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The downward spiral of hasty population growth

By Jane O'Sullivan - posted Monday, 8 March 2010


How much does this actually cost? Estimates vary, but they are in the hundreds of thousands of dollars per added person. Using USA data, MIT economist Lester Thurow estimated that it requires 12.5 per cent of GDP to expand capacity at 1 per cent per year. For the developed world this was over $200,000 per person of net population growth. Australian estimates would suggest that figure is right in our ball-park too.

So, if we’re currently growing at 2 per cent per year, then 25 per cent of our GDP is currently being used to expand capacity to accommodate the people who are not yet here (or will have to be spent eventually to catch up). This means that the GDP available per capita to serve current residents is 25 per cent less than the advertised per capita GDP.

Against this burden, the 2010 Intergenerational Report’s estimate of 4.1 per cent of GDP needed for extra health care and aged care by 2050 pales into insignificance. Not to mention that only 40 per cent of this is attributable to ageing, and less than half of that could be deflected by immigration.

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Does it make sense that we’re incurring a 25 per cent of GDP cost to avoid less than 0.8 per cent of GDP cost?

Interestingly, providing skilled personnel through training is a lot like providing infrastructure, as we have to spend the money up front before their working life begins. Their working life may be less than that of bridges and school buildings, but even if the average were only 25 years, we would need to be graduating trained people equal to 4 per cent of the total workforce in their trade or profession, in order to replace retirees. If population is growing at 2 per cent, we need to add 2 per cent to that workforce to maintain the same level of service to the larger population. So we should then be graduating 6 per cent of the skilled workforce. That’s a 50 per cent increase in training requirement, to accommodate a 2 per cent growth in population.

Instead of training them, we can import them. But, while each immigrant accountant or hairdresser may reduce the skills shortage in their own profession, they increase the demand for all other categories of skills. It’s not immediately obvious whether the net effect on the skills shortage is negative or positive. However, if we acknowledge that the training requirements for different skills vary greatly, and that the skilled immigration program has been dominated by applicants with the shortest and cheapest qualifications to meet entry requirements, the extent to which they reduce Australia’s training burden is unlikely to exceed the extent to which they increase demand for skills. If we further discount those who are actually trained in Australia using Australian training capacity, and all those who do not find or sustain work in the skill category on which they entered, as well as the family members of skilled immigrants who also enter under the skilled migration program, the net effect of skilled immigration is almost certainly to exacerbate skills shortages.

So we started with a skills shortage due to reduced government spending on post-secondary education, and tried to fix it by importing skills, but only succeeded in magnifying the problem.

We must restore training expenditure, to attack this problem at its source. But stabilising population would make by far the most cost-effective contribution to aligning training capacity with training needs.

It is interesting to reflect on the contrasting rhetoric around growth and ageing. Ageing is touted as the greatest economic challenge facing Australia, and therefore to be minimised by whatever means we have. Conversely, we are told that growth merely requires planning and management (as if the infrastructure magically appears by virtue of having been planned). In fact, the exact opposite is true.

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Growth is a virtually insurmountable challenge, becoming ever more costly as resources are spread thinner, pushing an ever increasing burden on future generations, while diluting their wealth base and inflating their living costs.

Ageing, in contrast, is a modest and limited shift, back towards the sort of dependency ratio we had in the 1960s, but with much higher workforce participation than then.

So we have immigration to reduce the fiscal gap anticipated to be caused by ageing, but causing a fiscal black hole. And we have skilled immigration to solve the skills shortage but actually increasing it. And we have a baby bonus requiring a school-building program comparable to the current debt-financed economic stimulus package repeated annually to accommodate the extra 50,000 kids per year moving through the system. And, just when we should be encouraging extra saving for retirement, instead we have orchestrated oversupply of labour suppressing wages and increasing casualisation and underemployment, combined with the orchestrated housing affordability crisis, having a devastating effect on national savings. I haven’t even started on environmental outcomes or greenhouse gas emissions.

Can we really be so stupid?

It’s not as if Australia is exploring uncharted waters here. The globe is replete with examples to demonstrate the effects I’ve been describing. Back in 1986, Lester Thurow concluded that no nation could move forward economically with population growth greater than 2 per cent. Deliberate (but not coercive) fertility reduction was the primary enabler of economic development in the Asian Tigers, boosting workforce participation and allowing government efforts to move from quantity to quality of services. In contrast, Argentina famously fell back from first-world to third-world status, with the most plausible explanation (PDf 1.39MB) being that its growth outstripped its ability to maintain quality of life. A disgruntled population and unmanageable public debt are not conducive to maintaining good stable democracies. Political turmoil soon fuels the downward spiral.

Could Australia enter such a downward spiral? We already have many of the symptoms: widening inequality between rich and poor, declining national savings and expanding current account deficit, the selling of public assets to balance budgets, welfare systems falling behind the cost of living, intractable queues for medical services, increasing youth unemployment, fracturing social tensions erupting in ethnic violence … the question is, will we wake up in time to arrest it?

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About the Author

Jane O'Sullivan is a research fellow at the School of Land Crop and Food Sciences at The University of Queensland.

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Creative Commons LicenseThis work is licensed under a Creative Commons License.

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