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20 Aug 2014

Asia’s wrinkles start to show

by Frederic Neumann, Co-Head of Asian Economic Research, HSBC, and Joseph Incalcaterra, Economist, HSBC

Asia’s wrinkles start to show

There is a limited window for benefiting from the demographic dividend

Asia is ageing at an unprecedented rate – arguably the fastest the world has witnessed. The opportunities permitted by the ‘demographic dividend’ in recent decades will be matched only by the challenges of ageing.

Over the next half-century, hundreds of millions of Asians will become senior citizens while the contingent of working-age adults thins, raising dependency ratios.

Low dependency ratios mean workers save more, funding their country’s investment in continued growth and productivity gains. Large domestic savings can also reduce the dependency on overseas capital. This positive demographic trend permits a growth strategy centred on labour-intensive manufacturing and export-processing zones.

This strategy was followed, more or less in succession, by Japan, Hong Kong, Korea, Taiwan and Singapore and eventually China. Indonesia and Philippines are among the most promising ASEAN countries if policymakers take advantage of the trend.

Over the next half-century, hundreds of millions of Asians will become senior citizens

But there is a limited window for benefiting from the demographic dividend. While East Asia was largely successful, the onus is now on other countries to use population so fruitfully. Vietnam and Thailand will face the most pressing ageing prospects.

Japan has one of the world’s oldest populations. However, the rest of the region is quickly catching up, with South Korea, Hong Kong, Taiwan and Singapore expected to age even faster. While the West had abundant time between industrialising and the ageing process starting, Asia must adapt more quickly, leaving less time to develop welfare systems effectively.

East Asian fertility rates are chronically and unsustainably low: of the 224 countries and territories in the CIA World Factbook, Korea, Hong Kong, Taiwan, Macau and Singapore are in the lowest 16 for children born over a woman’s lifetime. China’s relatively low fertility is a function of three decades of the one-child policy, which means a single working child will likely have to support several elders. China’s working-age population shrank by 3.45 million last year.

There are two ways participation rates can increase given a stagnant or declining overall population: more female or elderly workers. Many ageing Asian countries, including Japan and Korea, have female participation rates among the lowest in the Organisation for Economic Co-operation and Development and retirement ages have remained sticky despite longer life expectancies.

Changes in participation and workforce numbers will not change the underlying trend but will give policymakers more time to build systems to cope with a greying population.

The demographic trend is clear. The Asian tigers – Hong Kong, Singapore, South Korea and Taiwan – are most affected, followed by China, Vietnam and Thailand. The Philippines, Sri Lanka and Indonesia are least affected.

Singapore can offset its declining demographics through immigration – a solution also available to the other tigers. But for larger economies, policymakers must respond with structural solutions. Increasing the labour participation rate can help, especially through female participation. In China and Indonesia, urban growth, especially of younger people, could offset short-term ageing prospects.

This article was first published on 7 August 2014.

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