Population and Economic Growth

Population Growth and Economic Development

Let's discuss population growth and economic development. Population growth can be a potential catalyst for economic development. Will a country with 100 people produce more goods than a country with 100,000 people? Of course not! A country with a larger population will have the potential to increase its output more than a country with a smaller population. But just because a country has a large population doesn't mean that it will automatically develop its economy.

Developing countries experiencing a sudden spike in population can be problematic for a variety of reasons. Developing countries do not have the infrastructure or human capital to keep up with a large influx of people — an increase in output is not guaranteed in this situation. Institutions are also not as well trusted by other countries which makes it hard to engage in trade in the first place. Developing countries will end up being strained to keep up with a growing population.

So what is the correct approach? Is population growth good or bad for economic development? It depends on many factors that make it impossible to give a conclusive answer. Some factors include the following: trust in institutions, human capital, and infrastructure. Overall, it is important to recognize that population growth can have different outcomes on economic development depending on the current state of the country.

Figure 1. Population growth in the United States, StudySmarter Originals. Source: The World Bank¹

The graph above shows the population growth in the United States from 1961-2020. As you can see, the United States has had volatile population growth for the past few decades. Sometimes it is steadily declining; sometimes it is steadily increasing; sometimes it rapidly shoots up or down.

Relationship between Population and Economic Growth

What is the relationship between population and economic growth? Does a larger population cause economic growth? Or does a country with economic growth cause its population to increase? We can see examples of economically prosperous countries with large populations, but how did they get there? Which concept causes the other? Let's go over examples of both phenomena to understand this relationship.

Population Growth Causes Economic Growth

How might a larger population cause economic growth? The easiest path to economic growth through the population is labor. More people in a country can lead to a larger workforce and easier access to labor. More labor will lead to more products being produced which will then cause economic growth. Population growth allows for the expansion of labor and products which then grows the economy.

It is not just about more products being made, there must also be demand for those products! With a larger population, there will inevitably be more demand for products. Since the supply of products is growing due to the increased labor, the increased demand will be addressed. Overall, the population growth caused economic growth with more people demanding and supplying products!

Economic Growth Causes Population Growth

If population growth certainly causes economic growth, then we would not see economically poor countries with large populations. Is it possible that, instead, economic growth leads to population growth?

It is entirely possible that economic growth entices people to move to economically prosperous countries for more opportunities. An economically prosperous country is likely to have more jobs and entrepreneurial opportunities for people. An economically prosperous country is also likely to have better infrastructure, such as roads and bridges, causing more interest in immigrating to the country.

Unfortunately, there is no clear answer to the relationship between population growth and economic growth. There are theories that predict how the relationship will play out, but no definitive answer to its outcome.

Positive Effects of Population Growth on Economic Development

Let's discuss the positive effects of population growth on economic development. What do more people in a country do for the economy? There are more buyers and sellers — this is pivotal for economic growth! More products can be made and purchased from a growing population.

Besides, that a growing population can provide a larger labor force, expand domestic markets, and act as a catalyst for innovation. Other potential benefits of population growth on economic development include:

• increased entrepreneurship,
• greater diversity and cultural richness,
• support for social security systems through an influx of younger workers,
• increased demand leading to economies of scale in production,
• infrastructure development driven by urbanization, larger political influence,
• increased potential for specialization and division of labor,
• faster diffusion of ideas and innovation,
• and a larger pool of talent

Larger Labor Force

A growing population increases the size of the labor force, providing more human capital which is a key component of economic growth. For instance, China's population growth during the late 20th century contributed to its phenomenal economic expansion. A larger labor force facilitated an increase in industrial production and enabled China to become the "world's factory."

Increased Demand

The demand for all goods will increase as a result of a growing population. Recall that a key component of Aggregate Demand is consumption — with a growing population, increased consumption is likely to occur. Since a growing population will also mean growing labor, the increased demand will be met with increased supply and economic growth will occur.

Catalyst of Innovation

Population growth can stimulate innovation and technological advancements. A larger population often creates a diverse range of needs and challenges that require innovative solutions. For example, Japan's ageing population has been a catalyst for advancements in robotics and automation technology.

Negative Effects of Population Growth on Economic Development

On the other hand, unchecked population growth can exert immense pressure on economic, social, and environmental resources. Negative effects of population growth on economic development may include overpopulation leading to resource depletion, increased social expenditure, and rising unemployment and poverty rates. In this section we will focus on these free major effects. Other possible drawbacks encompass:

• increased pressure on housing and infrastructure,
• potential for increased crime and social unrest,
• a higher risk of disease spread,
• potential food and water shortages,
• impacts, increased waste production and pollution,
• challenges in managing urbanization and ensuring adequate public services,
• potential increase in income inequality,
• difficulty in achieving universal education,
• and increased demand for energy resources contributing to global warming.

FIg. 2 - Bridges are part of the infrastructure that easily reach their capacity when population growth outpaces economic development

Overpopulation and Resource Depletion

Rapid population growth can lead to overpopulation, which puts a strain on natural resources and the environment. For example, deforestation in the Amazon rainforest, driven in part by population growth, has led to biodiversity loss and contributed to climate change, which poses significant challenges to sustainable economic development.

Increased Social Expenditure

A high population growth rate often requires increased social expenditure in education and healthcare, potentially diverting resources from other areas that could contribute to economic development. This effect can be seen in many developing countries, where high birth rates necessitate substantial investments in schooling, potentially limiting the resources available for investments in infrastructure or industrial development.

Unemployment and Poverty

If economic growth fails to keep pace with population growth, it can lead to higher unemployment rates and exacerbate poverty. For instance, in some regions of Sub-Saharan Africa, rapid population growth has outpaced economic development, leading to high unemployment rates and persistent poverty.

Population and Economic Growth in Developing Countries

Let's go over population growth and economic growth in developing countries. Developing countries typically have fragile infrastructure and low average per capita income. Therefore, population growth will not directly lead to economic growth. In fact, population growth will likely cause economic stagnation in developing countries.

Why might population growth be bad for developing countries? Without the proper institutions and infrastructure, developing countries cannot meet the demand of a growing population. For example, if there is an influx of demand for resources but no more supply of those resources, then the country will have to raise prices on the existing supply — leading to inflation. There will also be a scarcity of all resources, such as land, food, shelter, and clothing. Institutions and infrastructure designed to keep up with a growing population can get around these issues. However, developing countries are not in the position to maintain a growing population within their borders.