How Will Aging and the Elderly Affect Asia's Growth?

Article | 14 September 2011

East Asia's rapid growth benefitted substantially from its young population. The demographic dividend that the region enjoyed accounted for as much as 1% of economic growth in recent decades in some countries. "But in the future it will be a less significant source of growth in Asia. Its contribution will decrease to 0.6% in the next two decades," said Changyong Rhee, Chief Economist for the Asian Development Bank.

According to a newly released report, Asian Development Outlook 2011 Update, rapidly shifting demographics will become increasingly important in shaping the economic direction of developing Asia. Under current projections, dependency ratios across East Asia are likely to increase sharply over the next thirty to forty years. This shift is likely to reverse the favorable demographics of the last half a century and will adversely affect growth, says the report.

"The declining birthrate and increasing life expectancies are the main drivers for the demographic transition," said Rhee. "The aging population in some of the large economies has brought an end to this demographic dividend and in some cases turned into a demographic tax."

"But these transitions are quite heterogeneous in Asia. Singapore and South Korea already are at advanced stages of the aging," said Rhee. "PRC and Thailand are somewhat older. India, Philippines and Vietnam are relatively young countries."

South Asian countries stand to gain from a young population. "Young countries have to try hard to create more jobs for young workers and train them properly to reap the demographic dividend, which is not automatic or guaranteed," warned Rhee.

South Asia must exploit the advantage of a demographic dividend that could structurally transform South Asia economically and socially. A key challenge facing the younger Asian countries is whether it can create enough good jobs to convert this large population into a productive asset.

Old age support systems in developing Asia are at a critical juncture. While aging will increase fiscal and health costs, the impact will vary based on the size and role of government and will also be mitigated by corrective policies.

In Asia, old people are usually supported by their own savings and family. However, the long history of traditional family support that existed in most East Asian countries has been steadily diluted, says the update. "This is due to the social and economic and cultural changes associated with income increase. So Asia needs to be prepared to build up supporting systems," said Rhee. At present, countries in developing East Asia have relatively moderate social security systems.

Many countries such as the Republic of Korea and Singapore have already begun the process of increasing access to social security systems and can be expected to experience a rapidly increasing share of the population eligible to receive a pension. Enhancing the mobility of workers from labor-abundant countries to older, labor-scare countries has the potential to reduce joblessness and increase regional cooperation.

"Aging populations, however, offer new opportunities that could reverse the demographic tax. Policies and increased savings will likely offset part of the negative demographics and the growing pool of retirement savings could foster investment in long-term capital markets," said Rhee.