A number of emerging Asian countries enter a demographic dividend phase, associated with high savings, investments and growth. However, aging in Asia is occurring at a faster rate than has happened in the West—at much lower levels of income per capita. Developing mechanisms to cope with the greying process will be the biggest challenge for the region.
The rapid aging of society is widely recognised as one of the most daunting challenges facing developed economies. Much less attention has been paid to emerging Asia—commonly associated with youthful populations and favourable demographics.
However, the Asian Development Bank (ADB) has identified the rapid demographic shift to older populations as one of the largest medium-term structural challenges confronting developing Asia.
It goes without saying that Asian demographic trends are subject to considerable heterogeneity. Each country faces unique aging-related challenges. Notwithstanding the differences one crucial denominator is shared across the board: the pace at which the interplay between longevity and declining birthrates is affecting dependency ratios in Asian economies.
Fast Rate of Greying
Due to its very rapid economic growth, emerging Asia is compressing industrialisation and economic transformation into a much shorter period of time than advanced economies in the West did. Accordingly, the region is replicating the demographic transition of developed economies within a much shorter time span (though following the general historical pattern of countries growing older as they get richer).
George Magnus, economist and author of The Age of Aging, suggests in a recent article that the speed and scale of population aging in emerging Asia are unprecedented. While it has taken — or will take — roughly 20 years to double the proportion of people aged 60 or over from 7% to 15% in much of Asia, it took 60 to 100 years in the U.S. and Europe.
In contrast to emerging Asia, Western countries exhibited relatively high levels of income per capita and sophisticated social support systems by the time they began to age rapidly.
Implications for Economic Growth
Why should policymakers and investors even bother about aging and the its pace? The problem is not about longevity per se. It is about the simultaneous decline in fertility rates and the ensuing transformation of societal age structures. These affect a country’s economic performance because economic needs and contributions of individuals vary over the course of their economic lifecycles.
Working-age adults produce national output and directly contribute to economic growth by means of their labour (with labour productivity being highest between the ages of 35 and 55). Moreover, working-age individuals tend to save more, contributing indirectly to economic growth by boosting the investment rate.
In contrast, older citizens consume national output and depend on those of working age. As the old-age dependency ratio rises, economic growth will inevitably slide. Greying societies hence face the dual—and interrelated—challenge of sustaining economic growth while delivering old-age support.
Demographic Dividend Turning Into Demographic Tax
The link between demographics and economic growth is no one-way street. Economies across the region have witnessed a substantial lift from demography. Demographic dividends — characterised by falling child dependency, growing working-age population and moderate rise in old-age dependency—have contributed up to 2% to annual GDP growth, according to ADB estimates.
That said, demographic dividends are not a sure-fire way to success. The quality of domestic institutions and their ability to create jobs are vital to harnessing this dividend.
The transition to an older population in the foreseeable future will deprive the region of a main driver of its economic success. The demographic dividend that has been driving economic growth will transform into a demographic tax that will subtract from it.
The magnitude and timing of the transition from dividend to tax will differ from between economies. While demographic dividends are vanishing in China and Thailand today, Indonesia, Malaysia and Vietnam are anticipated to lose their dividends by the 2020s. India and the Philippines should be able to benefit from their youthful populations a little longer: possibly up till 2030.
In any case, the positive impact of demography on economic growth will weaken across the region even in youthful economies where the demographic dividend will persist for the time being. Anticipating the transition from demographic tailwinds to headwinds, the ADB urges countries to start preparing now.
Adjusting Policies and Expectations
Demographics are not fated and countries can develop coping mechanisms that facilitate a sustainable transition toward older societies. Such mechanisms include immigration and enhanced productivity. In addition, the participation of older people and women in the labour force needs to be encouraged.
Across emerging Asia, the retirement is still fairly low: 55 in Malaysia, Indonesia, India, and Thailand, 60 in China and Vietnam, 62 in Singapore and 65 in the Philippines. Against the background of increasing life expectancy, a rise in the legal retirement age can be a simple yet effective policy response.
With regard to female participation in the work force, some countries have considerable room for improvement. Rates are particularly low in Malaysia (40%) and India (30%). To avoid the mistake of curtailing fertility rates, however, policy reforms targeted at better childcare are vital.
Eventually, countries need to find meaningful and fair ways to transfer resources from the working population that generates savings to retirees with inadequate income to sustain their consumption.
Given the changes in traditional family-based support structures, the development of comprehensive public transfer schemes has to be a key policy priority. The ADB’s Social Protection Index reveals that welfare-state-building in emerging Asia is still nascent, requiring the devotion of substantive efforts and resources.
Longevity — though a blessing for individuals — can create real quandary for policymakers. However, it is not impossible for governments to find effective solutions. As demography is a telling indicator of future growth, investors are well advised to closely monitor the policy measures by governments to adapt to the greying process of societies. After all, the real danger is not slower growth but the expectation gap between attainable and wishful growth targets.
