Hamish McRae: Demographic change means we must all prepare for a very different world

Economic view

It is not just about pensions; it is also about culture and power.

One of the encouraging aspects of recent months is that the importance of demographic change is now being widely appreciated by national authorities. They may not have started to do much about it but the deteriorating state of public finances everywhere (and especially in Britain) has forced governments to acknowledge that quite aside from the cyclical hit from recession and banking bail-outs there is the secular deterioration as a consequence of ageing populations. Both have to be fixed.

The pensions aspect was discussed last week in a paper by the OECD, Pensions at a Glance. It was a pretty penetrating glance. The central message is that governments will have to promote private pension reform, making them more affordable, accessible and efficient. Regulation would be part of it too. It is very much in the self-interest of governments to move fast. As Angel Gurria, the OECD's Secretary-General, put it: "Reforming pension systems now, to make them both affordable and strong enough to provide protection against market swings, will save governments a lot of financial and political pain in the future."

With pensions, however, at least we all know what the issues are. With culture and power, we have hardly begun to think through the consequences of a world where citizens of the present developed nations have become a tiny minority of the world's population. This shift of power is discussed in two other papers just out. One is part of the regular weekly notes from Goldman Sachs. The other is a more substantial booklet by Richard Ehrman, published by Policy Exchange and the University of Buckingham Press and called The Power of Numbers – why Europe needs to get younger.

Goldman focuses on four trends that will shape this century: the recovery in birth rates in advanced economies, baby-boomer retirement, the rebalancing of global population, and the development of multicultural societies. The first of these is also discussed in the Policy Exchange paper.

The message here is straightforward enough. Some developed countries, especially the US but also the UK and France, are pretty much up to replacement rate, but other nations, including Japan, Germany, Italy and Spain have very low birth rates. One consequence is that there will be a big power shift within the developed world, with the US (thanks also to immigration) and to a lesser extent the UK still gaining, whereas other countries will lose population. The UK is projected to become the largest European nation by population, passing Germany.

The more remarkable consequence, though, is the rebalancing of global population. Europe goes from having about 22 per cent of the world's population in 1950 to only about 7 per cent in 2050. We think of a world where population power is shifting towards China and that is partly true. But in the longer term (and particularly as the one-child policy changes China) power will shift to India and Africa.

That raises at least two further issues. How will environmental and health concerns be affected by this shift, or, how might this massive growth of population affect the environment and the health outcomes for these regions? And how might the greater weight these regions will have in the world economy affect social and economic attitudes? The Goldman paper holds out the tantalising possibility that Africa will improve its governance and hence its productivity and become an engine of growth for the world economy. But it warns that if Africa fails to do so, there might be severe humanitarian consequences. It says: "One way or another, events in Africa will matter much more in the future. Demographics will see to that."

A word about the two other issues in the paper. As far as the impact of baby-boomers retiring is concerned, the worry is that they will place an impossible burden on the smaller numbers of working people. That is right for most European countries, but, on the US, Goldman is more optimistic. There has been a strong rise in the number of older people staying in work. Despite the recession, employment among over-55s is rising.

If that is a surprise, try this: You might think that as retirees start to draw down their pensions this would have a negative impact on share prices. Well, that ain't necessarily so. Goldman plots the numbers of people in the prime savings age, 40-65, against share prices. It does peak next year and you might think that would have negative implications, but it declines only slowly. In any case, the paper cites other reasons to think that shares may not be too affected, including that many retirees want to pass on assets to their children.

It would be naive to make too much of the connection between demography and share prices. What is surely indubitable, though, is the fact that countries will become more multicultural as a result of these trends.

In the US and Canada, inward migration is the prime reason population is projected to rise to 400 million in the next 40 years, while in Europe there will be even greater pressures than those already evident. It is hard to stop such migration. Even in the US, which has increasingly stringent border controls, about 30 per cent of the foreign-born population is undocumented. That puts a huge onus on recipient countries to make sure immigrant students get the best education and training possible. They have to, if countries are to get the maximum benefit from inward migration.

That leads to some of the conclusions of The Power of Numbers paper. It looks at the issue from a UK policy perspective and makes half a dozen recommendations, starting with the point that the Government should acknowledge that mass immigration will not solve our ageing problems. It thinks Britain should have a population strategy, and that there should be a Royal Commission on Population. We should raise the retirement age more quickly. We should educate people about the consequences of ageing. And we should prepare for the consequences of the global shift of population and the power that goes with it.

I suppose the main thing I would add to that list is that we need to think about the social consequences of becoming an older society. Yes, we must do the mechanical things, including fixing pensions, increasing the retirement age and so on. And we have to recognise the rights of existing citizens, including recent immigrants. But we also have to accept that an older society will have older values. The grey vote and the grey pound will matter more and more. Fads and fashion will matter less and less. I am not suggesting a reversal of the social trends that have governed so much of the post-war period, just a tempering of them. And if that means there will be less bad language on the BBC, then so be it.

Never mind Auntie's expenses – the BBC faces much bigger problems

It was intriguing to see the attacks on BBC executive expenses last week. To anyone in the print media, battered as it is by recession and the shift of advertising revenue to the web, the expenses seemed a bit bull market – the sort of thing that newspapers did when the revenues flowed. But they were not outrageous, just insensitive. The BBC, after all, runs one of the world's great news-gathering operations, and some of its services, including Radio 4 and its website, are without doubt world-class.

What troubles me is that opprobrium should land on the corporation as a result of a relatively small issue, when there is a much bigger one that needs scrutiny. This is its protected status resulting from guaranteed income taken from people with all the force of the law: the licence fee. I should admit that I have stopped paying it. I used to pay – even though we don't have any televisions – because I admire the institution. But after the incident with those comedians last year I reckoned they could do without it.

However, irrespective of what individuals do, the licence fee looks increasingly out of kilter. There is a strong case for public broadcasting and the BBC is a star in the UK's global intellectual footprint. But are the public service and entertainment divisions a natural fit? No. A management good at world newsgathering is not going to be good at hiring comedians – as we have seen.

In any case, a management that does not have to worry about revenue is bound to become complacent, even arrogant. That is not a charge against Mark Thompson, whom I know slightly and admire. It is simply to say that the BBC in its present form is hard to run effectively. So there is a managerial case for a split. You would keep news and current affairs and some other functions in-house and fund them with a much smaller licence fee. And you would spin off the entertainment end. It is so obvious. If you were to start a national broadcasting operation now, it would not have its present cumbersome form. So why not change it?

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