Attrition: Affluence, Confusion And Population Decline

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August 8, 2022: South Korea is the latest newly affluent East Asian country to suffer an almost inevitable population decline associated with increasing per capita GDP’s. All the 2021 data has been analyzed and it confirmed that in 2021 the South Korean population declined .2 percent. This was not a surprise because this curse of affluence could be seen coming a long way off. The post-Korean war population boom peaked in 1960 (at three percent annual growth) and began to decline over the next three decades as South Korea’s industrialization took place. By the late 1990s the population growth fell below one percent a year and this decline accelerated as South Korea became an economic powerhouse. In the last few years, the South Korean economy has become the 10th largest in the world. That’s remarkable for a country with a population of only 52 million.

South Korea has a pretty good idea of where this is going. Japan was the first country in the region to go through an economic boom and population bust process. In 1965 Japan had a population of 98 million and a GDP of $105 billion. By 1995 GDP was 52 times larger, at $5.5 trillion and population was 125 million. The 1990s was when the real-estate bubble struck. For the next two decades GDP growth stopped, and even declined in some years. Population growth continued until 2010 when it peaked at 128 million.

The Japanese problem was a real-estate speculation bubble. The banks had lent too much money to many newly affluent Japanese seeking to upgrade their housing faster than new homes could be built. Prices kept rising until many were artificially high and home buyers realized it. Rather than risk an extended economic depression, the Japanese government adopted a series of rules and laws that made possible a manageable reduction of the bubble. This meant there was no GDP growth for nearly two decades. In 2012 that new growth was represented by a record GDP of $6.2 trillion. The growth stagnated again because since the 1990s two other factors had developed. Japanese were having fewer children and the consumer culture that had fueled the real-estate bubble was gone and not returning. By 2021 it was down to 125 million and shrinking at an accelerating rate. This was the result of not enough babies being born to replace the elderly who died. This is a worldwide phenomenon. In more affluent nations the birth rates have declined to below replacement rate.

Japan was the first Asian nation to modernize and achieve a Western level of affluence. The Japanese government tried all manner of incentives for women to marry and have children but it did not work. The growing population shortage made it more difficult to get anyone to join the military and with the growing threat from China, Japanese efforts to expand its armed forces were crippled by the fact that there are not enough Japanese for that, as well as much else in the country. China is now experiencing the same shortage of military personnel. South Korea had an easier time in this department because the Korean war ended with a ceasefire rather than a treaty to officially end the hostilities.

Communist North Korea saw its population double between 1965 and the present, just as South Korea’s did, but North Korea could not compete in economic growth. North Korea initially grew its GDP somewhat after the Korean War because of generous subsidies from the Soviet Union, but those ended in 1990 when the USSR collapsed. Even before that the South Korean free market economy was growing rapidly and is now 40 times larger than in the north, meaning the per-capita GDP is 20 times larger in South Korea.

The North Korean solution to this problem was to develop nuclear weapons to intimidate South Korea into subsidizing the failing North Korean economy. That did not work and actually backfired as South Korea developed a much more powerful military at the same time that the North Korean military becomes less effective each year because of a declining economy that diverts much money towards developing obsolete ballistic missile and crude nuclear weapons that anger more than terrify the neighbors. North Korea’s population continues to grow but just barely. Migrating (officially “defecting”) is illegal but people still try. Increasing hunger and poverty has produced a growing number of abandoned children who can be seen in towns and cities. For South Korea the major problem is economic growth, not threats from North Korea.

There are similar economic growth/population decline situations in Singapore and Taiwan. China is the most obvious example because its population comprises about half the people in the region. What happens in China matters for the entire region, and potentially for the entire world, because China now has the second largest economy in the world. What was remarkable with China was that its economic growth and low birth rates were largely the work of several hundred million well educated and highly skilled people in its new (and growing) middle class. China is now facing, for the first time in its history, a declining population caused by low birth rates, rather than war or pandemic disease. The Chinese government’s one-child policy was not a major factor in all this, it was the free-market economy and the resulting rapid growth in education levels and GDP.

South Korea learned from the Japanese and Chinese experience and seeks to limit the economic and population problems encountered by Japan and China. Chinese population experts expected the population to show annual decline sometime in the 2020s. That puts the year of peak population somewhere between 2022 and 2027. This is worse than it looks because birth rates are not growing among the middle class. As defined by education (a college degree), nearly half the population is qualified for middle-class status. When measured by income, less than a third of the new middle class have enough income to support more than one or two children.

During the decades of the “one-child” policy the growing middle-class lavished money on their only child, fueling the drive for nearly all these children to receive a university degree and the highest test scores possible. Currently about 60 percent of young Chinese will attend college and get a degree. Marrying and starting a family turns out to be much more difficult. About 30 percent of graduates cannot find middle-class jobs the new graduates were educated to handle. A more difficult problem is the shortage of affordable middle-class housing in urban areas. The portion of the population living in urban areas grew from 20 percent in the 1980s to over 60 percent now. Home ownership (usually an apartment) is over 70 percent for college educated urban couples, which is higher than in Western countries. While income for middle-class Chinese with a job makes it possible to buy a home and often a car as well, it does not make educated urban couples confident that they can afford the high cost of rearing and educating more than one child.

East Asia’s inexorable population shortages have no solution in sight. Integrating migrants into the culture is still forbidden although Japan has been forced to at least consider allowing qualified migrants to become citizens, although socially second-class ones. That will change Japanese culture, but that already happened in the aftermath of World War II and Japan thrived because of it.

South Korea is another matter, because the population decline is a decade behind Japan while South Koreans are more open to accepting qualified foreigners. Many South Koreans believe Korea will become united soon and hope this will somehow solve the population problem for a while. Unification is unlikely unless China agrees to cooperate and tolerate a unified democratic Korea as a neighbor. China does not want to share a border with 75 million affluent Koreans.

Europe and especially the former British colonies that became the United States, Canada, Australia and New Zealand all thrived by accepting migrants from everywhere and urging them to adapt to the new culture and become citizens. With a few exceptions, that population growth model was not widely accepted in Europe, but it was much more acceptable than in East Asia. Even migration can backfire if prospective migrants are not screened. Some nations establish net-worth and skills requirements for migrants. Radical solutions like letting in anyone who can reach your border creates more problems and angers those who got in legally. All this is another downside of affluence that has little historical experience to lean on for solutions. While democracy has proved better able to sustain economic growth, decision making for rapidly developing situations can rarely keep up. As the old saying goes, “democracies always do the right thing, often after trying everything else.”

 


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