This is the twentieth edition of weekly recommendations. Watch this space for facts, news, trivia and research around the world. Topics range from economics, public policy and psychology to finance, society and current affairs. Access all weekly recommendations here.
Birth Rates Dwindled
Studies have shown that in the last two years, birth rates have declined across the world. The most important factor is the Covid pandemic. The World Economic Forum (WEF) writes, “Deciding to have a baby is contingent on being optimistic about the future – and optimism is difficult to muster during a global pandemic.”
The Brookings Institute estimates that 300,000 babies were not born in the US as a result of economic insecurity related to the pandemic. The report was published in December 2020.
There are arguments as to whether this is a short term phenomenon or a long-term correction. Some analysts say that usually when a couple defers a child, they are unlikely to give birth to it later. However, some do expect a short-lived baby boom sooner as the risks of the pandemic recedes.
Apart from health-related risks, closed borders have also resulted in a decline in birth rates. The WEF reports that in 2020, Australia recorded its first population decline since World War I, due to stricter COVID-related border controls.
In the book ‘Empty Planet’, the authors state that urbanisation has been the major force behind falling birth rates since the turn of the century. In 1960, one-third of humanity lived in a city. Today, it’s almost 60%. The WEF adds, “Many children on the farm means lots of free hands to do the work. Many children in the city means lots of mouths to feed. That’s why we do the economically rational thing when we move to the city: we have fewer kids.”
Some believe that less population growth could turn out to be good for the environment. However, the data do not tie up with such a trend.
Some say we must learn to curb our obsession with growth, become less consumer-obsessed, and learn to manage with a smaller population. That sounds very attractive. But who will buy the stuff you sell? Who will pay for your healthcare and pension when you get old?
Usually, the younger adults pay for the healthcare of older people. The Ecnmy article suggests, “Future societies may therefore have to raise taxes, or decrease government benefits, or raise the retirement age, or prioritise elderly healthiness, or come up with some other solution entirely.”
China’s Real Estate Problems
The construction sector contributes around 7% of GDP in China. Around 27% of bank loans pertain to property-related sectors.
It all started in the 90s when China’s property market expanded due to higher household savings. Real estate developers continued to construct properties at a very large scale but they relied more on bank loans for the same. They also resorted to offshore financing. To hide the debt pile on the balance sheet, many developers entered into joint ventures.
Regulators and local governments continued to directly or indirectly pump up real estate sectors. Governments allowed prices to move up to avoid any social disorder.
In 2016, China began cracking the corporate debt down. The Diplomat reports, “These firms had taken on large amounts of debt in order to help carry out government policies to stimulate the economy in the wake of the global financial crisis and slowing global growth.”
But these measures did not address the source of the problem – implicit government guarantees of state-owned entity (SOE) debt. The current real estate crackdown, which began last year and caused giant Evergrande to default, will also be in the same fashion. The government authorities will attack individual players rather than solve the core issue of over-reliance on construction to boost economic growth.
The article notes, “Allowing property price declines, reducing reliance on property construction as a source of GDP, and creating other investment outlets can help. In addition, in the long run, a much-anticipated property tax may help to better control speculative behaviour in the housing market.”
The Myth of the Marshall Plan
The second world war had devastated Germany’s economy. In 1939, Germany’s GDP was $400 billion. In terms of GDP, it ranked second, just behind the US. But by 1946, it had tumbled down to $160 billion. Within 10 years, it had surpassed $400 billion. How did this happen?
If one asks an American history student, it would say that it’s because of Marshall Plan. Most modern historians won’t attribute this success to Marshall Plan. But American politics wants everyone to believe that it was the Marshall Plan behind the Wirtschaftwunder. The propaganda has been carried out ever since.
A FEE article states, “Not only is it frequently brought up to justify the United States getting involved in foreign conflicts, but it simply gives support for central planning. Just look at the economic miracle the government was able to create with easy credit, they say.”
The article explains how the German economy transformed post-war, largely due to ordo-liberal policy from Chancellor of West Germany Ludwig Erhard. He was an economist by profession.
Erhard created Deutsche Mark, West Germany’s new currency, to stabilise the currency in circulation. Earlier, the money supply and inflation were so high that the public lost faith in the currency and had started using cigarettes and coffee as currencies. He decreased the money supply by 93% overnight.
He removed all price controls and lowered taxes from 85% to 18%. The US opposed some measures but Erhard went ahead with them anyway. The impact was immediate. Industrial output doubled within a year. Unemployment dropped from 10% to 1%.
The Marshall Plan, on the other hand, included $13 billion in aid to European nations. Germany received only $2 billion. In 1948 and 1949, the aid was at its peak. But even in those years, it contributed around 5% of GDP.
Read more on Marshall Plan – Wikipedia and Investopedia
Read more on Ludwig Erhard’s economic policy – Wikipedia, Institute of Economic Affairs and EconLib.
– Swapnil Karkare
