Ageing in developing economies at a critical stage
The world is getting older. The United Nations estimates that the proportion of people aged 60 and above will more than double to 2.1 billion in 2050 from 901 million in 2015, with accelerating ageing in developing economies acting as a key contributing factor to this trend.
Low fertility rates and higher life expectancy, which are the major driving forces behind population ageing, are gaining momentum in developing economies. This is thanks to improved employment opportunities, family planning and medical services.
Population ageing has significant social and economic i mplications. Financing expenditure in old age can present a major challenge for households. Businesses may face higher costs from labour shortages and employer contributions to social security funds. Business and tax revenues may also be squeezed by the elderly’s lower spending.
FISCAL BURDEN OF OLD-AGE SOCIAL SERVICES
Pensions, healthcare and other social services related to old age are likely to become a major fiscal burden with lower contributions and higher expenditure. There will undoubtedly be behavioural and market adjustments to the changing demographic structure, such as increased household savings and labor-capital substitution. However, population ageing remains a significant challenge. It is important that a country attains growth and fiscal sustainability while its population ages.
Global growth has been stagnant for more than a decade, partly as a result of population ageing and the shrinking workforce. Productivity has also been weak, in part due to lower private investment, a consequence of smaller trickle-down impacts of new digital technologies and the growing services sector. Government investment has also slowed in the light of fiscal constraints. Fiscal sustainability in a number of countries is threatened by higher pension expenditure and healthcare costs as a result of improved longevity.
EMERGING MARKETS MUST ADAPT QUICKLY
The challenges of population ageing are even more critical for developing economies. These economies must adapt at a quicker pace, often with inadequate social services and lower incomes. Small and open developing economies that are dependent on exports are especially affected by stagnant global growth.
Disruptive technologies will substitute employment both in advanced and developing economies, but are likely to have more significant impacts on the unskilled segment of the workforce. This segment is proportionately bigger in developing economies compared with advanced ones. Less sophisticated education systems in these markets also make it more challenging to train or retrain populations to adapt to disruptive technologies.
Fiscal sustainability is a serious concern. On the expenditure side, developing economies have a bigger gap to fill between their current level of social services and what is required for their rapidly ageing populations. There will also be competition between resources for continued economic development, such as in infrastructure, and old-age related services.
On the revenue side, developing economies generally have a small tax base with inefficient tax collection. Furthermore, a large segment of their economies is often comprised of small- and mediumsized enterprises, where employers and employees may have limited ability to contribute to social security funds. Households likewise may have poorer financial literacy and lower ability to plan for old age and put aside long-term savings.
POPULATION AGEING RESPONSES
Developing economies can learn from the extensive studies on policy responses to population ageing. These range from encouraging higher fertility rates to pension and healthcare reforms. However, I’d like to add a few more suggestions.
There must be serious efforts to create common understanding and acceptance that, although population ageing may look like a distant challenge, action needs to be taken now since behavioural and structural changes take time. About half of the 30,000 public schools in Thailand have less than 120 pupils each due to the lower fertility rate. Parents also prefer to send their children to better schools in cities, thanks to the much improved road and transportation systems. This illustrates the lack of government efforts to convince local communities that these schools should be consolidated and cost savings shifted to benefits for the elderly.
Equally important are efforts to bring about changes in behaviour to deal proactively with population ageing. A major building material company in Thailand is developing soft bathroom tiles and fixtures to prevent injuries from falls. A Thai medical equipment company has started exporting robots for elderly care to Japan. Such development will support growth and sustainability as the population ages.
Developing economies must establish policies that fit their own contexts and constraints. Incentivising support for the elderly by extended families or communities is likely to be more cost effective than operating nursing homes. The approach also fits the culture of extended families in most developing economies. Hospice and palliative cares may need to be made widely accessible to provide a more cost-effective option than life-sustaining treatments.
Lastly, although governments should play the biggest part in providing adequate social services and maintaining fiscal sustainability, most are focused on the short term. International organisations such as the World Bank, IMF and regional development banks must play a role in providing technical assistance and pushing for policies that respond to population ageing.