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The Regional Dynamics of Economic and Population Growth

Wolfgang Fengler's picture

ML085S03 World BankAs many across the world entered the New Year in a celebratory mood, others are still struggling to recover from the effect of the recent economic downturn. Five years ago began the worst economic recession the world has experienced in generations. With life support by Governments and Central Banks, the global economy seems to have stabilized, but the ‘patient’ is still weak. In 2013, the global economy is estimated to have expanded at a modest 2.2 percent rate (despite a contraction in the Euro zone) and for 2014 the World Bank and IMF project a slight uptick to 3.0 percent.

But what do these numbers actually tell us about the well-being of people? Does economic growth capture what really makes a difference in peoples’ lives?

Gross Domestic Product (GDP) is the standard measure of economic activity and it captures the rate at which economies expand (or contract) from one period to the next. Total GDP for each country is also equivalent to the totality of each person’s income (which reflects the goods and services they produce). Although commonly used the measure is clearly not flawless: for instance the ‘services’ that mothers provide by educating their children (nurturing future economic agents) are not reflected in GDP, while a car accident and resulting repairs would count positively. Still, GDP growth on average is necessary for development and good for the poor and there is also some evidence that economic prosperity – all other things equal – makes people happier.
 
However, obviously, GDP growth can only bring about improvements in living conditions if it outpaces population expansion. Indeed, if a country’s economy grows at 3 percent and the population growth rate is also 3 percent, then no one is better off, on average, as a result. However, if the population grows at 1 percent only, then per capita growth is 2 percent. Since population growth rates differ across countries and regions in the world, a GDP growth of 5 percent in Sub-Saharan Africa has the same effect per capita effect as 3 percent growth in Europe; this is because population growth is 2.5 percent in the former while only 0.5 percent in the latter.
 
For this blog, we reviewed global GDP growth since 2000 and looked specifically at the ‘net’ effect, once the countervailing force of demography is factored in. At the global level, growth was 2.6 percent since 2000 despite the 2008/09 crisis and subsequent Euro-crisis; however, average incomes only registered a modest 1.4 percent increase as 1.2 percent was “eaten away” by a rising population.

The good news is that the world’s poorest regions have also grown more strongly both in terms of overall and per capita GDP and there are three broad groups of countries:

  • The first group includes South and East Asia which have witnessed a dramatic per capita growth of 7.2 percent. In other words average incomes have more than doubled in Asia since 2000. East Asia is doing particularly well (8.4% vs. 5.6% for South Asia) in part thanks to a low “population discount” of less than 1 percent;
  • High-income countries (predominantly USA, EU and Japan) have performed the weakest, with 1.1 percent annual per capita growth on average;
  • In the rest of the world (Africa, Eastern Europe and Central Asia, the Middle East, and Latin America) individuals have seen their incomes grow between 2.2 and 4.2 percent each year. Africa and the Middle East grew at a robust 5 percent rate but with a high “population discount”. By contrast, Eastern Europe and Central Asia experienced the highest per-capita growth but largely thanks to slow population change.

By 2020, when the world will reach 7.6 billion, population growth will have fallen below 1 percent for the first time in 200 years. If the world can achieve economic growth of 3.5 percent (thanks to a larger share of working adults), per capita incomes will rise by a substantial 2.5 percent, a level only exceeded once between 1945-1973 when average incomes rose by 3 percent per year. Africa, however, will need much more in order to sharply reduce poverty, while Europe can continue to cruise at a low 1-2 percent and still enhance the welfare of its citizens.

Money alone doesn’t bring happiness but none of it brings misery, especially for the poor. So let us also work in 2014 to grow the incomes of poorest countries and people.
 

Comments

Submitted by Franciska Eseenam on

Thanks a lot Wolfgang Fengler and Emi Suzuki for this report.

The simplicity and the explanative although data backed approach has been appreciated.

Best wishes for the team of this blog. Rgds

Submitted by Phil Anderson on

As I began to read this clear and interesting blog, I wondered why you didn't use Purchasing Power Parity as the output measure. Just curious.
Phil (2000 retiree)

Submitted by Wolfgang on

Dear Phil,
you may have just retired when I joined the World Bank!
There is no deeper reason for using GDP in constant 2005 US$ versus the corresponding PPP measure. GDP numbers are just more reliable and easier to compute at a regional level.
We also looked at PPP estimates and the divergence at the aggregated regional level is very small.
Wolfgang

Submitted by Padraic Cyril M... on

Appreciate the simplicity of the manner in which the information is presented as well. Women, nurturing future economic agents, do not appear to be factored into the overall economic equation adequately.

Submitted by Emi on

Thanks a lot, Padraic, for your comment.
Women's big role is already there in the equation as the population change as well as women's contribution to the GDP growth.
Gender equality is a theme for another post and there are already many of them.

Submitted by Ed on

Many thanks, Wofgang Fengler and Emi Suzuki for such a clearly written note. As a description of the effect of overall population growth on per capita income growth, this is very clear. This is, clearly, a very straightforward relationship.

But I am concerned it could lead to overly simplified conclusions. Populations may be growing because the elderly population is growing rapidly, whereas the working age population is declining and the younger age population is constant. Or population growth may be high because the labor force population is increasing rapidly, while both the old and young age age groups are declining.

Of course, populations with rapidly increasing old-age populations tend to have slower population growth, but not necessarily so. Populations with declining young-age growth rates, and increasing labor force growth rates are frequently those with the highest economic growth rates as well

Submitted by Wolfgang on

Dear Ed, thanks for your feedback.

Indeed, high population growth is nor a curse, especially if it is happening because people live longer not because they have more children. We have written about the Africa’s and the global demographic dividend before to precisely highlight this point:

http://blogs.worldbank.org/futuredevelopment/global-demographic-dividend...
http://blogs.worldbank.org/africacan/can-rapid-population-growth-be-good...

This blog just makes a simple point which most people interested in develop already knew: GDP growth has a different effect on people’s welfare even if you assume no changes in equality due to differences in population growth. The contribution of the blog is that it gives you the numbers for the world’s main regions since 2000.

Wolfgang

Submitted by Anonymous on

Thank you very much for this interesting article. It also should be mention how equal or unequal the increase of GDP is distributed in some countries. A 5% or 7% GDP growth in Southern Africa does not necessarily leads to a decline in poverty and an increase in wages for the majority of the population, since the inequality of distribution is extremely high (Gini very high).

Submitted by davidnyambura on

The relative movement of the poverty cycle is directional in the change in the poverty levels. Reduction in poverty after a positive movement in the GDP growth is not instant. And it does not necessarily mean that the poor are going to feel it in a micro-economic level in a single financial cycle. The effects are most often eroded by the GDP movement even before they materialise.

Submitted by Wolfgang on

It is correct that growth does not lead automatically to poverty reduction. However, without growth it is difficult to reduce poverty. There is enough evidence that, on average, "growth is good for the poor" (see the review by Dollar/Kleineberg/Kraay 12 years after their initial paper: http://www.voxeu.org/article/growth-still-good-poor.
The evidence in Africa so far has also been that recent growth went hand in hand with poverty reduction. However, it would have been even faster if labor –intensive manufacturing had taken off and if social protection systems had targeted the poorest even more.

Submitted by Wolfgang on

Dear Seo, many thanks you made our day and hope that you continue enjoying “Future Development”.
Wolfgang

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