This time last year I wrote a column to celebrate the decline of the Japanese population. I wanted to debunk the idea that countries with falling numbers of inhabitants were heading inexorably towards social and fiscal disaster or even extinction.

A year on, there are encouraging signs of a change in attitudes. In particular, economists are increasingly challenging the myth that population growth is essential for economic growth. There have, of course, been setbacks on the road to common sense. Jim Rogers, who founded the Quantum fund with George Soros, continues to question the wisdom of long-term investment in Japan because “there will be no Japanese” if the scurrent low birth-rate is maintained – a very big “if”. International Monetary Fund economists and Indian government ministers persist in using the awful phrase “demographic dividend” to describe the alleged economic benefits of hundreds of millions of young people entering the workforce, even though these people are just as likely to be a social and fiscal burden in increasingly capital-intensive economies such as India.

The fundamental – and flawed – argument in favour of young and endlessly growing populations was best summed up by Richard Jackson, director of the global ageing initiative of the Center for Strategic and International Studies in Washington.

“Relatively faster growth in the US population will translate into relatively faster economic growth,” he asserted in a commentary to mark the day in October when the US population surpassed 300m. “This is not optimism, but simple arithmetic. Japan and many European countries face long-term stagnation or even decline in their real GDPs – and hence the aggregate economic and fiscal resources available to pursue future-oriented agendas, from investing in the young to investing in national defence.”

It is tempting to mock this as a pointlessly circular argument: more cannon fodder means more cannons, which means more need for cannon fodder. We should also ask why policymakers focus on absolute economic growth rather than the per capita income growth that would make more individuals better off.

Even if one accepts the economic need to boost a country’s workforce, increasing the entire local population is a crude way to do it. In Japan – where the population is shrinking, remember – the labour force has been rising this year as older people rejoin the workforce and more women take jobs. The truth is that nations with small, stagnant or falling populations can produce strong economic growth. If GDP growth depended purely on population increase, Africa, Latin America, Indonesia and the Philippines would be rich.

Sharmila Whelan, economist at investment bank CLSA, concludes in a recent report* on demographics and Japan’s economy that since the rise of Venice in the 11th century there has been little connection between economic growth and population size or increase. Innovation and specialisation are more important.

Even in China, where population growth has clearly played its part in increasing the absolute size of the economy, Goldman Sachs reckons that accumulation of human capital – essentially education – has contributed more to GDP growth than the growth of the labour force since economic reform began in 1979.

It could be argued that ageing populations will not be able to deliver the innovation needed for future economic success. Yet those who bemoan the cessation of population growth are thinking back-to-front. As people move to densely populated cities, enrich themselves and feel more secure, they tend to have fewer children. It is no coincidence that some of the richest and most crowded places on earth – Tokyo and Hong Kong, for instance – have some of the lowest birth rates.

The point is not that increased population creates wealth; it is that wealth creation leads ultimately to static or falling population. There is no reason to fight something that is both inevitable and good.

*Power without people: Rising to the challenge – CLSA, September 2006

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