Fri | Jul 3, 2020

David Jessop | The potentially destabilising effect of demographic change

Published:Friday | October 26, 2018 | 12:00 AM

Last month, credit ratings agency Moody's published a report that indicated the potentially negative economic and political implications of demographic change in the Caribbean and Central America.

It suggested that if government and the private sector do not make significant improvements in education, healthcare, and other social determinants, many nations will struggle to remain competitive, particularly after 2050.

The report's findings were amplified just over a week ago in a webinar hosted by Moody's Assistant Vice-president Marla Dukharan, one of the region's leading economists, and analyst David Rogovic, who, in an online dialogue made clear the policy issues that needed to be addressed.




Moody's research contained potentially alarming statistics and tables that pointed to several critical and so far largely unaddressed long-term policy challenges facing the region.

Put simply, it indicated that although declining, the Caribbean still had the highest net outward migration in the world and the highest age-dependency ratio between retirees and citizens who work. The report also indicated that not only were very large numbers of the most highly educated and productive young people in their mid-twenties, and especially women, leaving the region mainly for the United States, but that the Caribbean's working population was diminishing.

The webinar additionally indicated that the replacement rate by the old for young in some Caribbean nations such as Barbados is very high and that the region's average age growth is accelerating compared with Central America so that by 2050, one-quarter of the Caribbean population will be over 60 and closer to 80 years old.

What this means is that the spending burden on government and the private sector is set to increase incrementally and that fiscal reform and structural change will be required to ensure that economies remain competitive.

The exchange between Marla Dukharan and David Rogovic went further. It indicated that the economic future of some parts of the region could be in doubt without a fundamental change in thinking about the scope and availability of education provision, ensuring wage equality for women, the role of new technology in development and government, the rational delivery of social welfare programmes, addressing crime, and the nature of the future relationship with the diaspora.

The alternative, they suggested, would be cuts to pensions and a further deterioration in public healthcare and education.

Paradoxically, the strength of the Moody's report was that it did not make recommendations. As the agency points out, demographics are a secondary force in shaping credit markets, so their study should be seen as an adjunct to the credit ratings they and others provide commercially to enable investors to take longer-term decisions about a country.




What Moody's well-researched, statistically based, and accessible report does is explode the myth perpetrated by some governments about their capacity to continue to meet the demands of economic growth, the young, and the ageing through a 'business as usual' approach.

Focusing on the 10 Caribbean countries and five Central American nations for which it provides ratings, the report suggested that apart from improving social and human capital indicators, there are steps that governments might take to improve their sovereign credit profiles. Moody's indicated that among the positive responses governments might make to address demographic change were encouraging inward migration of those of working age or with particular skills; attracting better-off retirees from other nations able to purchase retirement services and healthcare; the introduction of electronic government; and innovative approaches to income redistribution.

The ratings agency also observed that while outward migration resulted in relatively stable flows of remittances that supported domestic consumer demand and growth, this exposed the region to external shocks and the potential tightening in immigration policy in receiving countries.

What Moody's makes clear is that the Caribbean is on a wholly predictable but unsustainable path. Its report demonstrates that policymakers must find new ways to respond and reshape policy if there is to be any hope of delivering long-term economic growth and meeting future citizen demand across the demographic spectrum.




Speaking about this, Dukharan said that she believes that the importance of the report is that it touches on many often overlooked, but important, issues. Apart from demonstrating challenges not typically associated with sovereign credit ratings, it indicates, she says, the key sources of Caribbean vulnerability.

"We usually think about this in relation to external forces such as climate change and trade wars driving socio-economic underperformance or internal factors such as institutional weakness, fiscal irresponsibility, and corruption. But rarely do we link shifting demographics as a source of vulnerability," she notes. "This report shows us just how this is linked much more closely than we may have imagined."

Dukharan believes that policymakers need to address institutional weakness at a fundamental level.

"If we can tackle crime on a regional scale, gender inequality, and wealth and income inequality, it should be possible to mitigate some of the vulnerability," she said.

Some governments, most notably Jamaica and Barbados, in part encouraged by the IMF, are working in this direction. Cuba, too, has recognised the potential threat that demographic change poses, forming a government commission responsible for addressing population growth - something that seems not to exist elsewhere in the region.

Unfortunately, most Caribbean governments and politicians fail to look past their electoral horizon to recognise the fundamental nature of the social and economic decisions that the unstoppable force of demographic change requires.

It is not often a report appears that demonstrates so clearly the powerful factors at play beneath the surface in the Caribbean and the significant policy issues that need to be addressed.

Moody's report and the subsequent webinar made clear that there is a pressing need to break through the complacency and political inertia that grip much of the region. Together, they indicated that there is a pressing need for a consensus to form on the steps needed to address the potentially destabilising effects of demographic change.

- David Jessop is a consultant to the Caribbean Council.