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Opinion

Emerging Asia should learn from Japan's demographic experience

High-growth era has left demographic problems Tokyo has not handled well

The longer countries procrastinate, the bigger the challenge becomes.   © Reuters

Countries in Asia which have industrialized are often described as "flying geese," taking off around the region like the birds -- in waves. It started in Japan, with its average growth of 10% between the mid-1950s and early 1970s, before spreading to the Four Dragons -- Hong Kong, South Korea, Taiwan and Singapore. The South East Asian countries followed, then China -- last and certainly not least.

Such economic success, however, has carried with it intractable demographic challenges -- a low birthrate and rapid aging. The cost of raising children grew, medical services improved and social security provided a safety net, leading people to want fewer offspring. Again, Japan has led the way -- and there are lessons here for the rest of the geese.

About 25 years after high growth ended in the early 1970s, Japan's working-age population started to decline. Initially, the decline was slow but then it accelerated until it almost reached an annual loss of one million working-age people at times in the past decade.

No country has ever lost workers on this scale for reasons not related to war or illness. Its huge impact is best illustrated by Japan's economic growth since the start of this millennium: by total gross domestic product, it is the lowest among G-7 countries. But by GDP per working-age person, its cumulative growth rate is the highest.

Some other flying geese are already starting to face similar demographic challenges and, in the future, they will be more severe. In fact, in many countries -- including China -- a rapid decline in working-age population is projected to come soon.

I am not arguing that demography is the only factor in determining living standards. As Nobel Prize-winning economist Paul Krugman noted, "Productivity isn't everything, but, in the long run, it is almost everything." So, we must look at how demography in the form of an aging and declining population affects productivity.

First, aging changes voters' preferences which affects which public policies are adopted. The median age of the Japanese population is steadily increasing. Currently, it is 47.6 years compared with 30 years at the end of high-growth period and the OECD club of wealthy nations has forecast it will rise to 53 by 2050. Given their life expectancy, it is inevitable for the elderly to prefer the status quo and support income redistribution favoring them, not growth-friendly public expenditure with benefits which materialize after a long time.

Aging changes voters' preferences.   © Reuters

Second, aging affects regions differently. In many municipalities of Japan, it is becoming costly to maintain public infrastructure because the local population is decreasing. The same is true for many private services. The size of population is also an important determinant of productivity in service, whether public or private. In less populous areas, the benefit of scale cannot be realized. In terms of maximizing productivity, the smooth allocation of resources across municipalities, though painful, is vital, but this is often not easy politically, especially amid growing populism.

In any event, if the goal of economic policy is to sustain growth of per capita income, we are faced with two problems. One is how to stop a possible decline in growth of productivity per worker, or indeed to hopefully raise it, and the other is how to adjust the income of retirees relative to that of non-retirees. The difficulty of the latter is shown in the slow progress of public pension reform. This is all about rewriting social contracts which worked relatively well in the high-growth period. This is the nature of the demographic challenge or, to be exact, of rapid aging.

Optimists often point to the positive impact of technological change such as robotics and AI. Although I fully admit their importance, I cannot be that optimistic. This is because it is how society embraces the fruits of technology rather than technology itself that determines productivity growth at a macro level.

A harder challenge than simply an aging population is a declining one, stemming from a falling birthrate. If the birthrate is below replacement level -- it was 1.4 in Japan in 2017, while replacement level is 2.1 -- the population will continue to decline. One could argue that if the country increases productivity, that can compensate for a fall in population and maintain GDP growth per capita. But can we really say we do not worry about shrinkage of population size even if it shrinks to 100m, 10m, 1m?

If a country regards a shrinking population as an existential threat, some may say the only solution is to receive more foreign workers or immigrants. Not many people have noticed that Japan has already been receiving significant numbers of foreign workers in recent years, so that in terms of gross inflow of foreign-born residents in 2016, Japan matches the U.K. and surpasses France and Canada, for example.

Looking globally, there are still many countries whose population is increasing rapidly and thus like it or not, demographic challenges facing many advanced economies should be understood in the context of this potential pool for massive migration.

The lessons I can offer from Japan's experience do not involve immediate action but a broader perspective. The first and most obvious is to be prepared. Official projections produced every five years or so assumed birthrate would revert to 2.1 even though it continued to be below that level -- but in the projection in1992 this assumption was finally dropped.

Furthermore, economists tended to be inattentive to that interplay of economy, politics and society. I myself used to take an optimistic view about demographic-induced productivity increase, when in the late 1980s Japan started to discuss the influence of rapid aging in the future. But as we should have expected, politicians have not been incentivized to grapple with rewriting social contracts. The longer countries procrastinate, the bigger the challenge becomes.

The second lesson is to avoid collateral damage. Economists are expected to study the influence of demographic change, but, unfortunately, they tend to take demographic issues lightly and instead become fixated on tangential issues.

A case in point is the debate on deflation in Japan. Economists mistakenly blamed deflation for low growth for a long time -- but low GDP growth since the early 2000s has actually been mainly the consequence of unfavorable demographics. If people think monetary easing is a solution to low growth, then there will be no momentum for implementing economic and fiscal reforms which might help to combat demographic problems. Prolonged monetary easing in Japan was indicative of this mistaken diagnosis.

The demographic challenges facing Asian countries are enormous -- other countries must take note of Japan's experience.

Masaaki Shirakawa is the former governor of the Bank of Japan

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