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Economy

Demographic dynamics are reshaping emerging Asia

JAKARTA -- A major shift in the demographics of emerging markets in Asia is inflicting more profound impacts on the mechanics of the global economy than the ongoing shift of capital. For many emerging economies, the demographic shift means an end to the tailwinds, and they are increasingly being urged to accelerate structural reforms to secure growth from within. Those emerging economies are likely to diverge into achievers and dropouts; the global economy will certainly be affected by who succeeds and how well.

     In mid-December, a job fair took place in a shopping mall in a suburb of the greater Jakarta metropolitan area. A representative of a major Indonesian food producer was there but did not look very upbeat. Although applicants were abundant, it was difficult to fill open posts because "there tends to be a gap between our requirements and applicants' capabilities," he said. What the applicants typically lack is "basic vocabulary and the knowledge necessary to understand managers' direction," he explained.

     Indonesia, the world's fourth-most populous nation, is in the middle of a demographic-dividend phase, with a relatively high ratio of working-age (15-64) people compared to dependent children and elderly. This phase is projected to last until 2025-30. If the country can fully take advantage of its demographic dividend, it will realize many years of continuous high growth, paving the way to the status of a developed economy.

     Japan, Taiwan and South Korea managed to leverage their demographic dividends and became rich. China has also maximized its advantage, resulting in over two decades of high growth, which drastically reduced poverty. Many economists believe that one key to success is to make sure the new job-market entrants are "employable" -- equipped with the right knowledge and skills.

     Indonesia seems to be barely holding on to that path. Although its adult literacy rate has risen to about 93%, and its school enrollment is around 97%, promising even higher literacy in the future, many challenges remain.

     "The country's school enrollment has really improved. Now the main issue is the quality of the country's education," said Ndiame Diop, lead economist for Indonesia at the World Bank. "High school students score low in basic math and science. The country needs nationwide schemes to train teachers and motivate students for achievement."

"Skill india" campaign

In July in New Delhi, Indian Prime Minister Narendra Modi launched his "Skill India" initiative, warning that unless steps are taken now, the demographic dividend could "become a challenge in itself." The initiative aims to train the 400 million people projected to enter India's job market without adequate skills over the next decade. Under the program, graduates of government-run or government-certified training centers will be issued a "skill card" they can show to potential employers.

     India's working-age population is increasing by 10 million annually, and is projected to peak as late as around 2050. If all of them get a job, the country will have a good chance of realizing high and sustainable growth comparable to China's in scale and speed.

     But the country has a huge population that is excluded from even the most basic education, let alone vocational training. For a child to attend a primary school, he or she needs a home address. But there are roughly 65 million people living in slums or on the street without a formal address, and the slum population is rapidly growing. The literacy rate of the population aged 15 years or older still stood at 71% in 2014, according to a government survey.

     Education is always one key to escaping poverty, but poverty itself remains a tremendous hurdle for universal access to basic education in India.

     Chetan Kapoor, CEO of Edulever, a nonprofit educational project consultant, said, "The intent is certainly there in the government, but there are huge gaps" between government knowledge and reality. He pointed out that there is a huge shortage of decent primary-level teachers, after a rapid increase in the number of schools and classrooms around the country.

Old before rich   

Whether India and Indonesia succeed in education reforms is not only important for their own economies but is increasingly a crucial question for the entire global economy. Why? Because they and the Philippines are the only major Asian nations left whose populations are projected to stay in a demographic-dividend phase for the coming decades.

     The World Bank estimated in its early December report on Asian demographics that China's working-age population will decline by as much as 90 million during the 2010-2040 period. The proportion of that age group in its total population will drop from the current 73% to 63% in 2040, according to the United Nations.

     These estimates make it clear that China has passed the peak of its demographic dividend, which has been a powerful force behind the country's miraculously sustained high growth since 1990. This is a major reason China's growth is slowing.

     The World Bank report also said that China, Thailand, Vietnam and Mongolia are all "growing old before growing rich." It predicts that the working-age population ratio in these middle-income economies will shrink during 2010-2040. The internal tailwinds of demographic dividends have peaked before those economies reached "developed" status.

     Now, having lost the powerful tailwind of China's growth, emerging economies, regardless of their own demographic reality, need to build their own growth mechanism. And the government in every one of them has a long to-do list, of which education and skill development, though never easy, are just one part.

     Above all, skill development is meaningless unless enough jobs are created to utilize the newly trained manpower. Job creation requires business growth. Governments need to provide the environment for businesses to thrive.

Infrastructure issues

One major challenge that many emerging Asian economies share is the underdevelopment of physical infrastructure, such as roads, railways, ports, airports and bridges. The World Bank says that Indonesia's underdeveloped infrastructure is depressing its gross domestic product growth by a full percentage point every year. While China has been investing about 10% of its GDP in infrastructure for many years, Thailand and Vietnam are putting just over 7%, and Indonesia only 3-4% in recent years.

     To finance infrastructure investment without excessive exposure to foreign-currency debt, governments need effective tax collection capacity, as well as an inclusive and efficient financial system capable of channeling nationwide household savings into public and private investment.

     Nationwide household savings would not exist if income distribution is concentrated among a few rich people. Also important is a fair and efficient tax regime, not to mention fair law implementation and justice, which are also crucial in running a business.

     In many countries, small groups of powerful people with vested interests try to hinder fair distribution of national income. Indonesian President Joko Widodo is fighting with his own party, which repeatedly tries to pass bills to weaken the country's anti-corruption agency. A nation's ability to implement such necessary measures, after all, is up to the will and resoluteness of its leaders.

     There are good signs among central bankers in Asia. "We have seen a marked change in the mindsets of Asian monetary authorities," one central banker said recently. At a meeting of Asia-Pacific central bank deputies in spring, "most participants were just demanding China to do something" about the global slowdown, the person said. But at a meeting in the fall, "no one blamed China. Instead, they were more focused on how to get their own houses in order."

     Many government leaders and bureaucrats in emerging Asian economies seem to be entering 2016 with a stronger awareness that China's demand bubble and the easy-money bubble in the U.S. are over. From now on, emerging Asian nations will see their own competence tested in all aspects of policy. If the high achievers include India, Indonesia and the Philippines, all of which have favorable demographics, the world may enjoy another external tailwind beyond China. If none of them succeed in leveraging their situations, economies around the world, including the U.S., will need to work even harder to live with external headwinds.

Nikkei staff writers Yuji Kuronuma and Nupur Shaw in New Delhi, Erwida Maulia in Jakarta and Shotaro Tani in Tokyo contributed to this story.

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