Population Problem – Part 2 – Who can cope with growth?
In the last piece we highlighted which countries in the world will be growing fastest. We now endeavour to answer the question, which countries can cope with this population growth?
We looked at the Top 75 countries in terms of population growth from now to 2050 and 2100. These countries were then filtered to include only countries that would be considered Frontier Markets, or early Emerging Markets countries. All countries which lacked a basic stock exchange were removed. However, this list will be reviewed periodically, and countries will be added as they become more accessible.
In order to conduct our analysis, we identified factors which we believe are integral to the success of a country. While many countries have succeeded with a significant weakness in one or more of these factors, it is very rare for a country to succeed without any of these factors. The factors we looked at were the following:
- A 20% weighting was assigned to the growth rate of countries’ population under 40, between 2012 and 2050. This demographic would ideally have the impact on the country in question that the ‘baby boomer’ generation had on the United States and Western Europe.
- A 10% weighting was assigned to the absolute level of the population in 2012. Any country with a high base, in terms of population is better situated to grow.
- One surprising result was that Indonesia will lose 17% of its population that is under 40 by 2050, negating the bonus it get from its large population. That is a monumental shift for one of the world’s most populace countries. India also surprised us, with only 1% growth in its population below 40. On the opposite end of the spectrum the United States is expected to increase its population under 40 by 21% by 2050.
2. Education (25%)
- Education was measured using two factors: People per University (PpU) (15%), and Literacy Rate (10%)
- People per University (PpU) (15%):
- This is our own metric, which measures how many people there are per university. This metric has its shortcomings, as it does not account for the size of each university, however, it does produce results that we believe are useful.
- The United States has the highest concentration of universities of the countries we analyzed (101 PpU), followed closely by France (108 PpU). Some countries which surprised us were Jordan (171 PpU), Colombia (164 PpU), and Mongolia (130 PpU).
- On the opposite end of the spectrum, certain countries are so lacking in these institutions, that it will take a long period of time for them to be well-positioned for economic growth. Niger had a PpU of 8,335 and Guinea had a PpU of 10,525, far beyond the minimum threshold of 3,000 that we had set.
- Literacy Rate (10%):
- We believe that the ability to read and write is critical to the development of a modern economy. While countries with low literacy rates can and will grow, we suspect that they will be unable to leverage their population within the next 40 years, relative to those countries that have higher literacy rates.
- The majority of former communist countries have high literacy rates but low to negative rates of population growth. However, Kazakhstan and Kyrgyzstan shined with 99% literacy rates and population growth that would support strong economic growth.
- A country that was compelling in all respects but literacy was Chad, which has a literacy rate of 34% and very poor academic institutions. It is for this reason alone, that Chad did not make the final cut.
3. Business Environment (25%):
- The quality of the business environment in each country was judged using two existing studies: the Ease of Doing Business (15%) and the Corruption Perception Index (10%)
- Ease of Doing Business Score (15% weighting): This is compiled by the International Finance Corporation and the World Bank. Many countries are struggling economically, but have introduced initiatives to make it easier to conduct business in the country.
- A good example would be Rwanda which ranks 45 or Peru which ranks 41.
- Corruption perception index (10% weighting): Here we used Transparency International’s index and incorporated the scores in our own ranking. Some corruption is unavoidable in Frontier Market countries. However, there is a level where corruption is not merely an encumbrance but in fact a detractor of growth.
4. Political Environment (10%):
- Democracy Index (10% weighting): This is a very controversial measure. It is tabulated by the Economist and measures the degree of democracy in the country. While many countries such as those of the Persian Gulf or Singapore have achieved a high degree of wealth within Authoritarian regimes; a healthy democracy is highly correlated with affluence. It also mitigates the risk of upheaval, as was seen in Tunisia and Egypt in the Arab Spring, despite robust economic growth.
- As would be expected, Western democracies tend to score higher. A strong score is anything above 7 on the index. Some surprised were found in Jordan (4.5), Rwanda (5), and Kuwait (4.7). Disappointments were Equatorial Guinea (1.9), Angola (2.0), and Iraq (1.8).
5. Poverty Rate (5%):
- A lower poverty rate is of course better, but it also means less opportunity for growth. If poverty is crippling (in the case of Liberia, a 95% poverty rate), then the opportunities to profit by investing in this market will be constrained for a long time. Higher poverty also leads to less desirable population growth. “Poverty” has been defined here to mean a daily income of less than $2 USD per day.
- The Middle East surprised us here. Recent political issues notwithstanding, the region still holds tremendous potential. Despite relatively low GDPs per capita, Palestine, Egypt, and Syria exhibited very low poverty rates (26%, 15%, and 17% respectively). This means that all three countries have a robust middle class with a high literacy rate that will enable the economy to grow rapidly; if provided with the right environment.
6. Doctors per Capita (5%):
- Having enough doctors and adequate access to healthcare is necessary to prevent high levels of infant mortality, and to ensure that population is healthy enough to be productive. A low level of ‘Doctors per capita’ indicates inadequate institutions to train doctors and the likely presence of several life-threatening epidemics. This not only impacts the economy but also the psyche of the populace.
- There were some notable surprises in the ‘Doctors per Capita’ metric. Given its sparse population and low GDP per capita, we expected Mongolia to have a low level of doctors, but Mongolia has 2.6 doctors per 1,000 people. For reference, this rate is higher than Canada and the United Kingdom. Similarly, Argentina had 3.1 doctors per 1,000 people and Kazakhstan had 3.5 doctors per 1,000 people (one of the highest rates in the world).
- Some notable disappointments were Congo with only 0.2 doctors per capita despite a GDP per capita of 3,714 which would give it a normalized level of 0.8 doctors per capita.
Other factors which we looked at, but were not directly inputted into our scoring were the Credit rating of the country and its GDP per capita. It is important to note that as investors we are more concerned with the nominal GDP, as opposed to the Purchasing Power Parity (PPP) GDP. The reason is that we analyze everything back in USD.
The results of this are what we will call the Shalifay Investment Frontier 30 (SIF30). 30 countries which we believe will grow faster and provide better returns to investors over the next 40 years. These countries are:
|Saudi Arabia||Middle East|
|Papua New Guinea||Oceania|
- Cambodia has a number of positive features that make it attractive as an investment destination. However, given the theme of this piece, it simply didn’t pass the muster as far as population growth was concerned. Its population will top in approximately 2050 at 19mm and then decline to 18mm by 2100. The absolute level of growth and the percentage growth are not attractive enough for it to be placed in the index.
- Myanmar’s population will only grow 16% between now and 2050. Between 2050 and 2100 it will only grow 4%. It is possible however, that given recent liberalizations and the gradual opening of the economy that birth rates could spike. If this happens we will revisit the inclusion of Myanmar. We visited the country in 2007 and were left enamoured.
- Vietnam will only grow 20% between now and 2050 and the share of the population that is below 40 will fall drastically.
- Thailand’s population will actually decline 10% between 2050 and 2100.
- Bangladesh will grow at a strong pace until 2050, but between 2050 and 2100 it will only grow 13%. Furthermore, the country was debilitated by low literacy rates, high corruption, a lack of institutions, and unattractive age demographics. However, this is another country which we would country to monitor due to its sheer size.
- Morocco is expected to have population growth of 24% between now and 2050, and the population will then decline 10% between 2050 and 2100. Furthermore, the cities in Morocco have been able to develop, but rural areas have an astoundingly low literacy rate and high poverty rate. Growth in the country has been very uneven and limits its attractiveness.
- Algeria is a very similar situation to Morocco. However, the factor which could change our assessment of Algeria is how successful they are at converting natural resource revenues to long-term economic growth.
- Democratic Republic of Congo is very attractive; it lacks a stock market at present though. As soon as the Democratic Republic of Congo has an investable market, it will be included in our list.
- Venezuela and Colombia were both very close to making our list. While both do not have torrid population growth, it is healthy and the economies, people, and institutions are well situated to capture economic growth.
- However, Colombia with its drug issue and Venezuela with the political risk of Hugo Chavez were not included. While we have included countries that have significantly worse political regimes, they are found in countries with institutions that are so weak, that an investor may be able to find alternative way of securing their investment. However, in the case of both Colombia and Venezuela, the government institutions are very strong.
In the next piece we will look at the market size of these economies, the nature of their stock markets, and how our index will be composed. If you have any feedback, please do let us know.