Improving Our Standard of Living (Wattpad Edition)

Chapter 21: Why Developed Economies Are Slowing

The economies of developing countries like China, India, and Indonesia are growing faster than developed ones like the US and the UK. That's because industrializing nations are still transitioning to capitalism. Doing so always causes a massive wave of investment and business creation. If a country goes from zero capitalism to just a hint of it, it opens the floodgates of commerce. Its GDP will skyrocket for a time, even if its market is more restrictive than a developed nation.

Developing countries that continue to liberalize will soon catch up with the industrialized world. But economic growth will stagnate in those that don't continue to loosen regulations on businesses.

If becoming more like developed countries increases economic growth, then why have gains in GDP been shrinking in First World nations over the last few decades? They are, after all, the most deregulated and capitalistic; the friendliest to free trade. Their growth rates should be steady if not going up. But they're slowing. Why?

First, let's verify that the rate of GDP growth is falling in developed nations. According to the World Bank, in the United States, the average real GDP growth rate from 1970 to 1990 was 3.27%. From 1990 to 2014, GDP grew at only 2.46% per year on average. That's a 25% decrease in economic growth compared to the mid-to-late 20th century. These figures are adjusted for inflation.

In the United Kingdom, annual GDP grew by 2.53% on average from 1970 to 1990. From 1990 to 2014, average GDP growth slowed to 2.07%. That's almost a 20% decrease.

In France, GDP grew at 3.19% on average from 1970 to 1990 and slowed to 1.57% from 1990 to 2014. That's a 50% drop.

In Japan, yearly GDP grew at 4.30% on average from 1970 to 1990. It slowed to 1.12% from 1990 to 2014. That's a 75% decline.

I looked at several other developed nations and found the same thing. Countries with the highest living standards today—those that are the most capitalistic, democratic, technologically advanced, friendliest to free trade—now have the slowest economic growth rates. This excludes impoverished nations that have no semblance of capitalism yet.

The poorer developing nations—those catching up to the industrialized world and adopting the same capitalist policies—are growing the fastest.

Why is capitalism working better for industrializing nations than First World ones? It makes sense that economic growth is faster for countries that recently adopted capitalism. They are attracting a massive wave of investment for the first time. 21st century technologies and infrastructure are pouring into them. But why is economic growth slowing in developed nations?

A lot of people point to the economic slowdown of industrialized countries as proof that capitalism is failing.

They're wrong. The answer is so obvious it's easy to miss.

The reason economic growth is slowing in developed countries is because the percentage of working-age people is shrinking. A growing share of the First World population is getting older and dropping out of the labor force. They're retiring, but not dying. Moreover, the birth rate is shrinking. The rate at which people are retiring is faster than the rate at which young people are replacing them. That's why the labor force participation rate is going down in many developed economies.

In other words, the percentage of retired people as a share of the population is going up every year in the developed world, while the proportion of working-age people (aged 15-64) is going down every year. What this means is that the number of individuals working as a percentage of the population is declining.

The developed world is aging to death.

Imagine a society in which 99% of the population is 65 years of age or older and is retired. The other 1% is between the ages of 15 and 64. This society would have a very low GDP growth rate. That's because most of its resources are being diverted to a demographic that isn't working. 1% is supporting the other 99%. But if the other 99% were to suddenly die, GDP per capita would skyrocket. All the wealth going to 99% of retired people would instantly become available to the young working demographic.