A recent paper published by Nobel laureate Daron Acemoglu and MIT colleagues fits neatly into the tradition of counter-intuitive economics. It found that “lower birth rates are associated with higher growth in GDP per working-age adult across countries and higher wage growth across US commuting zones, with no negative impact on aggregate GDP or earnings.”
This seems a bit odd. Economists have long believed that slowing population growth is likely to depress economic growth. In ageing societies with growing numbers of retirees, we can assume a lower share of the population will be in work.
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The rate of human capital accumulation – a major driver of growth over the last century as more people (especially women) entered the labour market and many more young people completed secondary and tertiary education – is likely to slow. The demand for labour intensive personal services such as health and care will increase, tending to lower the aggregate rate of productivity growth.
But Acemoglu et al find that countries and regions with lower birth rates more than compensate for these negative impacts through “the endogenous, labour-saving response of technology to the scarcity of younger workers.”
They also find that “countries and regions with lower birth rates exhibit more labour-saving patents and growing high-tech activity.” Their conclusions are driven by “declines in younger population, rather than population size per se.”
Simply put, as populations age, firms have strong and growing incentives to invest in labour saving technologies and innovation more generally. The impact is sufficient to offset the growth dampening effects of societal ageing. Working age adults are more productive and aggregate growth does not suffer.
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This all sounds pretty optimistic. If true (and, economics being economics, the findings are bound to be contested sooner rather than later), does Scotland not need to worry about the impact of population on growth?
Steady on. There are very compelling reasons to be cautious. Yes, Scotland’s population is ageing – relatively quickly compared to some economies, relatively slowly compared to others – but our record of investing in new technology is poor. We face the downsides of an ageing population and might lack the primary mechanism for compensating for it.
Indeed, low investment is a major, long-standing structural problem in the Scottish economy. It is probably the single most important factor helping to explain our productivity deficit with better performing countries. It would be wrong to say this problem has been ignored but it hardly receives the political attention it warrants.
“Gross fixed capital formation” —investment in buildings, machinery, infrastructure, software, R&D, and other productive assets – was 18.6% of GDP in 2024. This represents a small increase on pre-pandemic levels but remains modest by international standards.
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Scottish Government data show investment has fluctuated between 16% and 19% of GDP over the last decade. By contrast, France, Sweden, and Denmark invested around 22-25% over the same period.
These are big differences. Matching the OECD average would imply spending roughly £7-8 billion more annually on investment in Scotland. Matching the Nordic economies would require around £12bn more.
Relatively weak business investment has been repeatedly identified by the Scottish Government, the enterprise networks, academics, and other stakeholders as a constraint on productivity growth. A recent benchmarking exercise by Scottish Enterprise concluded that Scotland has consistently ranked in the lower half of comparator OECD economies on business R&D and several other investment-related indicators.
Of course, persistently weak investment is a UK rather than a specifically Scottish problem. The reasons for structural under-investment are complex and contentious. The structure of the UK economy undoubtedly provides part of the explanation: the manufacturing sector, in which investment tends to be higher, is relatively small.
Many would also point to the endemic short-termism of both UK politics and financial markets. The UK’s model of shareholder capitalism – quite unique in European terms – has long been blamed for weak investment and the lack of patient capital flowing to growing firms.
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An intensely relaxed approach to firm ownership, weak corporate governance, lack of “blockholders” (investors with substantial shareholding held over the long-term), high shareholder turnover, and executive pay packages that incentivise short-termism all work against patient investment. A number of reviews (Kay Review 2012, Patient Capital Review 2017) have sought to address these problems but to little avail.
Others will invoke those reliable bogeymen of high taxes and over-regulation for the UK and Scotland’s structural investment problem. But low investment is a very longstanding issue and it is difficult to see how tax and regulation can explain poor performance relative to other countries.
The UK has long been one of the least stringently regulated product markets in the OECD. The labour market – contrary to much noise – remains relatively lightly regulated. Even if the Employment Bill is implemented in full, the UK would only move towards European norms.
There are no easy answers to the investment problem and there are no good grounds for believing that, in the context of the ageing population, Scotland will see growth in working-age GDP per capita, even if this has been shown to have occurred elsewhere.
Shifting more of national income from consumption to investment is one of the great political challenges of our time. It will require significantly higher public and private investment. UK corporate ownership and governance will have to be reformed.
Politicians will have to summon the courage and wit to persuade the public to forego jam today for a better country tomorrow. Expect a long and difficult journey.
Stephen Boyd is director of IPPR Scotland.