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Aging Asia: Turning Demographic Weakness to Strength

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Pacific Money

Aging Asia: Turning Demographic Weakness to Strength

Will developing Asia get old before it gets rich?

Aging Asia: Turning Demographic Weakness to Strength
Credit: Flickr/ timquijano

Asia’s changing demographics are expected to generate winners and losers across the region, with younger nations seen enjoying a demographic dividend while aging societies tackle the costs. Yet the future for East Asia’s ultra-aging societies might not be as bleak as feared, if policymakers can turn education, migration, and technology to their advantage.

Recent research by the International Monetary Fund (IMF) highlights the expected winners and losers from aging in the world’s fastest growing region. Japan, which saw its population shrink by a record 308,000 people in 2016, could see its annual gross domestic product (GDP) growth dragged down by 1 percentage point from 2020 to 2050, adding to the stress on public finances from rising health and welfare costs.

However, China, South Korea, Thailand, and Hong Kong are also all expected to suffer around a 0.5 percentage point annual decline over the same period, sparking concerns that emerging Asia will get old before it becomes rich.

China already has 200 million senior citizens, more than the European Union nations combined, with its working-aged population projected to fall by 170 million people over the next three decades.

Rapid aging is expected to hit GDP growth in China, Hong Kong, South Korea, and Thailand by 2020, and Singapore by 2025, well before China’s expected transition into high-income status in 2026 and Thailand after 2040, according to Standard Chartered.

Overall, Asian populations are expected to age at a faster pace than any other region in coming decades, with the elderly population projected to reach nearly 923 million by 2050, according to the Asian Development Bank.

Declining fertility, increased longevity, and falling mortality have combined to cause Asia’s rapid pace of aging, giving governments plenty of headaches.

“Institutional support is not yet in place to respond to the rapid rise in aging. Pension systems remain unsustainable despite recent policy reforms. China’s nationwide pension system may run a deficit as early as 2030; Thailand will likely run a deficit from 2041. By then, the pension systems in [South] Korea and Vietnam should also run small deficits,” Standard Chartered said.

However, Asia also has some expected demographic winners, where an expanding pool of younger workers is seen boosting growth. At the top of the list is the Philippines, which could enjoy a 1.5 annual average GDP gain over the period from 2020 to 2050.

Malaysia, Indonesia, and India are expected to enjoy around a 1 percent annual GDP gain over the same period, with immigrant-friendly Australia and New Zealand also benefiting along with Vietnam.

The IMF urges policymakers to pursue labor market reforms such as more flexible employment, encourage foreign workers, raise the female participation rate, and expand child-care facilities, to help mitigate the adverse effects of aging.

All such measures have been adopted in Japan, which despite officially not welcoming mass immigration has quietly grown its foreign resident population to 2.3 million. In 2016, the number of foreign residents increased by 150,000, helping to halve the overall population decline.

Aging: Don’t Worry?

Yet not all economists see aging as a major negative for modern society. In a June 26 report by ANZ Research, chief economist Richard Yetsenga argued that aging demographics “may not necessarily lead to slower growth or secular stagnation… A range of factors have led to reduced trend economic growth in many economies over the past decade, but in our view demographics is one of the least worrying.”

Yetsenga notes that the old-age dependency ratio, defined as those aged above 65 years as a share of those between 15 to 64, has steadily grown across the region. In Japan, the ratio has already reached 43.3 for every 100 people, with nearly 23 in Australia, 18 in South Korea, 16 in Singapore, and 13 in China.

“Conventional wisdom claims this is a problem. As a population ages, it is assumed there will be more ‘unproductive’ people (retirees) in the economy, supported by diminishing numbers of working people, leading to unsustainable pensions and buckling health care costs,” he said.

However, the economist questions this conclusion, suggesting that demographic forecasts can be wrong, such as the fall in U.S. births during the 1970s, which went against predictions. While the U.S. Census projected between 40 and 49 million births, the actual number was 33 million, due to factors including birth control and a rising marriage age.

Yetsenga also argues that demographic trends “aren’t static, they’re responsive.” For example, helped by “womenomics,” the female participation rate in Japan is now higher than in the United States. A renewed push by policymakers could create a second “demographic dividend” by adding 314 million extra employees to Asia’s labor force.

Japan also plans to raise the retirement age to 65 from 60, while Australia has debated increasing it to 70, adding more mature workers to the labor force who might otherwise have retired and started collecting pensions.

Yetsenga also suggests that technological innovations could boost growth, even in the most advanced aging societies. Based on an OECD study, “countries with aging populations are likely at the forefront of adopting robots… where capital is abundant and cheap labor scarce, technology can fill the gap and even lead to higher economic growth.”

The economist suggested government programs could aid workforce retraining, such as Singapore’s SkillsFuture program, which offers credit toward educational courses. According to Yetsenga, older workers have shown a clear preference for information technology courses, indicating that government programs can help mature workers adapt to a changing labor market and potentially extend their working careers.

Education is also seen as a potential savior for aging societies. A falling labor participation rate for young people is seen carrying a “silver lining” in countries such as Australia, where youth participation in full-time education recently reached a record high of 52 percent.

“This is another reminder that demographic change is manageable,” the economist said, suggesting that consumption by better-paid, more highly skilled workers could offset some of the drop from a declining population.

Finally, immigration is argued as another potential solution, given recent studies that suggest more than half of a person’s income is determined by where they live. As well as boosting the number of working people, migration can also increase the younger portion of the population, as seen recently with Japan’s increase in foreign workers that are younger than the general population.

“A modest temporary increase of immigration to Japan, of 4 people per 1,000 inhabitants over the course of 2020 and 2029, would see the number of live births be 6 percentage points higher by 2060,” Yetsenga said.

Asia-Pacific nations such as Australia, New Zealand, Hong Kong and Singapore are already seen using immigration as a means of not just replacing people, but also “injecting ideas and expertise to strategically boost sectors that are vital to a country’s future.”

For example, Yetsenga sees immigration helping Singapore increase innovation in such industries as aerospace, biomedical devices and digital animation, among others.

Traditional definitions of “working-age” may also be challenged in coming years. Yetsenga points to Germany; when over a century ago it first introduced pensions for workers aged over 70, life expectancy was just 45.

“There seems little doubt that scientific and sociological forces influence a country’s demographic and economic trajectory. Countries have powerful tools at their disposal – including education, pension, and migration policy – to influence outcomes. The future might well be less aged than you think,” he concludes.

With longer life expectancy projected in nations such as South Korea and Japan, Asia’s approach to aging could prove vital in turning a potential economic threat into a demographic dividend for all.