The current status of Asia’s young and old
Diverging demographics outlook promises heterogenous regional performance in the decades ahead.
Along with global output growth, Asia as a region has slowed in the past decade. While the 2008/09 global financial crisis and the subsequent rise in trade protectionism have played major roles in subtracting from economic activity, a broader, structural factor is at play. Many of Asia’s dynamic, fast growing economies of the past decades are slowing as they have begun to age, with the share of the economically inactive population rising as a share of those in the labor force.
For economies like Singapore, South Korea, or Japan, this is taking place at a time when they have already reached the high-income cohort, affording them with the wherewithal to deal with the associated headwinds. But for the likes of China and Thailand, the onset of aging has coincided with reaching only middle-income status. For a variety of reasons, aging before getting rich can be particularly challenging.
Although economies representing 1.8b Asians are past their demographic peak, another group of countries, representing an even larger population (around 2.1 billion) remain blessed by favorable demographic dynamics. Led by
India and Indonesia, and followed by Bangladesh, Myanmar, Pakistan, and the Philippines, these economies offer considerable potential in the form of a demographic tailwind. Indeed, the fact that some parts of Asia are aging and some parts will likely remain largely youthful offer intriguing recalibrations of growth and relocation of production in the coming decades, in our view.
Population dynamics is a critical factor in determining potential economic growth. A favorable proportion of working people over non-working ones means more income generation, higher tax collection, higher savings, lower cost of labor (and hence competitiveness), and more societal and fiscal affordability with respect to pension and healthcare costs. All of these trends can reverse as the population ages. Of course, a youthful population is not a guarantee for high growth, nor is aging destined to confine an economy to low growth. A poorly educated workforce and inadequate infrastructure can diminish the demographic dividend, while productivity enhancement through innovation and investment can keep growth going even in an aging society.
Asia’s working age population will grow by 317m, roughly in line with Africa’s, to 3.3b by 2030.
Abundant labor supply
Asia has impressive financial savings, sizable FX reserves, and vibrant markets, but its biggest asset is in fact its people. According to the United Nations, the region is home to 60% of the world’s population. Going forward, Asia will therefore continue to account for the bulk of global growth and demand. The region’s large population also ensures abundant labor supply, providing firms relative ease to expand capacity within the region. While the African continent is fast catching up, Asia
remains home to 6 for every 10 of the world’s workforce. Mediumvariant projections of the United Nations, which assume that fertility behavior evolves in line with historical trends, indicate that Asia’s working age population will grow by 317m, roughly in line with Africa’s, to 3.3b by 2030, whereas the rest of the world’s workforce is projected to remain stable. With continued labor force growth, increased labor competition could give way to technological advancements and innovations, breathing vitality to many of Asia’s economies.
In particular, emerging economies of India, Indonesia, and the Philippines, as well as the frontier markets of Bangladesh, Cambodia, Laos, Myanmar, and Pakistan-altogether comprising a population of around 2.1 billion, nearly half of Asia’s headcount--have the potential to achieve stronger economic growth going forward. Most of these economies can leverage on their large and youthful populations to stimulate domestic demand and lift output. In addition to a demographic tailwind, many of these economies have populations over 100m, a large enough scale to help support self-sustaining domestic demand. At a time when the global trade outlook has darkened, economies with large and young populations ought to be able to differentiate with higher potential
GDP growth in the coming decades.
Harvesting demographic dividend
A demographic dividend is not a guarantee; it needs to be harvested.
The gains would only occur if the rapidly expanding workforce is channeled into gainful employment, thereby, converting the ample labor supply into productive economic agents. In fact, realizing the demographic dividend requires prudent policymaking and collaboration between the public and private sector. For one, it requires good governance, sound macroeconomic management, sufficient public sector investments in economic and social services, and efficient labor and financial markets to attract jobcreating private sector investments. The socio-economic progress they have attained in the past decade or so--in terms of reviving growth, containing inflation, liberalizing trade and finance, fiscal consolidation, and ultimately poverty alleviation -- also puts these countries in a position to reap the demographic dividends to some extent.
On the other end of the spectrum are Asian countries marked with a graying population. Leading the pack is Japan with a median age of
46, the world’s highest, and which is projected by the United Nations to rise to 51 by 2030. Japan’s rapidly declining birth rates have already driven down the population to 126.5m in 2015 since peaking at 127.3m in 2009. The United Nations is projecting the population to further drop to 120m by 2030, with the elderly accounting for 53% of the working age population. The protracted struggle of Japanese policymakers to revive the country’s sluggish economic growth and reverse chronic deflation illustrates the challenges associated with rapid population aging.
Hong Kong, South Korea, and Singapore are also at the advanced stages of their demographic transition. With a median age of at least 40 years old, these three countries currently have three dependents for every 10 people in the workforce, and which are projected by the UN to double in the next 15 years.
But in as much as the dividends are not automatic, there remains hope for countries facing an unfavorable turn in their demographics. Faced with an aging society, policymakers would now have to turn their attentions towards structural reforms particularly aimed at boosting productivity and promoting innovation. The labor force pool can also be expanded by raising the retirement age and encouraging more women to work, while creating a working environment conducive to the seniors and women such by allowing flexible working schedules and providing more childcare centers. Singapore, for instance, apart from raising the retirement age to 62 years old, is requiring employers to re-employ eligible employees up to the age of 65, and which from July onwards, will rise to 67. In addition, policies and incentives to encourage child-bearing would help to boost labor force participation in the long run.
Equally important as well, Asia’s diverse demographic dynamics poses an opportunity to deepen intraregional integration. More advanced yet aging economies of China, Hong Kong, Japan, Singapore, South
Korea, and Taiwan, would find it viable to export capital and expertise to less advanced economies in the region with large domestic markets and abundant labor supply. This would increasingly be the case going forward, in our view, as protectionist measures are advanced by the US and to some extent, Europe, triggered by Brexit. Deepening regional economic integration would also have to involve greater labor mobility so that countries with labor shortages can leverage on the slack in other parts in Asia, and vice versa. That is partly the goal of the ASEAN Economic Community, although progress in establishing free movement of skilled labor has unfortunately lagged behind. With recent developments in the West becoming unfavorable to Asia, now will have to be the time for policymakers to step up efforts to facilitate easier flow of goods, labor, investment, and capital within the region. That is, as the West looks inward, Asia would have to awaken its growth potential from within.
Hong Kong, South Korea, and Singapore are also at the advanced stages of their demographic transition.
Population dynamics is a critical factor for growth