The Impact Of World Demographic Change On The Future Of Business Operations And Trading Opportunities - Essay Example

? Contemporary Management Issues: THE IMPACT OF WORLD DEMOGRAPHIC CHANGE ON THE FUTURE OF BUSINESS OPERATIONS AND TRADING OPPORTUNITIES Name of University/ Institution Class: Professor: Submission Date: THE IMPACT OF WORLD DEMOGRAPHIC CHANGE ON THE FUTURE OF BUSINESS OPERATIONS AND TRADING OPPORTUNITIES 1. Introduction Unprecedented global demographic changes taking place are expected to impact business operations. During the twentieth century “the global population increased nearly fourfold, growing from 1.5 billion in 1900 to 6 billion in 2000” (Mason 2003, p.3). Population growth rates increased significantly particularly in the developing world in the first part of the century, reaching a peak in the late 1960s. The swift growth in population was met with a hitherto uncommon response. The increased concerns related to environmental and economic effects of demographic increase motivated the United Nations, bilateral foreign aid agencies, multilateral institutions and private foundations to invest billions of dollars in population programmes. The governments of several developing countries, specifically those in Asia vigourously formulated and implemented policies aimed at slowing population expansion (Mason 2003). The emerging evidence indicates that across the globe, population impacts economic growth with age structure playing a crucial role. “As the dependency ratio falls, opportunities for economic growth tend to rise, creating what is now referred to as a “demographic dividend” (Bloom & Canning 2004, p.12). Thesis Statement: The purpose of this paper is to investigate the changing demography of the developing world, and critically analyse its impact on companies’ trading opportunities in future. 2. Global Changes in Demography Development in the quality of health care, improvements in health, and the related increase in life expectancy are among the most outstanding demographic changes of the past century. The historical rise in life expectancy reveals reduced infant and child mortality due to public health interventions related to water and sanitation, along with medical interventions such as vaccines and antibiotics. On the other hand, the continued increase in life expectancy since the past few decades particularly in high income countries, is mainly associated with reductions in age-specific death rates at middle and older ages. The declines are related to “improvements in medical technology, life-style changes, and income growth” (Bloom & Canning 2004, p.4). Globally, life expectancy rose to more than double the earlier levels, from around 30 years in the year 1900 to 65 years by 2000. It is estimated to rise to 81 years by the end of the 21st century, states Lee (2003). Clark, Ogawa and Mason (2007) reiterate that all developed countries are experiencing rapid aging of the population, and in most countries over 12 percent of the population is over 65 years and older. In Japan, the proportion of the elderly population exceeded the 20 percent level in 2005, and several other developed countries reveal similar statistics. In most parts of the developed world, “national population projections indicate continued aging, with some countries facing the prospect of actual population decline and a super aging of the population” (Clark et al 2007, p.3). Further, several developing countries particularly in Asia such as China and South Korea, as well as others less economically successful, are now aging rapidly. Those countries that age before attaining economic prosperity will likely face extensive challenges in the future. The association between population growth and the economy has been debated by several scholars and policymakers. As early as 1798, Thomas Malthus put forth that the rate of population growth was held in equilibrium by the rate of economic growth (IMF 2004). While East Asia met the challenges of rapid population growth, “other demographic changes were creating opportunities for more rapid economic growth” (Mason 2001, p.13). The most important demographic change was transformation in age structure. Reduced rates of childbearing caused stablisation in the total number of children in East Asia, while the number of people of working-age continued to increase with great speed. This resulted in high concentrations of the population at a productive age who were low in dependency because of being financially and personally independent. As an outcome of accelerated population changes in East Asia, the substantial difference between increased labour force and population growth contributed to high rates of economic development (ADB 1997). The rate of labour force growth surpassed the rapidity of population growth by 0.8% yearly between 1960 and 1990. In Latin America the difference was an average of 0.4% per year, and in developed western nations the gap was 0.3% annually. On the other hand, in Africa and South Asia labour forces grew more gradually than populations. The reasons why East Asia’s labour forces grew more rapidly than its population is because of the increased numbers of its working-age population (Mason 2001). 3. Impact of Changing Demographics on Business Operations There are several approaches to studying the interface between demography and business. The traditional focus is on “the way demographic change influences the busines environment, and how the so-called demographic perspective can help in achieving business goals” (Bell 2002, p.1). Changes in the size, composition and distribution of the population have extensive implications for the marketing of products and services, and over the past two decades a thriving industry functions in applying demographic tools to business. Although population dynamics have an effect on business decisions, the reverse is also true concerning the way in which business decisions, practices and priorities impact demography. Employer organisations call for population growth to serve business, hence it is required that the way in which business influences population should also be examined. Such a focus is necessary in view of the debate over maternity leave, and the prime minister’s underscoring of ‘work and family’ and ‘demographics’ as two of the government’s main policy interests. A major challenge is presented to business and the economy by the current change in demographics, with increasing aging and shrinking populations around the world. The demographic problems include threats posed by declining numbers reflected in the shrinking workforce, the added welfare burden, social conflict and other difficulties. However, what first appears to be a crisis could also be a valuable opportunity. For example, together with more numbers in the aging population and the shrinking populace, there is the “emergence of new markets, the potential for innovation, the integration of older people into jobs and workplaces, the joy of active aging and varied roles within the society” (Kohlbacher & Herstatt 2008, p.22). A specifically important implication of the demographic shift is the rise of the so-called ‘greying market’ or ‘silver market’. This is the market segment broadly encompassing people aged between 50 and 55 years of age and older. This group is constantly expanding in number and proportion, while they are also comparatively wealthy; hence they are perceived as very attractive and promising, although their potential has still to be developed in terms of product and service offerings. This is true for both the business-to-consumer (B2C) and the business-to-business (B2B) segments, because the workforces of companies are also aging. Kohlbacher and Herstatt (2008) consider it necessary to adapt workplaces to fulfill the needs of an aging workforce, and to meet the challenges of the ‘silver market phenomenon’. Japan is the most highly affected by the population change, “and it is the most advanced in terms of product development and innovation with very affluent, freespending but also demanding customers” (Kohlbacher & Herstatt 2008, p.22). Thus, in Japan, the aging and shrinking society has heavy implications for business. Though the country continues to focus on innovative products and services, only the tip of the iceberg has been touched. Japanese pioneer firms include NTT Docomo’s ‘Raku-Raku’ (Easy-Easy) phone, with its modifications for greater ease of use. The ‘silver market phenomenon’ creates both business opportunities and challenges with respect to “innovation, invention, creativity, learning, social response and responsibility” (Kohlbacher & Herstatt 2008, p.23) in commercial operations . It can serve as a role model for the rest of the world. According to the International Monetary Fund (IMF 2004), various countries and regions are at different stages of the global demographic transition. Most advanced countries are in the process of increasing their aging population, while a number of developing countries in “east and southeast Asia and central and eastern Europe will also experience significant aging from about 2020” (IMF 2004, p.137). The demographic change in other countries is however less advanced, and in the next few decades the proportion of their working-age populations will increase. 3.1 Increasing Developing Countries’ Access to the Capital Market A greater proportion of the world’s working-age population will be located in developing countries in the future. Currently, however, international capital flows to these economies are relatively small; they are usually directed at only a few countries some of which are comparatively advanced in the aging process. An example is China which drew around 40 percent of net foreign investment to developing countries in 2003. The decline in global saving could cause a reduction in the capital available for developing countries in the future. The economic advantages arising from increase in the relative size of their working-age populations in these countries may be difficult to maximise based on a lack of access to capital. The predominant question is what developing countries can do to increase their access to international capital. Measures are required to be taken to enhance investor confidence in policies and institutions, including processes to increase the “sustainability of public and external debt, strengthen financial sectors, and tackle governance issues” (IMF 2004, p.167). The above reforms are required, as seen from the success of Chile in maintaining low spreads on its external debt and uninterrupted access to global capital markets; although modelling the impact of such reforms is complex. Reforms create a better investment environment, and are assumed to reduce the risk premium associated with investing in developing country assets. The reduction of the risk premium promotes increased flow of capital into developing countries, which reduces real interest rates, and has a deep impact on real GDP. With improvement in the rate of return of domestic capital which further benefits growth, domestic saving also rises (IMF 2004). 3.2 Aging of the Population and the Macroeconomy Clark, Ogawa and Mason (2007) offer evidence from research studies on population, aging and the macroeconomy. The study conducted by Bloom et al traces a representative sample of Americans between the ages of 51 to 61 from 1991 to 2004 from the Health and Retirement Survey. The study’s approach to policy is the suggestion that positive changes in labour supply and savings can be achieved by eliminating institutional arrangements of public pension provision. Another research study by Prskawetz, Mahlberg and Skirbekk (2007) with Austrian matched employer-employee data, examined the presumption that an aging workforce is related to lower productivity. The study isolates the impact of employee age from other influences in the workplace. For each business, the Austrian dataset takes into account both economic as well as socio-demographic numbers. The evidence from research indicates that the proportion of older workers adversely affect productivity only in smaller firms. If firm characteristics are more important than individual characteristics of employees, policy makers may focus more on the mix of small versus large businesses in the economy, unlike earlier methods in relation to aging workforce. In Clark et al’s (2007) work, the paper by Peter Heller on whether Asia is prepared for an aging population focuses on the economics of aging, uses economic analytical approaches, and neglects to include the extensive, continued and increasing demographic and sociological research on aging. The same limitation is also identified in Mason and Lee’s paper on transfers, capital and consumption over the demographic transition. Similarly, it is also true in Hock and Weil’s modelling exercises related to the effects of population aging on consumption in the presence of intergenerational transfers. Lindh and Malmberg on the effects of age composition on capital flows, and the studies on tradable quotas and Australia’s Future Fund (McDaniel 2011). 3.3 Demographic Change and the Global Economy Multiple generations models were first proposed by earlier scholars which were later modified by more recent authors advocating simplified versions of pure overlapping generations models (IMF 2004). The global economic impact of demographic change can be explained using three multiple generations models including the Ingenue, the Tosun and the MSG3. Their key features are summarised in Table 1. below: Table 1. MAIN CHARACTERISTICS OF THE MULTIPLE GENERATIONS MODELS Characteristic INGENUE Tosun MSG3 Number of countries/blocks 16 2 4 Intertemporal optimization/ overlapping generations Yes Yes Yes Expectations Rational Rational Rational and rule of thumb Sectors 1 1 3 Age cohorts 4 young, 15 adult 1 adult, 1 elderly 1 young, 1 adult (including elderly) (including elderly) Period lengths (years) 5 30 1 Life ends at Fixed at 60–94 years Fixed at 60 years Fixed with probability “p” Rigidities No No Yes Capital mobility Yes Yes Yes Labor mobility No Yes No Intergenerational transfers Adults to young Adults to elderly Adults to young Adults to elderly Public sector Yes Yes Yes (simple public pension scheme) (articulated with public (articulated pension scheme) without public pension scheme) (IMF 2004, p.171) 3.3.1 The INGENUE Model This is “a multiregion world model in which the structure of each regional economy is similar to that of earlier applied overlapping generations (OLG) general equilibrium models” (IMF 2004, p.171), except that labour supply is exogenous. The globe is divided into six regions including three advanced areas: Europe, North America, and Japan; three developing country regions which are ranked in order of their stage in population change: as rapidly aging, moderately aging, and slowly aging zones. Each region of the world consists of three categories of economic agents including households, firms and the public sector. The firms model of INGENUE assumes that identical firms situtated in various regions of the world are perfectly competitive, are equipped with Cobb-Douglas constant-return technology using capital and labour, and produce a single good for consumption and investment. “This good is used as a numeraire and is freely traded at no cost on a world market” (IMF 2004, p.172). This implies that regional real exchange rates are constant and always equal to one. In the model, capital is also completely mobile and the world financial market is ideal, so that in the long term, there is equalisation of regional interest rates. Although production technology is assumed to be the same in all the regions, the model is simulated assuming an extensive gap initially in the level of total factor productivity between regions, which in turn is propelled by an exogenous development and convergence process. A process of exogenous international diffusion of technological advancement is defined, by which the various regions of the world slowly converge to the level of total factor productivity in the world’s technological leader, the North American economy. This will support all regions to develop at the same time, in the long term. 3.3.2 MSG3 Model The MSG3 consists of energy, nonenergy and capital-producing sectors, and is an advanced model of the previous MSG2 version. The model divides the globe into four regions composed of the United States, Japan, the rest of the Organisation for Economic Cooperation and Development (OECD), and the rest of the world consisting of the world’s developing bloc. The MSG3 model integrates “the modern intertemporal optimisation approach to modeling economic behaviour with short-run rule-of-thumb behaviour” (IMF 2004, p.173). This results in combining elements of real business cycle models with a fully articulated analysis of progressive producers and consumers, and modern macroeconometric models, describing the effects of demand downturns under situations of wage and price being stationary. A core feature of the MSG3 model is its two types of capital distinguishing between the “stickiness of physical capital within sectors and within countries and the flexibility of financial capital that can flow immediately where expected returns are highest” ( IMF 2004, p.174). This differentiation results in a variation between the quantity of physical capital available at any time to produce goods and services, and the valuation of that capital as a result of geographical allocations of financial capital. 3.3.3 TOSUN’s Two-Region Model with International Labour Mobility “This two-period, two-country model builds on the standard closed-economy overlapping generations framework developed by Diamond (1965)” (IMF 2004, p.174). The model includes either capital or labour mobility. In this version, two countries represent the advanced and developing regions of the world, with two age groups making up the population of each country. The population features of each country are scaled to actual United Nations projectiosn for advanced and developing blocs of the world so that the advanced countries age more rapidly than the developing countries. The model consists of the interaction of “household behaviour, firm behaviour, the political process and international labour flows” (IMF 2004, p.174). Tosun’s Firms model believes that each country produces a single good using Cobb-Douglas technology. Competitive factor markets necessitate the real wage and the real interest rate to be equalized to the marginal product of labour and capital respectively. 4. Conclusion This paper has investigated the changing demography of the developing world, and analysed its impact on global and regional economies as well as business trading opportunities in the future. The world is in the process of major changes in demography. Population is growing slowly, and the age structure of the population is changing, with the proportion of the young declining, and the share of the elderly increasing. In most advanced countries, the aging process is well under way, while in several developing countries significant aging will take place from around 2020, or alternately will show an increase in the working-age populations in the future. The market to cater for the elderly cannot be a homogenous one, and will need to incorporate “powerful concepts of universal and transgenerational design” as reiterated by Kohlbacher and Herstatt (2008, p.23). The global impact of demographic change is explained with the help of multiple generations models including the Ingenue, the Tosun and the MSG3. The Firms models of Ingenue and the MSG3 and the two-types of capitals model of Tosun reveal the relationship between the availability of capital and the production of goods and services. 5. Bibliography ADB (Asian Development Bank), 1997, Emerging Asia: Changes and challenges, Manila, Asian Development Bank Publications. Bell, M 2002, The business of demography, Paper prepared for the Eleventh Biennial Conference of the Australian Population Association, Sydney, 2-4 October 2002. Bloom, DE & Canning, D 2004, Global demographic change: Dimensions and economic Significance, Paper presented for Symposium at the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, August 26-28, 2004, viewed 8 March 2012, http://www.kc.frb.org/PUBLICAT/SYMPOS/2004/pdf/BloomandCanning.Paper.0923.pdf Clark, RL, Ogawa, N & Mason, A 2007, Population aging, intergenerational transfers and the macroeconomy, The United Kingdom, Edward Elgar Publishing. IMF (International Monetary Fund) 2004, ‘How will demographic change affect the global economy?’ In World economic outlook: September 2004: The global demographic transition, Washington, DC, International Monetary Fund Publications, Chapter III, pp.137-174. Kohlbacher, F & Herstatt, C September 2008, ‘The Silver Market Phenomenon: The aging and shrinking has huge implications for business in Japan’, j@pan.inc, viewed 8 March 2012, http://www.dijtokyo.org/articles/J_inc0809_Silvermarket.pdf Lee, RD 2003, ‘The demographic transition: Three centuries of fundamental change’, Journal of Economic Perspectives, vol.17, pp.167-190. Mason, A 2003, ‘Population change and economic development: What have we learned from the East Asia experience?’, Applied Population and Policy, vol.1, no.1, pp.3-14. McDaniel, SA 2007, Review, Canadian studies in population aging, intergenerational transfer, and the macroeconomy, Canadian Studies in Population, vol.38, no.1-2, pp.207-208. Prskawetz, A, Mahlberg, B & Skirbekk, V 2007, ‘Firm productivity, work-force age and educational structure in Austrian industries in 2001’, In RL Clark, N Ogawa & A Mason (eds) Population aging, intergenerational transfers and the macroeconomy, The United Kingdom: Edward Elgar Publishing, Chapter 3, pp.38-66. Read More