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Ageing Populations and Macroeconomy

Yunus Aksoy smiling into the camera.Professor Yunus Aksoy shares how ageing populations impact the workforce and discusses possible policy responses.

Ageing populations are a global phenomenon. They are caused by two main trends:

  1. Fertility decline: the number of children per woman in a population has been slowly decreasing since the 1990s.
  2. Declining mortality rates: people are living longer due to medical advances and lifestyle changes.

These demographic structure changes have wide-reaching impacts in the short and medium/long term. However, the fact that their impact is not visible day-to-day means that they are relatively less discussed in everyday policymaking. My work with my colleagues Professor Ron Smith at Birkbeck, Dr Henrique Basso at the Bank of Spain and Dr Toby Grasl investigates the impact of ageing populations on macroeconomy in general and brings it to the table in policy circles. I am very pleased to see that the issue has started to be taken seriously by many international organisations like the IMF, ECB, World Bank, BIS and numerous central banks. Our research has had significant impact on the debate.

Economists tend to concentrate on growth, inflation and unemployment rates, and what Central Banks and Finance Ministries can do to stabilise the economy over the short term. However, there are other deep and slowly changing forces affecting the economy about which policymakers can do little. The weak recovery after the global financial crisis has sparked renewed interest in these longer term forces, including demographics, which had often been ignored. As individuals, we are often aware of the adverse effects of ageing, as the years go by. Societies can suffer similar adverse effects from ageing, and most developed economies are ageing.

According to the UN Population Division, almost every developed economy has seen a decline in fertility rates and an increase in life expectancy. As a result, the average proportion of the population aged 60+ is projected to increase from 16% in 1970 to 29% in 2030, with most of the corresponding decline experienced in the 0-19 age group in 21 OECD economies.

In the 1960s, Simon Kuznets suggested that a society consisting of consumers, savers and producers can grow in a sustainable way if the demographic structure was a rough pyramid. Larger at the bottom, where there are the youngest – up to the age of twenty or so – the working age next – then at the top a smaller group of older people. The pyramid is now turning upside down, with the bulge at the top.

Why is the demographic structure relevant?

Our research has examined the impact of demographic structure on economic activity, productivity, and innovation. Demographic structure may affect long and short-term economic conditions in several ways. Different age groups have different savings behaviour; have different productivity levels; work different amounts (as the very young and very old tend not to work); contribute differently to the innovation process; and have different needs. Therefore, changes to the demographic structure of a society can be expected to influence interest rates and output in both the long and short-term.

Our analysis shows that the changing age profile across OECD countries has economically and statistically significant impacts and that it roughly follows a life-cycle pattern; that is, people who are likely to be dependent on state or other forms of support – generally the very young and the old populations – seem to reduce economic growth, investment and real returns in the long-run.

Demographic structure also affects innovation; the economy is less likely to develop and/or patent new innovations/inventions. Similarly, productivity, which is driven by innovation, is positively affected by young and middle aged cohorts and negatively by the dependant young and retirees.

Demographics, innovation and medium-run economic performance

When people expect to live longer, they save more for their retirement and consume less, increasing demand for investment products and causing a decline in their returns. This provides one explanation in the steady decline in real interest rates in OECD countries since the 1980s. But it leaves us with a puzzle. A decrease in long-term interest rates should increase investment, but that is not what we observe. Our estimates show that long-term investment is declining. Our solution to the puzzle is that aging has also lowered the productivity of investment, reducing the incentive to invest, because the rate of ideas production and innovation, mainly done by the young, has reduced.

With fewer younger people in the population, there will be less creativity and ideas. Thus, while the cost of investment finance may be lower due to higher savings of the aging population, there are not enough ideas worth capitalising on and so long-term investment and real output declines. An ageing population also throws up social challenges, such as the provision of care for the elderly and how this can be supported.

Are there solutions?

While immigration may address the shortage of workers in the middle of the age categories, the political problems it raises are such that governments are usually unwilling to develop immigration policies that would truly address the issue. Furthermore, as populations are aging globally, this is not an adequate long-term solution. Giving more childcare support for young parents could help increase fertility rates and this is also related to building human capital starting from a very young age.

Increases in productivity by investing in human capital, education and skills is of crucial importance, as is increased funding for research and development that could bolster a  generation of new ideas and create new innovations and investment opportunities.  At Birkbeck, we have long understood the importance of lifelong learning that is directly associated with productivity gains for the economy, which in the current climate could help to compensate for a reduced workforce and staggered productivity. Robots and AI could also address the productivity/labour supply challenges, especially if we reach a point where machines can generate innovations and robots might be used more to fill gaps in the work force and provide care for the elderly, but it might make more people unemployed.

A typical challenge is that politicians are often short sighted. Long-term investment in order to boost human capital and productivity would not be a top priority for an incumbent politician in the short term, despite the transformative effects they could have for the generations to come.  Often, what we think is happening now is the slow moving changes that started a long time back, so a long-term view is essential to tackle the economic impact of ageing populations to address the future.

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The surprising impact of innovation on reducing climate change

New research by the Department of Management’s Dr Fred A. Yamoah and colleagues explores the relationship between innovation input, governance and carbon dioxide emissions.

Picture of a wind farm

There is no doubt that the humanitarian and economic impact of climate change is a matter for global concern. However, prior research tells us that it is emerging and developing economies that are likely to be hit hardest by the impact of global warming.

In their 2019 report, the Intergovernmental Panel on Climate Change (IPCC) found that emerging and developing economies, with their heavy reliance on agriculture, forestry and tourism, were more at risk from the adverse impact of climate change than more developed economies. Indeed, the IPCC found that every one-degree centigrade increase in temperature would lead to a 1.3% drop in economic growth in an emerging economy.

What role does innovation play in the fight against climate change?

Typically, the fate of countries in this position has been viewed somewhat fatalistically, with little known about what can be done to mitigate the damage caused by the poor climate choices of more developed countries. However, since innovative technologies are known to have a positive impact on climate change factors by conserving energy and reducing emissions, we wanted to know whether increased innovation input could support developing economies in the fight against climate change.

Our study involved an analysis of data from the World Bank database on 29 emerging countries over the period from 1990 to 2018. My colleagues Godfred Adjapong Afrifa, Gloria Appiah (both Kent Business School), Ishmael Tingbani (Bournemouth University) and I examined whether investment in cutting-edge technologies could help address climate change problems in emerging economies, and how this relationship is supported or mitigated by governance factors.

The impact of governance

Why is it important to consider governance alongside innovation and climate change? First of all, it is good for business: stakeholder theory tells us that organisations that please their stakeholders by following ethical norms of fairness, trustworthiness and respect are likely to see improved overall performance in the long term.

When it comes to climate change targets, governments and international governing bodies such as the EU or ECOWAS are among the most critical stakeholders, as they are more likely to take a long term view and possess the necessary regulatory powers to ensure best practices are upheld.

How innovation benefits emerging economies

The introduction of innovative technologies and practices can benefit emerging economies in a number of ways. For farmers, genetic technologies can develop resilient crops that adapt to environmental challenges in agriculture. New technologies also typically conserve energy and reduce harmful fuel emissions.

Looking at the data, our results suggest that emerging countries with high innovative competencies reduce climate change problems by approximately 26.8%, with a 10% increase in cutting-edge technology.

While these findings show the dramatic impact of innovation on mitigating the negative effects climate change, it is important to note that the positive results were moderated by governance factors, as the quality of governance influences countries’ investment in innovative technologies towards curbing environmental damage.

Contrary to the typically deterministic view of climate change, our results suggest that emerging economies’ innovation efforts could have a significant impact on national and global success in the fight against climate change.

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COVID-19 induced travel restrictions are not enough to mitigate crises like climate change. Could a circular economy be the answer?

Research by the Department of Management’s Dr Fred Yamoah and colleagues points to a new way to rebuild the global economy in the wake of the coronavirus pandemic.

Image of a reuse logo

There is no doubt that COVID-19 is first and foremost a human tragedy, resulting in a massive health crisis and huge economic loss.

While the impact on life as we know it has been unthinkable, a side effect of the way of life forced upon us by the pandemic is an unprecedented reduction in global carbon dioxide emissions, which are projected to decline by 8%. If achieved, this will be the most substantial reduction ever recorded, six times larger than the milestone reached during the 2009 financial crisis.

However, these changes should not be misconstrued as a climate triumph. They are not due to the right decisions from governments, but to a temporary status of lockdown that will not linger on forever; economies will need to rebuild, so we can expect a surge in emissions in the future. Indeed, the relatively modest reduction in emissions prompted by the COVID-19 pandemic has proven that zero-emissions cannot be attained based on reduced travel alone; structural changes in the economy will be needed to meet this target.

The case for a circular economy

Before coronavirus prompted this dramatic shift in our way of life, it seemed that the world had been waking up to the need for change to protect our environment. The linear model of our industrial economy – taking resources, making products from them and disposing of the product at the end of its life – jeopardizes the limits of our planet’s resource supply. Girling (2011) found that around 90% of the raw materials used in manufacturing become waste before the final product leaves the production plant, while 80% of products manufactured are disposed of within the first six months of their life. Similarly, Hoornweg and Bhada-Tata (2012) reported that around 1.3 billion tonnes of solid waste is generated by cities across the globe, which may grow to 2.2. billion tonnes by 2025.

Against this backdrop, the search for an industrial economic model that satisfies the multiple roles of decoupling economic growth from resource consumption, waste management and wealth creation, has heightened interests in concepts about circular economy.

What is circular economy?

Circular economy emphasises environmentally conscious manufacturing and product recovery, the avoidance of unintended ecological degradation and a shift in focus to a ‘cradle-to-cradle’ life cycle for products.

In our current situation, there has never been a better time to consider how the principles of circular economy could be translated into reality when the global economy begins to recover. Strategies to combat climate change could include:

  • material recirculation (more high-value recycling, less primary material production)
  • product material efficiency (improved production process, reuse of components and designing products with fewer materials)
  • circular business models (higher utilisation and longer lifetime of products through design for durability and disassembly, utilisation of long-lasting materials, improved maintenance and remanufacturing).

Building back better

A circular economy could also act as a vehicle for crafting more resilient economies. The pandemic has forced a rethink of the way our global economy operates, revealing the inability of the dominant economic model to respond to unplanned shocks and crises. The lockdown and border restrictions have reduced employment and heightened the risk of food insecurity for millions.

To prevent a repeat of the events of 2020, it is necessary to devise long-term risk-mitigation and sustainable fiscal thinking, moving away from the current focus on profits and disproportionate economic growth. Circular economy concerns optimised cycles: products are designed for longevity and optimised for a cycle of reuse that renders them easier to handle and transform. Future innovations under this model would focus on the general well-being of the populace, alongside boosting the market and competitiveness.

This economic model would also support the achievement of social inclusion objectives, for example by redistributing surplus food from the consumer goods supply chain to the local community.

The benefits of a circular economy are therefore obvious in that it strives for three wins in terms of social, environmental and economic impact. The pandemic has instigated a focus on the importance of local manufacturing for a resilient economy; fostered behavioural change in consumers; triggered the need for diversification and circularity of supply chains and evinced the power of public policy for tackling urgent socio-economic crises.

Governments are recognising the need for national-level circular economy policies in many aspects, such as:

  • reducing over-reliance on other manufacturing countries for essential goods
  • intensive research into bio-based materials for the development of biodegradable products
  • legal frameworks for local, regional and national authorities to promote green logistics and waste management regulations which incentivise local production and manufacturing
  • development of compact smart cities for effective mobility.

Post COVID-19 investments needed to accelerate towards more resilient, low carbon and circular economies should be integrated into the stimulus packages for economic recovery being promised by governments, since the shortcomings in the dominant linear economic model are now recognised and the gaps to be closed are known. The question is no longer should we build back better, but how.

This blog was adapted from T. Ibn-Mohammed, K.B. Mustapha, J. Godsell, Z. Adamu, K.A. Babatunde, D.D. Akintade, A. Acquaye, H. Fujii, M.M. Ndiaye, F.A. Yamoah, S.C.L. Koh, ‘A critical analysis of the impacts of COVID-19 on the global economy and ecosystems and opportunities for circular economy strategies’ in Resources, Conservation and Recycling, 164. Available at: https://doi.org/10.1016/j.resconrec.2020.105169

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Introducing the Centre for Innovation Management Research

The Centre for Innovation Management Research (CIMR) is one of Birkbeck’s inter-disciplinary research centres. Professor Helen Lawton-Smith, Director of CIMR, explains what it’s all about.

CIMR is an inclusive and impactful centre of research excellence in the field of innovation and entrepreneurship. Inclusivity comes from the engagement in all our activities of CIMR members, our academic colleagues in Birkbeck and in other universities, our diverse set of visiting fellows and alumni (professionals in a wide range of organisations) and our PhD students.

Impact comes from our research, publication and dissemination in societally important topics. Recent studies include analysis of strategies for knowledge exchange, of knowledge co-creation, of diversities of innovation (BAME and disabled groups), public policy on entrepreneurship and innovation in differing regional, national and international contexts and on. We’ve been awarded research grants by the ESRC, British Academy, European Commission and Innovate UK.

Our recent workshops have included: Accelerating SME Internationalization: Academic, Policy and Practitioner Perspective (March 2019); International perspectives on measuring and evaluating knowledge exchange (July 2019), Strategies for knowledge exchange in a changing higher education landscape, (September 2019).

We engage in national and international collaborations. In 2019, led by CIMR, the School of Business Economics and Informatics signed a Memorandum of Understanding with the Kogod School of Business, American University, Washington DC. CIMR colleagues work closely with scholars in the US and in mainland European countries including Sweden and Italy.

We publish in top international journals including Research Policy, Industry and Innovation, Technological Forecasting and Social Change, European Urban and Regional Studies, Entrepreneurship & Regional Development, Small Business Economics, and Regional Studies.

Our research insights feed directly into UK and international policy-making. We have informed practice in the Department for Business, Energy & Industrial Strategy, Innovate UK, European Commission and the OECD.

Our research and international collaborations feed directly into teaching on technology transfer, innovation and entrepreneurship and blockchain. Masters students are welcomed to CIMR events and to join our alumni – we look forward to meeting you.

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