Which emerging markets have the best demographic growth?

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Much of the investment case for emerging markets revolves around a topic I haven’t yet focused on closely in this newsletter: demographics.

An African Century?

In fact, much of the narrative around the “African Century” revolves around Africa’s breakneck demographic growth.

At around 1.5 billion souls today, the continent comprises a bit less than 20% of the global population.

But it is set to reach 2.5 billion by 2050 and 4 billion by 2100, increasing its global share to 40%.

Meanwhile, populations are rapidly aging across parts of Europe and East Asia, including in many advanced economies.

So it makes sense to channel capital from wealthy countries as investment to labor-abundant, capital-poor economies where that money has the potential to be used most productively.

Or at least this is the story that the IMF’s Managing Director, Kristalina Georgieva, has been selling.

Not so fast.

But here’s the catch. Over the past decades, the world has failed to galvanize enough investment from rich countries to poor.

Today, developing economies face a $4 trillion annual investment shortfall to achieve the United Nations’ Sustainable Development Goals.

What’s more, the road ahead appears rockier than in past years.

With right-wing populism on the march in many advanced and emerging market countries alike, rising geopolitical tensions, widespread sanctions, and the threat of further tariffs and geoeconomic fragmentation, the outlook is clouded, to say the least.

Indeed, in coming years, it will become harder for money, people, trade, and technology to flow across borders. Not easier.

Moreover, Africa’s demographics are actually quite terrible. Let me explain.

The demographic sweet spot

It’s true that population growth typically leads to economic growth.

Supply-side inputs to economic growth are labor, capital, and factors such as technology that affect productivity.

So it makes sense that more labor - i.e. more people - means more potential output.

Yet, in reality, demography is actually like Goldilocks: some population growth is good, but either too fast or too slow (or a decline) is bad.

The x-axes on the charts below both look at the projected percentage change in population by 2050 compared to 2022.

The y-axis shows something called the dependency ratio, which is the number of people under 20 or over 64 for every 100 people aged 20-64.

Because children depend on financially on working adults and because retired people often depend on state pensions, the idea behind the dependency ratio is that they are dependent on working-age people to keep the economy running.

So a low dependency ratio is desirable because it means a large share of the population is of working age and, well, working.

Demographically speaking, the sweet spot in these charts is the bottom right quadrant, where there is strong population growth but a low dependency ratio.

Many of the countries that are set to benefit from these demographic tailwinds are in fact emerging markets: India, Indonesia, Saudi Arabia, South Africa, Colombia, to name a few.

This demographic dividend unlocks all types of investment opportunities in such countries.

The danger of high dependency

In contrast, the top left quadrant features many countries in Europe and East Asia with low or negative projected population growth and high dependency ratios: the worst of both worlds, from an economic perspective.

Although this dataset doesn’t include many African countries, it’s safe to assume that most of them would be in the top-right quadrant, above and to the right of Israel.

Israel’s fertility rate is actually relatively modest: at 2.89 births per woman, it is above the replacement rate of 2.05, but not by a huge amount.

Africa’s average fertility rate is somewhere in the vicinity of 4.3, a truly staggering figure.

This makes it challenging for working-age people to support youth while also achieving the growth levels needed to increase GDP per capita.

So instead of betting on an “African Century”, focus instead on investment cases with a demographic advantage rather than a demographic hindrance.