Japan is causing its own demise

Japan is causing its own demise

January 24, 2011
Santiago, Chile

Most people have never heard of Lee Kuan Yew… but he’s an incredibly important figure in one of the world’s most cutting-edge economies.  As Singapore’s first prime minister, he governed for 3 decades, overseeing his country’s transformation into a modern, developed economic powerhouse.

Prior to Lee’s tenure, Singapore was fairly provincial backwater under British colonial rule; completely devoid of natural resources, its only real importance was as a conveniently located trading post.

Post-independence, Lee’s government passed substantial labor, immigration, and tax reforms that were incredibly favorable to businesses and foreign investors. These policies are widely viewed as the spark for Singapore’s economic growth, and Lee is still heavily revered today for those decisions.

In short, he has a Mandela-like influence in his society… and when Lee speaks, people listen in Singapore.

Last week, Lee made some remarks about immigration and Singapore’s aging population, indicating that in order to avoid a disastrous population decline, Singapore needs to attract young immigrants to save the economy in the long run:

“At these low birth rates, we will rapidly age and shrink… So we need young immigrants. Otherwise our economy will slow down, like the Japanese economy…. [Young immigrants] will increase our population and talent pool. Singapore will be vibrant and prosperous, not declining and ageing.”

Low birth rates and declining populations tend to have terrible consequences for an economy; in countries which have a bloated social welfare network, for example, a declining population means that fewer and fewer people are paying into a pension system that supports more and more beneficiaries.

Perhaps more importantly, though, an aging population dramatically shifts its consumptive habits. Older folks are notoriously thrifty, usually opting to save their money for an uncertain future. They don’t have young children to go through a different size shoe every month, college tuition to pay for, etc.

Saving is ordinarily a good thing for an economy– it’s an essential ingredient in long-term growth along with technological advancement. But ‘being thrifty’ isn’t necessarily the same as ‘saving’.

Generating a large pool of savings requires a society to produce much more than it consumes… and with a declining population, even though a society is consuming less, it is also producing less because the labor force is decreasing as well.

The net effect of population declines is a deteriorating standard of living and a host of social welfare system that go bust. Whatever younger generation that still exists is usually burdened with the clean-up costs, but this only increases their rate of emigration. Nobody wants to get stuck with the check.

Japan is a rather famous example of a developed country with a demographic crisis. The rising cost of living and decades-long economic decline caused families to have fewer children, such that the birth rate for the last 30+ years is well below the ‘population replacement level’ of 2.1 births per woman.

With a median age of 44.6 years, Japan already has one of the oldest societies in the world (compared to 39.6 in Singapore, 40.7 in Canada, 36.8 in the United States, 28.9 in Brazil, 25.9 in India, and 31.7 here in Chile).

Japan also has one of the world’s highest life expectancies and highest costs of living… which means that the long-term cost to support idle pensioners is extremely high.

One would think that the Japanese government would be rolling out the red carpet for young foreigners, yet Japan remains a fairly closed society. Foreign residents comprise less than 2% of the population according to government statistics, not enough to even qualify as a drop in the bucket.

Without serious addressing this issue and attracting young foreigners both at the economic and cultural level, Japan runs substantial risk of fading into obscurity.

It’s amazing how so many governments don’t get it… going out of their way to repel or even prevent talented foreigners from settling, as if the fundamental freedom to work hard and prosper is somehow derived from bloodlines, ethnicity, or irrelevant, invisible lines on a map.

These governments will figure out soon enough that labor and intellectual capital are easily exportable assets. Some governments like Singapore, Estonia, and Chile understand that truth, and they’ve laid out incentives to compete for foreigners and establish conditions for long-term growth.

Singapore’s open, mutli-lingual, multi-cultural society is well-equipped to deal with the matter… and given the host of residency incentives that it already provides to talented foreigners, I suspect this free market approach will become a model for global migration and population stability.

Sometime in the next two years, I expect the government to act quickly and unveil a new series of packages aimed at attracting younger people to Singapore; I will look forward to telling you more about it when the time comes.

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