ''discouraged jobseekers'' is rising. These are people who'd like to work but who, believing there are no jobs available, have stopped actively seeking one, meaning they're no longer counted as unemployed.

So, many economists would take the fall in the participation rate last month to mean the jobs market deteriorated despite the unchanged rate of unemployment.

But if we want to play this game we should really start two years ago, in January 2011, when (using the trend figures) the unemployment rate reached a low of 5 per cent. Since then it's risen only to 5.4 per cent, which doesn't seem much.

Over the same period, however, the ''part rate'' has fallen from a peak of 65.8 per cent to 65 per cent. Saul Eslake, of Bank of America Merrill Lynch, calculates that had this decline not occurred, all else being equal the unemployment rate in December last year would have been 6.6 per cent, not 5.4 per cent.

Fortunately, however, it's still not that simple. Heard of the ageing of the population? Whereas for decades it was pushing our participation rate up, it's now started pushing it down, meaning it's no longer safe to assume a fall is all the work of discouraged jobseekers.

This is an unfamiliar but important story, so settle back for a primer on demography.

We are living at a time in the world's long history when longevity is steadily rising (because of improvements in public health, increasing affluence and advances in medical science) but fertility is falling (because of improvements in contraception and rising affluence). A country's ''total fertility rate'' is the average number of children women are projected to bear over their lives.

As The Economist magazine has explained, when a country's fertility rate falls sharply, the children born before the fall become ''a sort of generational bulge surging through a society''.

In the case of the developed countries, the sharp and continuing fall in fertility was caused by the advent of the contraceptive pill, and the surging generation became known as the baby boomers. But something similar happened a few decades later in those developing countries that began developing rapidly. Access to contraception improved, girls became better educated and families decided to have fewer children.

A country in this situation enjoys a ''demographic dividend''. After a while, the earlier generation becomes old enough to be part of the labour force (they reach the age of 15) and this happens while old people are dying fairly early and fewer babies are being born.

So the country enjoys a big improvement in its ''dependency ratio'' - the ratio of people who are dependent on others for their living (because they are either too young or too old to work) to those of working age (which is often defined as everyone over 15, but for these purposes should be limited to those aged 15 to 64).

The decrease in the dependency ratio - that is, the increase in the number of potential workers relative to the number of people they have to support - is the demographic dividend. It means a country can grow faster and become richer (measured as income per person) - provided you can find jobs for all those who want to work.

The dividend continues for several decades and actually gets bigger as the bulge generation enters the ''prime working age'' of 25 to 54. It has helped keep our participation rate rising and made a significant contribution to Australia's rate of economic growth for the past 30 or 40 years.

Can you see where this story is heading? Eventually, the demographic dividend becomes a negative as the bulge generation continues to age and eventually starts retiring. As Dr David Gruen of Treasury put it last year, the tail-wind of the past becomes the head-wind of the future.

When a baby boomer stops working, the working population falls by one and the dependent population increases by one, meaning the bulge of baby boomers produces a rapid deterioration in the dependency ratio. It also means we should see a decline in the participation rate as more of the population moves from the age range where they're highly likely to be working to one where they're much less likely to be working.

The first baby boomers were born in 1946, which was 67 years ago. The last were born in 1964, which was 49 years ago.

So by now you'd expect to see the participation rate falling for reasons that are completely demographic and have nothing to do with the state of the economy and the jobs market.

Sorry, one more complication. We've known for some years that the trend to early retirement has reversed and more older workers are delaying their retirement or finding ways to keep working for a few days a week. In other words, some baby boomers aren't retiring as expected - maybe because they're not feeling old and tired or maybe because they haven't saved enough to allow them to retire in the comfort to which they've become accustomed.

Obviously, to the extent this is happening it's working to counter the purely demographic decline in the part rate. So what is happening?

The econocrats have done some figuring which shows that, over the year to December, ageing contributed minus 0.3 percentage points to the participation rate, while the trend to delay retirement contributed plus 0.1 percentage points.

In other words, the demographic dividend has reversed, although it's being partly offset by the trend of some baby boomers delaying their retirement.

So most but not all of the overall fall in the part rate can be regarded as a rise in hidden unemployment.

Read more >>

Punters well aware of economic case against more immigration

The Big Australia issue has gone quiet since the election but it hasn't gone away. It can't go away because it's too central to our future and, despite Julia Gillard and Tony Abbott's rare agreement to eschew rapid population growth, the issue remains unresolved.

This year Rebecca Huntley of Ipsos, a global market research firm, and Bernard Salt of KPMG, a financial services firm, conducted interviews with business people and discussions with 13 groups of consumers, showing them two markedly different scenarios of what Australia could look like in 2020.

In the "measured Australia" scenario, governments limited population growth, focused on making our activities more environmentally sustainable and limited our economic links with the rest of the world.

In the "global Australia" scenario, governments set aside concerns about the environment, promoted rapid economic and population growth, and made Australia ever more a part of Asia.

Not surprisingly, the business people hated measured Australia and loved global Australia. But even though global Australia was described in glowing terms - ignoring the environment apparently had no adverse effects - ordinary people rejected it. And although measured Australia was painted in negative terms - all downside and no upside - there were aspects of it people quite liked.

The message I draw is that if governments keep pursuing rapid growth to please business they'll encounter increasing resentment and resistance from voters.

Considering the human animal's deep-seated fear of foreigners, it's not surprising resentment has focused on immigration. It's clear from the way in the election campaign both sides purported to have set their face against high migration that they're starting to get the message.

But at the moment they're promising to restrict immigration with one hand while encouraging a decade-long, labour-consuming boom in the construction of mines and gas facilities with the other. And this will be happening at a time when the economy is already close to full employment and baby boomers retire as the population ages.

Their two approaches don't fit together. And unless our leaders find a way to resolve the contradiction there's trouble ahead.

Business people support rapid population growth, which really means high immigration; there's little governments can do to influence the birth rate, because they know a bigger population means a bigger economy. And in a bigger economy they can increase their sales and profits.

That's fine for them, but it doesn't necessarily follow that a bigger economy is better for you and me. Only if the extra people add more to national income than their own share of that income will the average incomes of the rest of us be increased. And that's not to say any gain in material standard of living isn't offset by a decline in our quality of life, which goes unmeasured by gross domestic product.

The most recent study by the Productivity Commission, in 2006, found that even extra skilled migration did little or nothing to raise the average incomes of the existing population, with the migrants themselves the only beneficiaries.

This may explain why, this time, economists are approaching the question from the other end: we're getting the future economic growth from the desire of the world's mining companies to greatly expand Australia's capacity to export coal, iron ore and natural gas, but we don't have sufficient skilled labour to meet that need and unless we bring in a lot more labour this episode will end in soaring wages and inflation.

Peter McDonald, a leading demographer at the Australian National University, argues that governments don't determine the level of net migration, the economy does. When our economy's in recession, few immigrants come and more Aussies leave; when the economy's booming, more immigrants come and fewer Aussies leave. Governments could try to resist this increase, but so far they've opted to get out of the way.

To most business people, economists and demographers, the answer to our present problem is obvious: since economic growth must go ahead, the two sides of politics should stop their populist pandering to the punters' resentment of foreigners.

But it seems clear from the Ipsos discussion groups that people's resistance to high immigration focuses on their concerns about the present inadequacy of public infrastructure: roads, transport, water and energy. We're not coping now, what would it be like with more people?

And the punters have a point. In their instinctive reaction to the idea of more foreigners they've put their finger on the great weakness in the economic case for immigration.

As economists know - but don't like to talk or even think about - the reason immigration adds little or nothing to the material living standards of the existing population is that each extra person coming to Australia - the workers and their families - has to be provided with extra capital equipment: a home to live in, machines to use at work and a host of public infrastructure such as roads, public transport, schools, hospitals, libraries, police stations and much else.

The cost of that extra capital has to be set against the benefit from the extra labour. If the extra capital isn't forthcoming, living standards - and, no doubt, quality of life - decline.

If we don't build the extra homes - as we haven't been doing for some years - rents and house prices keep rising, making home ownership less affordable. To build the extra public facilities, governments have to raise taxes and borrow money. But they hate raising taxes and both sides of federal politics have sworn to eliminate government debt.

The interviews and discussion groups revealed both business people and consumers to be highly doubtful about the ability of governments - particularly state governments - to provide the infrastructure we need. As well they might be.

At present, our leaders on both sides are heading towards a future that doesn't add up.

Read more >>

Our deprived country folk, and other myths

So, we're back to worrying about RARA - rural and regional Australia. Thanks to the newly acquired political leverage of the two country independents, we're now being told the regions haven't been given their fair share and, in future, "equity principles" should prevail.

There's a lot of righteous indignation on the part of many country people and, I suspect, quite a bit of sympathy on the part of city folk. But there are also a lot of misconceptions.

Many people have the impression there has been a continuous flow of people leaving the country for the big city. It's not that simple. The capital cities' share of Australia's population hasn't been increasing. While there has been a flow of people leaving inland regions for the cities, there's also been a flow of people - particularly the retired - leaving the cities for coastal regions. So many coastal towns and cities (such as Rob Oakeshott's Port Macquarie) have been growing strongly. Their problem is not declining population but keeping up with the increasing needs of an ever-bigger population.

Even with the inland regions it's not simply a matter of everyone leaving for the big city. In many cases it's people leaving small towns and villages for bigger regional centres (such as Tony Windsor's Tamworth).

Leaving aside the sea change factor, people have been drifting from country to city for the best part of a century. Why? Because of the increasing mechanisation of agriculture. There is unceasing pressure for farmers to use more and better machines to replace human labour. Our farms produce more than they ever have, but need fewer people to do it.

With the increased use of expensive machinery there's continuing pressure for individual farms - including dairy farms - to be bigger to better exploit economies of scale. That is, for farmers to sell out to their bigger neighbour and find work elsewhere - in the nearest regional centre or in the state capital.

The pressure comes in the form of their bigger neighbours being able to operate profitably despite falling real prices for their produce - prices at which smaller, less efficient producers can't survive. Real prices fall not so much because of the rapacious behaviour of Woolworths and Coles but because market forces - competition between producers - cause the benefit of economies of scale to be passed on to end consumers (via the much traduced Woolies and Coles). In a well-functioning market economy it's not the producers who win, it's the consumers.

Country people don't enjoy seeing people leaving the district, and small farmers don't enjoy being forced off the land. But are these long-standing trends a bad thing? They're the product of the capitalist system (you're not a socialist, are you?) and the technological advance it fosters and exploits (nor a Luddite?).

The notion that the regions should be given a fair go is appealing, even to city slickers. But what is fair? Country people are convinced they're being ripped off: they pay all this tax, but the city people spend most of it on themselves and send only a trickle back to the regions.

One small problem: it ain't true. For a start, on a per-person basis country people pay less tax than city people do. That's because incomes in rural areas are generally lower and they have a higher proportion of retired people.

What would be a fair distribution of government spending - equal amounts per person in country and city? Actually, governments spend more per person in the country than they do in the city. According to calculations by a government agency, spending on hospitals is 7 per cent higher in moderately accessible regions than in the highly accessible capital cities.

In remote areas the cost differential per person rises to 14 per cent and in very remote areas to 44 per cent.

For schools, spending per student is 12 per cent higher in moderately accessible regions, 34 per cent higher in remote areas and 60 per cent in very remote. The story for spending on policing is similar.

But how is this possible when it's so clear the quality of these services in country areas is less than the quality people receive in the city? It's possible because the cost of delivering services in the regions is so much higher relative to the (small) number of people for whom the services are being provided (and relative to the number of country taxpayers).

It's much cheaper to deliver services to people when they're all crammed together in a big city. Citysiders have economies of scale working for them, whereas country people have scale economies working against them. That's no one's fault, it's just a fact of nature.

When governments install some new and expensive facility in the big city, tens of thousands of people are able to take advantage of it and so reduce its cost per person (and per taxpayer). Were such a facility installed in some small town, the cost per person assisted would be remarkably high. Even if it were installed in a big regional centre, the cost per person would still be a lot higher.

So now you know why facilities are so much better in the cities than in the region: hard economics. If you say that's not fair and people in the country deserve equality in the quality of services provided, you're saying you want city taxpayers' subsidy to country taxpayers to be even greater than it is (so you are a socialist, are you?).

Most Australians crowd into big cities and they do so for good reasons: more and better-paying jobs, plus better services, both public and private. They put up with the drawbacks of city living: much higher housing costs, unpleasant commuting, congestion, tar and cement, and less feeling of community.

Country people prefer living in the regions for the opposite sets of reasons. It's a free country and that choice is up to them.

Read more >>

Population fall poses immense new challenges

Peter Costello used to say demography is destiny. Like many of the things he said, that's an exaggeration. But it is going to have a big effect on your future.

Demography is the study of human populations. In principle, it's quite separate from economics. But economists are likely to be saying a lot more about it - and boning up on it - because demographic change will have a big effect on the thing they care about most: the growth of the economy.

Actually, as you realise when you read the article by Jamie Hall and Andrew Stone in this quarter's Reserve Bank Bulletin, demographic change has always had a big effect on the growth in gross domestic product.

It's just that, because so far its effect on growth has been positive, we've been able to take it for granted. From about now, however, its effect is likely to be negative, so we'll be taking a lot more notice.

Leaving aside migration (as we will do in this article), the main factor that drives population growth is the fertility rate - the number of babies per woman. (The death rate also matters, obviously, but we'll also take rising longevity as read.)

The world's population has been growing rapidly for most of the past century, thanks to improvements in public health, medical science and economic development. But the global fertility rate has been falling sharply since the end of the postwar baby boom. From five babies per woman it's now down to about 2, thanks to the spread of effective contraception and rising living standards.

United Nations projections foresee the rate falling to two babies per woman by the middle of this century, which is lower than the replacement rate of 2.1 babies.

So the rate of growth in the world's population has been slowing for decades and, while population is expected to continue growing until the second half of this century, it will then start to decline.

Get that: some of our youngsters will live to see the world's population falling. But population decline will start earlier in some countries than others. Indeed, it's already started in Japan and Germany. And it won't be just the rich countries where population is falling.

The growth in a country's output of goods and services (GDP) can be viewed as coming from two sources: growth in the input of labour and improvement in the productivity of that labour. Three main factors determine the growth in the input of labour: growth in the population, growth in the proportion of the population that is of working age, and changes in the rate at which people of working age choose to participate in the labour force. (Again for simplicity we'll ignore changes in the participation rate.)

Over the 10 years to 2005 the United States' average growth in real GDP was 3.3 per cent a year. Turns out that 1.1 percentage points of that growth came from increased population (meaning it did nothing to raise America's standard of living) and 0.2 percentage points came from the rising proportion of the population that was of working age (here assumed to be those aged between 15 and 64).

But now Hall and Stone estimate that, over the 10 years to 2020, the average annual contribution to economic growth from population increase will be a smaller 0.9 percentage points, and the contribution from change in the working-age share will be minus 0.3 percentage points.

In other words, America's average rate of economic growth is expected to be 0.8 percentage points a year (or about a quarter) less, simply because of direct demographic change. The equivalent expected declines in the demographic contribution are 0.6 percentage points for Japan, 0.3 points for Germany and 0.2 points for Italy.

Why is America's loss likely to be greatest? Because demographic change is only now catching up with it. The others have already taken a fair bit of their medicine. It turns out that most of Japan's "lost decade" of weak economic growth is explained by its ageing and now declining population. Without that, its growth was much the same as Germany's.

So far we've tended to think of slow-growing or falling population as an issue purely for the developed countries. But Hall and Stone demonstrate that the coming decade will see demographic change making a reduced contribution to growth throughout Asia.

What's more, China's population will start to fall slowly in about 20 years' time and South Korea's population will peak in 10 year's time and then fall quite rapidly.

Looking again at the 10 years to 2005, China's economic growth averaged 8.8 per cent a year. Of this, 0.8 percentage points came from population increase and 0.6 percentage points from a higher working-age share.

Over the coming 10 years, however, Hall and Stone estimate that population's contribution to growth will slow to 0.6 points a year and the working-age share's contribution will be minus 0.3 per cent. So demography's contribution to growth will be 1.2 points a year lower than in the previous period.

Now take Korea. Demography contributed 0.7 percentage points to its average economic growth of 4.4 per cent a year in the first period, but will make a zero contribution over the coming decade.

The general story for east Asia (the five main ASEAN countries plus Korea, Taiwan and Hong Kong, but excluding China and Japan) is that demography's contribution of 1.8 percentage points (or almost half) during the 10 years to 2005 will fall to 1 percentage point in the coming decade.

But two Asian countries stand out from this general picture of demographic change making a significantly reduced contribution to economic growth over the next 10 years. Population growth in Indonesia and India will be slowing, but still relatively strong.

So the demographic contribution in Indonesia will slow only from 1.9 percentage points a year to 1.2 points a year. In India it will slow only from 2.2 points a year to 1.6 points.

Much of the demographic difference between China on one hand and India and Indonesia on the other would be explained by differences in population control policies, particularly China's one-child policy, which is about to really make its presence felt. (The main explanation for Korea, I suspect, is simply rising affluence prompting people to have fewer kids.)

But however it's explained, the likelihood is that, in about 2030, India will overtake China as the most populous country. So rest assured, economists will be saying a lot more about demography in coming years.

Read more >>