August 28, 2014 12:00 am JST

George Magnus: The clock is ticking for an aging Asia

Clockwise from top left, elderly citizens in Thailand, Japan, China and Vietnam (Reuters except for Japan)

The rapid aging of the population is widely recognized as one of the most daunting challenges facing developed economies, such as Japan and Germany. Less attention has been paid to the fact that graying demographics are a ubiquitous global phenomenon -- even in once youthful emerging Asia.

     Asians born today can expect to live about 30 years longer than their grandparents, most of whom were born in the 1950s. In developing Asia, life expectancy at birth is now roughly 70 years for men and a little over 73 for women, and gerontologists say the rise is far from over. This is an important measure of the success -- and rising quality of life -- that has spread from rich countries to the emerging and developing world.

     As in the West, the problem is not so much about people living longer, but about the sharp fall in birthrates that has occurred at the same time. Asian women typically had almost six children each at the start of the 1960s, but now the average is only 2.2. The interplay between these changes in longevity and fertility has changed the age structure of Asian societies, increasing the dependency of older citizens on a slimmer or shrinking working-age population.

     Within these trends, there are large differences among Asian countries. In some, the fertility rate has already dropped below the replacement level of 2.04 children per woman -- the rate at which a population is self-sustaining. In Japan, China, South Korea, Taiwan, Hong Kong, Singapore and Thailand, the fertility rate is between 0.9 and 1.6. Japan's population is already contracting, and these other countries will follow suit after an extended period of stagnation unless they compensate for fewer births through higher immigration or a revival in fertility.

     In poorer Vietnam, Myanmar and Cambodia, the fertility rate is about 2.0. It is much the same in richer Malaysia, while in the Philippines it is about 3.3. In South Asian countries, fertility rates of 2.5 or more are still common, but the trend toward lower birthrates is likely to persist. Demographers attribute this to a combination of rising levels of literacy and female education, cheap and readily available means of birth control, and higher per capita income.

     As Asians live longer and have fewer children, there will be profound effects on the region's economic growth. These effects are already being felt in faster-aging East Asia and parts of Southeast Asia, including Singapore and Thailand.

     The younger and more slowly aging countries -- India, Pakistan and others in South Asia, for example -- will not face the same issues for another 30 years or so, though they will have different ones in the meantime. The most difficult of these will be providing jobs for a swelling workforce as their earlier high fertility rates result in hundreds of millions of new job seekers entering the workforce each year.

     Everywhere in Asia, however, the combination of rapid aging and smaller families, with a lower number of siblings and cousins, will pose difficult challenges. Businesses will be seriously affected because family structures play a more prominent social and organizing function than in Western economies.

     The main economic issue that all countries will face sooner or later is that as fewer workers enter the labor force to replace those who retire, the size of the working-age population will stagnate or decline. Unless countries can find ways to offset this phenomenon, economic growth will slide as the dependency of older citizens, who tend to consume national output, on those of working age, who produce it, starts to rise sharply.

Getting older faster

Japan's old-age dependency ratio has already more than doubled to 44% since 1995 and is predicted to rise to 72% by 2050. Put another way, there will be fewer than 1.4 workers to support each citizen age 65 or older, compared with 2.3 today. China's old-age dependency ratio is forecast to rise threefold by 2050, cutting the number of workers per older citizen from 8 to about 2.5. The fastest rate of change, though, is likely to be in South Korea, where the dependency ratio is expected to rise almost fivefold to around 65%.

     Old-age dependency ratios are rising more slowly in other Asian countries, with Thailand and Vietnam aging faster than their peers. For the latter, the rise in old-age dependency will be modest until the middle of the century, though the number of workers per older citizen will nevertheless fall from between 10 and 12 today to between four and six.

     There are two important consequences of this rapid aging of societies. First, aging in developing Asia and other emerging countries is occurring much faster than has happened in the West, and at much lower levels of income per capita. In much of Asia, it has taken -- or will take -- 20 to 23 years to double the proportion of the over-60s from 7% to about 15% of the population, whereas in Europe and the U.S., it took 60 to 100 years. And by the time Western countries began to age rapidly, they already had sophisticated and relatively generous social and income support systems. It is this combination of rapid aging, relatively low levels of income per capita and limited welfare development that has given rise to the fear that Asia may get old before it gets rich.

     Second, the demographic dividend phase -- when child dependency is falling, the working-age population is growing and old-age dependency has yet to start increasing -- is associated with high savings, investment and growth. The dividend is spent once old-age dependency starts to rise, after which countries have to look for new ways to sustain high economic growth.

     China exploited the demographic dividend very effectively, but it would be a mistake to imagine that other countries can easily mimic its success. The world is looking to India for the next demographic miracle, as its labor force is forecast to increase in the next 10 to 15 years by more than the existing population of workers in Western Europe.

     But exploiting this phenomenon depends on creating jobs -- public, private or both -- and effectively harnessing savings. It is also contingent on the quality of government and domestic institutions. Harvesting this dividend is thus as much about politics, education and benign external circumstances as it is about the existence of large numbers of young people. For an extreme example of this, we need look no further than the Arab Spring countries, where political and economic turmoil have generated youth unemployment averaging 29%, according to the International Monetary Fund.

     As a general point, the positive dividend associated with younger populations declines over time, and the negative one associated with older citizens rises. South Korea's dividend disappeared in the 2000s, while the Chinese and Thai dividends are now vanishing. By the 2020s, Indonesia, Malaysia and Vietnam are expected to have lost their dividends too, but India and the Philippines should, in theory, be able to squeeze out a bit more.

     Across Asia, the economic and financial problems associated with rapid aging and the loss of the demographic dividend highlight the biggest challenge for the region, for the public and private sectors alike: developing mechanisms to better cope with, if not slow down, the graying process.

George Magnus, an economist and senior adviser to UBS, is author of "The Age of Aging: How Demographics are Changing the Global Economy and Our World."