blogwinbig_banner_blue_strip-banner-800xTHE AGED


Samantha Amerasinghe analyses the economic effects of ageing populations

The phenomenon of ageing has been a dominant feature of Western economies over the past few decades. According to United Nations (UN) projections, by the end of this decade – and for the first time in at least 60 years – the number of adults aged 65 and over globally will outnumber children under four.

While this transition has been led by advanced economies, the next phase of global ageing will be driven by rapid ageing in key Asian economies. China, Thailand, South Korea, Singapore and Hong Kong are set to age the quickest while Sri Lanka isn’t far behind.

The speed of Asia’s demographic transition is a major concern for policymakers. As the workforce shrinks, policymakers will need to meet the many challenges presented by ageing societies.

In developing Asia, growing old before becoming rich presents a major medium-term structural challenge.

Ageing will also act as a headwind to global growth as shrinking labour forces detract from GDP growth in the coming decades for many Asian economies.

While many developed economies have a high share of the 65-and-over age group, emerging markets currently represent two-thirds of the world’s elderly. The UN forecasts that the share of this age group in emerging markets will rise to almost 80 percent by 2050.

China already has in excess of 130 million citizens over 65 – over twice as many as Japan, Germany and Italy combined. Asia is ageing much more rapidly than Europe and the US did in the last century.

This means that some Asian nations like Thailand, China and Sri Lanka will grow old before they get rich with their median age on track to reach 40 before they generate a national income of US$ 30,000 per capita. These countries will also be among the most rapidly greying societies, becoming ‘aged’ (defined by the UN as 14-20% of the population being above 65 years) by the middle of the next decade.

China and Thailand will both become ‘hyper-aged’ by 2035 with 21 percent or more of their population being 65 and over while Sri Lanka will reach ‘hyper-age’ status by 2045. These countries need to find ways to manage their already rapidly ageing populations or they will find themselves stuck in the middle-income trap.

In contrast, Japan, South Korea and most of the rest of the Organisation for Economic Co-operation and Development (OECD) nations had relatively young populations when they reached the high-income bracket. Malaysia and the Philippines also look set to get rich before they age thanks to rapidly growing young populations.

Ageing impacts economies primarily because it undermines the supply and quality of labour. Having enjoyed a demographic dividend for decades, China, South Korea, Hong Kong and Thailand will begin to see an economic drag from ageing before 2020, and Singapore will follow suit by 2025.

Despite multiple new policies, attempts to raise fertility rates across Asia have so far proven unsuccessful. Fertility rates are estimated to fall to two children for every woman across Asia by 2025-2030 compared with marginally over five as recently as 1970-1975.

The rapid ageing of several Asian countries is also likely to be reflected in their labour forces. The working-age population is expected to decline in China before 2020, and in Sri Lanka between 2025 and 2030.

While the greying of Asia is unavoidable, the economic effects may not be. By making even modest improvements to the quality of labour through investing more in education, China could postpone the impact of ageing on economic growth by as much as 10 years.

Moreover, the rapid rise in the number of seniors is challenging the traditional Asian family value system in which younger generations care for their elders. For example, China is facing a ‘4-2-1’ phenomenon where the only child is responsible for two parents and four grandparents. It’s unlikely that the younger generation will be willing or able to afford such a burden.

With their relatively low government debt, Asian countries can help by taking on some of the increased costs of ageing through their pension systems that remain unsustainable in many parts of the region. Governments need to step up efforts to support ageing populations through the provision of healthcare and social security benefits.

China, Thailand and Sri Lanka have limited time to tackle the challenges before the effects of ageing kick in. They will also need to implement policies that mitigate the structural decline in the labour force as their working populations shrink.

This will be a priority for Asia’s advanced economies (e.g. Japan, Hong Kong, Singapore and South Korea) too. In particular, they need to maintain or improve labour force participation rates.

Raising female participation rates will have the most significant immediate impact. Countries like South Korea, Singapore, China and Japan have launched various initiatives – including childcare subsidies, allowances and employer incentives – to become more family-friendly.

This is likely to be the quickest route to mitigate the impact of ageing.

While governments in Asia have displayed a willingness to tackle the challenges of ageing demographics, their continued attention to this phenomenon will be critical over the longer term.