Southeast Asia’s share of the global economy grew from 2 per cent to 3 per cent in the 10 years to 2011. But growth in the ASEAN countries – home to 600 million people – averaged just 5 per cent.
However, the region is on the cusp of a golden demographic era with an increasing number of prime-age adults – 25 to 54 – to supply labour and savings. Older people require healthcare and pensions.
This will significantly reduce its dependency ratio – the proportion of the young and old to working-age adults, freeing up resources for investment elsewhere.
The region is on the cusp of a golden demographic era with an increasing number of prime-age adults
For decades, Southeast Asia had to channel much of its resources into caring for the young and elderly with only a few people saving. That limited growth. But with the dependency ratio dropping to 0.5 in 2008 from 0.9 in 1970, there are now two working-age people for every dependent.
ASEAN’s current profile is bottom-heavy: there are more young people and fewer older adults at the top. In 2050, the profile should become more balanced, even if the young still outnumber the old. The Philippines, Malaysia, Vietnam, Indonesia, Myanmar and Cambodia have growing working-populations and declining dependency ratios – the conditions most favourable to growth.
The key to sustaining growth is to use the extra workers to promote productivity. But not all ASEAN countries have prepared for this transition: birth and infant mortality rates vary, causing different consumption, saving and investment behaviours.
Malaysia, Thailand and Indonesia raised income levels most between 1970 and 2011. They benefited from a “peace dividend” – improved infant-mortality, education and public health, financial markets and trade liberalisation.
The Association of Southeast Asian Nations comprises: Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunei, Myanmar, Cambodia, Laos and Vietnam.
Thailand has had a huge demographic dividend. Its dependency ratio fell from 0.9 to 0.4 and its proportion of prime-age adults has risen from 30 per cent to 45 per cent since 1970. This, coupled with reforms, raised Thailand’s average income from 4 per cent of the US level to 11 per cent.
Indonesia also raised its output significantly because of reforms and an export-oriented manufacturing sector that absorbed excess labour.
But Cambodia, Myanmar, Laos, Vietnam and the Philippines raised incomes least, largely because of long periods of conflict. They also had high dependency levels and failed to increase productivity, leaving fewer incentives to save and invest.
Vietnam opened its economy in the 1980s and, coupled with a demographic boom, created higher productivity jobs. GDP growth averaged 7 per cent over the past decade and it has Asia’s highest public investment in education as a share of GDP.
The Philippines had Southeast Asia's third highest income per capita in 1970 but by 2011 it was eclipsed by Thailand and Indonesia. For 30 years it had one dependent for every working-age Filipino. But despite the working-age population rising, the lack of higher productivity job opportunities or incentives to save and invest has resulted in weak output.
All ASEAN countries except Singapore and Thailand will have strong working-age population growth in the next decade. Myanmar, Vietnam and Indonesia should have robust population booms. The Philippines could easily lift output by focusing on absorbing the current and incoming labour in the market productively.
With the right policy tools, benefits should flow from such favourable demographic transitions. Capturing labour-intensive manufacturing, especially in Cambodia, Myanmar and Vietnam, would be an easy and effective way to lift labour productivity and absorb excess workers. But for this to translate into a virtuous cycle of wealth creation, these countries must also turn the extra income into investment that raises their level of technology.
This research was first published on 6 November 2013.