ANALYSIS: The fallacy that higher population growth implies a higher GDP growth rate

Economic flat-earthers try to explain away the acceleration in Malta’s GDP growth observed in recent years by saying that it is driven by population growth. The simplistic argument is that the government contrived to import huge amounts of foreigners who then boosted the size of the country’s economy.

No one denies that since 2013 Malta has had a higher rate of GDP growth and a higher population growth. However, a basic tenet of statistical analysis is that correlation is not causation. Two things might be happening at the same time, but that does not mean that one causes the other. To establish causation, one needs to conduct advanced statistical analysis, besides having a solid theoretical framework to justify such causation. Spurious correlation can be found among innumerable pairs of variables. Let’s throw in a few examples:

US Government spending on science correlates perfectly with the number of suicides by hanging. Similarly, the time series of the number of Americans who drown in swimming pools has a very high degree of correlation with the amount of power generated by US nuclear power plants. Clearly, however there is no direct or indirect relationship between these data pairs.

To demonstrate the fallacy of the theory that higher population growth implies higher GDP growth one can look at evidence from around the world. If GDP growth is plotted against population growth for all countries across the globe, one finds no evidence whatsoever of a link. To give an example, the country with the worst population change, Moldova, which registered a decline of 1.8% of its population, experienced GDP growth of 3.6%. The country with the largest population growth, Bahrain, at 4.6%, saw its GDP rise by 1.8%, or by half as much as Moldova. More broadly, World Bank data shows that the region with the highest population growth, Sub-Saharan Africa, had half the GDP growth of East Asian countries even though the latter had population growth one fifth that of the African nations.

Now, let’s focus on Malta. Plotting population growth against GDP growth for the period 1961 to 2019 shows the same lack of statistical relationship. The highest GDP growth ever recorded during this period was in the mid-1970s, when GDP rose by nearly 50%, and our population rose by 2%. By comparison, in the mid-2000s, our population also grew by 2%, but GDP rose by less than a third than in the mid-1970s. In the late 1960s we lost 5% of our population to emigration and yet GDP grew on average by more than 8%. In the early 1970s Malta’s population was stable, but GDP growth still averaged 8% per annum.

Another way to understand the fallacy of thinking that higher population growth leads to a faster economic expansion is by looking at regional GDP and population trends. Since 2013, Malta’s GDP has risen by 83% while the size of the population on the main island grew by 23%. In Gozo, during the same period, population growth was limited to 10%. According to this logic, one would guess that Gozo’s economy would have grown by half Malta’s rate. Well, Gozo’s economy grew by 84%, or slightly more than the Maltese economy, even though its population rate was half as strong. 

The feat of doubling a nation’s GDP in less than two legislatures requires a much more complex explanation than the puerile argument that it is due to a higher population. For one thing, Eurostat data indicates that the growth in GDP was much more pronounced than that in the population. So much so that from having a GDP per head which was 87% of the EU average in 2012, by 2017, Malta had reached the EU average.

Malta’s economic turnaround is the reflection of several important structural changes. Energy sector reforms made Maltese businesses much more competitive, while the increased purchasing power of households resulting from lower utility bills fuelled consumption. Active labour market and social security reforms, including free childcare and tapering, raised the participation rate of women greatly bringing it to reach the EU average in a few years. Appropriate fiscal management allowed the Government to lower the tax burden and keep administrative prices contained, boosting concurrently external competitiveness and domestic purchasing power, hence buoying up both exports and private consumption. Increased public investment boosted productivity, while higher education spending helped to upskill the workforce and alleviate skills shortages. A vigorous push to attract foreign direct investment and to sustain local investment in a wide range of sectors led to a quadrupling of the number of new firms being set up every year. 

Given Malta’s demography, the doubling of the economy raised demand for labour beyond the domestic labour supply. As a result, firms had to resort to employing foreign workers. While the availability of foreign labour inevitably helped firms to satisfy demand and expand, to argue that the process of recruiting from abroad was the underlying cause of business expansion is preposterous. It is the equivalent to arguing that by purchasing trousers that are two sizes larger, one’s belly automatically widens.