If Norway can prosper with a stable population, why can’t Australia?

The projection that Australia’s population will grow to 36 million by 2050, contained in the 2010 Intergenerational Report, was received very differently by Australian governments and the community.

Many Australians are deeply uncomfortable with rapid population growth. A recent poll (PDF 108KB) found that 48 per cent of Australians thought such growth would be bad for Australia, while only 24 per cent thought it would be good. They intuit, perhaps, that governments might not be up to the task of providing sustainable water, energy and transport infrastructure for rapidly growing cities.

The Government’s stance has vacillated between claiming that such rapid population growth is inevitable on the one hand, and assuring us that it is good for Australia on the other.

The claim of inevitability is disingenuous and easily dismissed. While some degree of growth is inevitable over the next few decades, both the pace of growth and the ultimate trajectory are well within the government’s power to influence. Migration is the largest determinant of long-term population growth for Australia, and different migration levels mean the difference between population stabilisation and ongoing rapid growth.

More interesting, and more forthright, is the claim that rapid population growth is in Australia’s best interest. Finance Minister Lindsay Tanner has been the government’s most vocal proponent of the “Big Australia” preference. In a recent piece, Tanner asked “Do we want lower productivity and less economic growth?”, implying that lower population growth could only damage our economy.

Is there good evidence for or against a link between population growth and economic prosperity? Tanner unfortunately offered none in support of his argument for rapid growth. One’s view on the question depends largely on an assessment of so-called “economies of scale” and “diseconomies of scale”.

Economies of scale are things that get better the more of us there are - greater diversity of restaurants is an example that rings true for me.

Diseconomies of scale are things that get harder the more of us there are. For example, water supply tends to get more expensive per unit as population increases, as increasing supply requires resorting to progressively more distant and difficult to access sources. A desalination plant is more expensive than extraction from local wells, for example. Congestion is another diseconomy of scale, and greenhouse pollution is rapidly emerging as another.

Economic modelling conducted for the Intergenerational Report concluded that lower population growth would mean lower per-capita GDP for Australia, among other ills. But a closer look reveals some flaws. For one, the modelling excluded any environmental parameters, such as the potential impact of a larger population on greenhouse pollution, water use, and congestion. The omission seems all the more glaring when you consider that climate change was identified as one of the two most important intergenerational challenges facing Australia today. In effect, the Intergenerational Report included many potential economies of scale, while excluding the most important diseconomies of scale. The result tells us more about the modeller than about what is likely to happen in the real world.

The most considered and balanced treatment of this issue in recent times is the final report of the National Population Council, an official Commonwealth body, released in 1991. Although nearly two decades old now, its analysis remains compelling and relevant. It is not, I should stress, an “anti-growth” document.

On the link between population and economy, the Council found that the jury was still out: “because of our limited present direct knowledge of economies and diseconomies of scale, it is not possible to state … that population growth per se enhances or reduces the productivity basis for economic progress.”

Unfortunately, our knowledge of economies and diseconomies of scale is no better today than it was back then. This leaves Tanner’s claim that we’d be less prosperous if we don’t grow our population on a pretty shaky theoretical base.