An Optimal Population for Australia

An address to a seminar organised by

the Economic Society of New South Wales
Reserve Bank, Sydney

17th April 2002
Executive Director, The Australia Institute


I don’t want to dwell on the economic arguments for population growth and higher
levels of immigration because I don’t believe the economics of the issue are very
important. Let me make just four points, then move on to my main areas of comment
– the environment and the implications of an ageing population.

Firstly, there is no correlation between population size and economic performance.
There are plenty of very small countries that do very well by any standard, including
northern European ones whose populations are stabilising. If we take the richest countries (by GDP per capita) and compare population with GDP per capita the
correlation coefficient is less than 0.1, and the rank correlation coefficient is negative.
Over the last 15 years Australia’s population has expanded by 22% while that of the
European Union has grown by only 4%. Yet growth of GDP per person has risen
faster in the EU than in Australia. In other words, size doesn’t matter.

Secondly, this crude association has received more sophisticated corroboration by the
work of Ian McDonald and Ross Guest on the implications of demographic change for
living standards. 2 In place of the vague assertions about higher population growth
making an economy more ‘dynamic’, Guest and McDonald show that demographic
factors are themselves unimportant and that a proper analysis must account for levels
of employment growth, consumption and investment and how these interact with the
age structure of a population. They conclude that differences in fertility and
immigration will have no appreciable effect on living standards by the middle of the
century and beyond and that, indeed, low fertility may even result in slightly higher
consumption per person. As the implications of it are absorbed, the work of
McDonald and Guest will transform the debate and get us to focus on the issues that

Thirdly, studies that examine the economic impact of immigration in isolation suggest
that there may be small net gains. But this depends on the type of immigrant (and the
economic circumstances at the time). Rich immigrants bring capital and, if it is
economic growth we are after, we would be advised to favour rich immigrants and
exclude others. Personally I would favour increasing our humanitarian program over

our economic program because while we have plenty of wealth in this country there is
a big deficit of compassion and fellow feeling.

Fourthly, even if immigration (and faster population growth) does increase the rate of
economic growth, I don’t believe that this will make us better off as a nation. The
assumption that making us materially richer will improve national or individual well-being cannot be sustained by the evidence. This is a big subject, but let me support my
claim with just two facts. In the USA, there is virtually no difference in reported life
satisfaction between people with incomes of US$20,000 and people with incomes of
US$80,000. Secondly, again in the USA where consistent surveys have been
conducted since 1946, real incomes have increased nearly four-fold since the late
forties, yet there has been no increase in reported levels of well-being. Indeed, the
proportion of Americans reporting themselves to be ‘very happy’ has declined from 35

per cent in 1957 to 30 per cent in 1988, while the percentage who said they agreed
with the statement that they are ‘pretty well satisfied with your financial situation’ fell
from 42 to 30 per cent. The story is the same in Australia. In short, as incomes rise,
income and economic factors become less important in welfare. This has been
described by the British economist Sir John Hicks as the ‘law of diminishing marginal

significance of economics’. (Those of you who are attracted to the environmental
Kuznets curve will recognise this idea).

Now I want to dwell on two major arguments − the environmental one and the issue of
population ageing.

Population and environment

Firstly, it’s worth pointing out the absurdity of suggestions that Australia could
expand its population to 50 million people by 2050. This would require the
construction of a city the size of Sydney every seven years and an annual immigration
rate of 450,000. This idea seems to be driven not by any understanding of demography
but by vague notions of Australia as a vast land of untapped opportunity. It is as if the
boosters have learned nothing from 20 years of national debate about the pressures on
Australia’s natural environment.

While I am speaking of unscientific arguments, I note that Glenn Withers has said if
we took the entire population of the world, formed them into families of four and gave
them a quarter-acre block then they would all fit into Queensland (The Australian, 25
March 2002). They would all fit into Antarctica as well; but they would not survive
for long, just as they would not survive for long squeezed into Queensland.

The relationship between population growth and environmental impact is a complex
one, and varies from environmental problem to environmental problem. For some
problems, such as rangeland degradation and logging of old-growth forests, the
relationship is weak (but not insignificant). For others it is very strong and direct. Here
I will comment on two of the latter type, greenhouse gas emissions and pressures on

coastal systems.

Greenhouse gas emissions

Population growth is directly related to the growth of greenhouse gas emissions. The
Australia Institute has conducted a systematic analysis of the implications of
population growth in Australia on emissions growth. 3First we carried out a
decomposition analysis to track the sources of growth in greenhouse gas emissions in OECD countries.4 In contrast to most other OECD countries, population growth in
Australia has in the past been one of main factors driving growth in emissions. The
effects of population growth and growth of income per person have not been offset by
increased use of non-fossil energy sources and greater energy efficiency.

We also examined the expected influence of population growth on growth of
emissions through to 2020 by adapting ABARE’s energy projections model to include
the explicit effect of population growth. Briefly, population is assumed to influence
activity in all sectors except mining and agriculture. Demand for the output of these
two sectors is assumed to be independent of Australia’s domestic population, although

this is not really the case. If the population grows, imports of consumer goods, and
capital goods used to make consumer goods, will grow and, unless we are to have a
continuously worsening trade deficit, we must increase exports.

Energy use in some other sectors – namely, the residential sector, passenger car
transport and air travel – is assumed to be directly related to population. Energy use in
other sectors – including the commercial and services sectors, construction, road
freight and rail transport – is assumed to be influenced by the impact of population
growth on GDP growth. Energy use in the manufacturing sector is divided between
export-driven and domestic output, the latter being influenced by population growth
via increasing consumption.

Depending on Australia’s population policy decisions, population growth is expected
to lead to total energy-related emissions of between 385 and 455 Mt CO2
by 2020.
These are 37% and 62% above the 1990 level of energy-related emissions,
respectively. The difference between the ABS’s high and low population growth
scenarios makes a very big difference in expected growth of emissions.

Looking at the results another way, we can say that each additional 70,000 immigrants
arriving annually from now on will lead to additional emissions of 20 Mt CO2 per year
by 2010, increasing to 30 Mt CO2 per year by 2020. How big is this? The additional
20 Mt CO2 per year by around 2010 can be compared with a reduction in emissions of
8-10 Mt CO2 per year by 2010 expected from the Government’s 2% renewables policy in the electricity sector. Roughly speaking, therefore, one might say that a decision to
adopt a policy of high rather than low immigration would require two or three 2%
renewables policies to offset the consequent increase in emissions.

In our study we also showed that, while difference between high and low immigration
scenarios is 70 Mt of greenhouse gas emissions in Australia’s by 2020, the world’s
greenhouse gas emissions would increase by less than half of this amount since
immigrants to Australia come from countries that have per capita emissions levels less
than half of Australia’s (around 42%).

It is often argued that we don’t have to worry about the effect of population growth on
emissions growth because we can cut our emissions by changing technologies and
pursuing energy efficiency. Indeed we can. But every small step in this direction has
proven very difficult politically. We know how hard it was to get the 2% renewable
energy policy up, a tiny first step made in the teeth of resistance from the fossil fuel

lobby. It was, in fact, watered down so that it is more like a 0.5-1.0% policy. Any
increase in the current immigration intake will require more severe restrictions on the
economy to control emission-producing activities if Australia is to meet its
international targets.

It should be said that for business groups such as the BCA to call one day for much
faster population growth but to oppose measures to reduce our greenhouse gas
emissions the next is hypocritical. They can’t have it both ways. If the BCA wants
higher population growth then it should also be vigorously lobbying the Federal
Government to introduce a large carbon tax or equivalent to offset the impact.

Coastal pressures

Another major environmental stress for which population growth is directly
responsible is degradation of coastal ecosystems. These pressures are much more
difficult to measure than emissions of greenhouse gases, but the effects are plain to

Around 80 per cent of Australians live close to the coast and the trend to move closer
to the coast is continuing. The NSW Department of Planning has produced map
showing the population drift out of Sydney. The largest flow is to the north coast of NSW. The drift of residents out of Sydney is more than offset by new arrivals from
overseas who fill the gaps left. Or perhaps the decline in amenity due to the flow of

immigrants into Sydney is pushing established residents out.

This drift of population to the North Coast is the cause of a creeping environmental
crisis – one that local councils are struggling with. The new arrivals want land to
build on, roads to travel on, new water supplies and sewerage systems. Some of the
pressures are described in the recently released State of the Environment 2001 report5 – a rather cautious document that cannot be accused of exaggerating the problems. It

is guilty of under-statement if anything. Here are some observations from it.

“Where human settlement and land use is light, Australian coastal waters are
often in excellent condition.” (p. 45)

“Effects of human activity cause the loss or degradation of specific habitat
types, alter tidal water flows in wetlands and streams, cause erosion of beaches
and dunes, and degrade water quality through stormwater runoff, sewage and
litter. Developments may cause loss of familiar and loved landmarks and
seascapes, obliterating cultural heritage and changing land use patterns (eg.
subdivision of farmland for housing)” (p. 38).

The report notes that the condition of Australia’s 972 estuaries is deteriorating with
almost half degraded significantly. We are losing habitats for sea-birds and shore-birds. It sums up as follows:

“Overall, the quality of estuarine and coastal waters has not improved,
although there are some locations where signs are positive, for example around
Sydney’s beaches and parts of the Harbour. But these improvements have
required massive infrastructure investments …” (p. 40)

In other words, state and local governments up and down the coasts of Australia are
engaged in a relentless battle to protect the environment from the effects of human settlement as more and more Australians decide that they want to live near the sea. Every year thousands of planning decisions affect the natural environment. Population
growth is directly related to these pressures. Of course, it is possible, through the

diversion of resources, to protect against some of the impacts; but it is expensive, and
it will increasingly require restrictions on how people can live near the coast.

Under current pressures, and even more so if population growth is faster, we can
expect to see a proliferation of medium and high-density residential and commercial
developments in coastal towns and cities as space runs out. Yet it is above all to find
more space that people move to the coasts. Space is what people leave the cities in
search of and it is what tourists come to Australia to enjoy. According to recent

polling, people are increasingly resentful at overdevelopment and overcrowding
(Sydney Morning Herald 25 March 2002). It seems bizarre to throw away the very
features of Australia that define us so uniquely.

An environmental trade-off?

Perhaps it is possible to achieve sustainable population growth in Australia. Perhaps
environment groups could strike a deal with the government by agreeing to support
higher population growth in exchange for measures to eliminate the environment
effects. What would it take to protect environment from effects of faster population
growth? Here is an initial list.

1. The Government would need to agree immediately to ratify the Kyoto Protocol
and go well beyond the limits embodied in it.

2. There would need to be an enforceable Federal-State plan to restrict the
settlements that jeopardise coastal ecosystems, including land from the coast to the
Great Divide. This would cover urban and rural developments, roads, water
diversions, sewerage systems and waste disposal.

3. Serious measures would need to be taken to solve the problems of urban transport,
problems too numerous to list.

Could such a trade-off work? I question to political feasibility of it, simply because of
the time-frames involved.

Population ageing

It is often said that Australia needs to increase its rate of population growth in order to
stave off the ageing of the population. It has become accepted wisdom that an ageing
demographic structure will carry all sorts of problems and must be avoided at all
costs. The work of Guest and McDonald shows that there is no issue with respect to
living standards. Moreover, if we take this argument seriously, then the population of

the earth, and every country in it, must grow forever, because stabilisation of
populations always means older age structures. Does anyone argue that we must grow
forever? Does anyone believe that the earth’s population could pass, say, 100 billion,
and Australia’s could pass, say, 300 million? If not then we must have an ageing
population sooner or later.

In fact, there is no looming crisis of ageing in Australia, as work by Pamela Kinnear of
the Australia Institute has demonstrated convincingly.6 Her paper shows that the
expected costs of retirement incomes and healthcare for the elderly have been
exaggerated, and that popular solutions to the perceived problem of ageing, such as
slashing public expenditure and increasing immigration, are misplaced.

She deals with the three main assumptions on which the ‘ageing crisis’ is based are
finds them flawed.

Firstly, older people are not a social and economic burden. The vast majority of older
Australians enjoy healthy, active and independent lives, with 93 per cent living in
private homes and only 7 per cent in residential care. Many make significant financial
contributions to their families and participate in voluntary community activities.

Secondly, on the question of pension costs, Australia is particularly well placed to
cope, a fact well recognised both within Australia and overseas. Official projections
of expenditure on pensions indicate that over the next 50 years, pensions expenditure
will grow by only 1.5 percentage points – from the current 3% of GDP to 4.5% – well
below that expected for other countries. This is due to Australia’s unique flat-rate,

means-tested, non-contributory pensions system. The OECD recognises that Australia
is very well placed to manage these fiscal effects of population ageing, and the current
Federal Government also accepts that there is no need for alarm in this area.

Thirdly, concern about a future ‘dependency ratio’ imbalance is misplaced (once again
Guest and McDonald have also dealt with this). A simple dependency ratio divides the
working age population by the non-working age population and comes up with
apparently alarming figures. But these ratios are very misleading and do not measure
levels of dependency accurately. But by falsely equating dependency with age the

standard measure reflects the stereotype of ageing. It ignores the fact that many older
people are wholly independent and contribute substantially to society and the
economy. Many families of working age are in fact dependent on parents and
grandparents for financial support and assistance with childcare. It also ignores the
fact that many younger people are dependent for reasons of study, unemployment, sole
parenthood and a range of other factors.

Cross-country comparisons reveal that the size of the aged population does not
necessarily impose a disproportionate burden on taxpayers. Although there is a clear
relationship between ageing and costs of pensions, analysis does not show a
corresponding relationship between ageing and total social costs.

High health costs are not determined so much by age, that is, time from birth, as by
the time from death. High health costs are experienced in the few years prior to death.
Rising health costs are caused mainly by factors other than ageing such as the growth
of medical technology, expensive pharmaceuticals, rising consumer demand and
escalating prices. Over the period 1983 to 1995, Australia’s expenditure on health

grew by 2.8 per cent but only 0.6 per cent of this growth (around one fifth) was
attributable to ageing. Of course, there will be some increases in costs due to the
increase in absolute numbers of people in this category, but focusing on population
ageing as the cause of rising health costs diverts attention from factors that are more

On the question of ageing and immigration, the research indicates that immigration is
a highly inefficient method of increasing the size of the working population. Feasible
increases in the immigration program would have virtually no effect on population
ageing, simply because immigrants grow old too. Research has shown that migration
levels at around current levels would slow population ageing, but higher levels will
have very little impact.

Not only will ageing not be the cause of substantial problems, but there are major
social benefits from an ageing population. We are likely to overcome the strange fear
of ageing that pervades society. Ageing is associated with decline, decay, inactivity
and loss of dynamism and reflects the perverse emphasis on youth culture. In my view
we have too much youthful impetuosity and not enough wisdom. More concretely, in

an older society we are likely to have less drug addiction, less road rage, and less
testosterone generally. We will have more voluntary work in the community.

We will also have less crime, especially violent crime. According to criminologist John Walker, the age profiles of people arrested are remarkably stable over time and demographic changes are the ‘driving force’ behind changing patterns of offending.
Young people are responsible for a hugely disproportionate rate of criminal activity
and the declining share of younger people in an ageing population will mean fewer
assaults, robberies, unlawful entries and vehicle thefts. Homicides are much more
likely to be committed by people between the ages of 16 and 29 than older people. We
estimate that the homicide rate will fall by around 16% between now and 2050 (from
1.82 to 1.53 per 100,000) as a result of the ageing of the population.7 In 1999, two
thirds of all prisoners were aged less than 35 so the ageing of the population will mean

substantial savings in the costs of incarceration.8

There are all sorts of benefits that will arise from the ageing of the population that will
make Australia a safer, more relaxed place to live. Yet ageing is the result of slowing
population growth. Combined with the reduced stresses on the natural environment
that lower population growth will inevitably entail, and the fact that higher population
growth will bring no economic benefits, it is hard to draw any conclusion other than that it is time we embraced stability rather than more growth and pursued quality
instead of quantity.


1 Thanks are due to Hal Turton and Pamela Kinnear for assistance with some of the data and calculations used in this paper.

2 Ross Guest and Ian McDonald, ‘Would a decrease in fertility be a threat to living standards in Australia?’, Australian Economic Review, March 2002; Ross Guest and Ian McDonald, ‘Prospective demographic change and Australia’s policy agenda for the 21st century, Paper to Towards Opportunity and Prosperity, a conference organised by The Melbourne Institute, Melbourne, April 2002.

3 Hal Turton and Clive Hamilton, ‘Population Policy and Environmental Degradation: Sources and Trends in Greenhouse Gas Emissions’, People and Place, Vol. 7, No. 4 (1999)

4 Clive Hamilton and Hal Turton, ‘Determinants of Emissions Growth in OECD Countries’, Energy

5 Australian State of the Environment Committee, State of the Environment 2001 (Environment Australia, 2001), p. 45

6 Pamela Kinnear, Population Ageing – Crisis or Transition, Discussion Paper Number 45, The Australia Institute, 2001.

7 Using the ABS’s Series III population projection i.e. assuming a fertility rate of 1.6 births per woman and net immigration of 70,000. Series I population growth (fertility rate 1.75 and immigration 90,000) would see the homicide rate fall to 1.56, a 14% decline. Sources: ABS, Population Projections 1997 to 2051 (Cat. No. 3222.0) 1998; Australian Institute of Criminology, Australian Crime: Facts and figures 2001 (AIC, Canberra, 2002)

8 AIC 2002, ibid., p. 79


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