Date posted: 7/05/2018 5 min read

A question for the ages

The Asia-Pacific region, so long the young part of the global economy, now faces rapid ageing – and that will change the world.

In Brief

  • Nations in the Asia Pacific are ageing at different rates.
  • China will likely grow old before it grows rich.
  • The seeds for the successful economic management of an aged population are sown several decades earlier.

By Chris Sheedy.

The Asia-Pacific has become the fast-ageing region in the world. The region’s three biggest economies – China, Japan and India – are all growing older. They start from different points, but by the second half of this century, all will have declining working-age populations. That ageing seems certain to effect the entire Asian region, including Australia and New Zealand. In the case of economies the size of China and India, their management or mismanagement of the massive shift in demographics will likely have global effects, according to a new generation of economic research from accounting firms, management consultancies, central banks and academics.

Tim Taylor, editor of the Journal of Economic Perspectives, sums up the new thinking on Asia’s demographic transition thus: “With China's working-age share of its population topping out and India's on the rise, we are at the hinge of a demographic transition that will reshape relative economic (and probably also political) power across Asia.”

The ageing issue is not just about China, Japan and India. The Philippines, Malaysia, Indonesia, South Korea and more, are at different stages of their ageing journey. All are experiencing effects and challenges, as are Australia and New Zealand . Some are more prepared than others for the inevitable economic trials and tribulations brought on by ageing.

Why should we care about the effects of ageing? Of course, one day we will all grow old. But it’s also important that countries in our region are prosperous and stable. And we need to understand what sort of societies we will all be. As Professor Sarah Harper, Professor of Gerontology at University of Oxford and founding director of the Institute of Population Ageing, writes in her 2016 book How Population Change will Transform our World: “To grow old in a society where most people are young is fundamentally different from doing so in a society where most people are old”.

A tale of three nations

An effective way to understand the ageing landscape of Japan, China and India is to observe their historical, and future, ageing figures side by side.

The graph uses data from the United Nations to compare the working age as a percentage of total population of each nation. It begins with historical data from 1957 and uses current data to project ageing statistics to 2107, 89 years from now. The graph depicts three different nations with very different demographic futures.

In the first nation, Japan, the working age population peaked at around 69% in the early 1990s and has dropped off since then. A 2016 Marsh & McLennan study notes that by 2030, Japan will become the world’s first “ultra-aged” nation, with the elderly accounting for more than 28% of the population. From 2050 onwards, Japan’s working age population will settle at just over 50% of the nation’s total population. There will be significantly fewer workers to pay the taxes required to support Japanese society, and potentially greater spending on health and aged care.

In the second nation, China, working age population peaked quite recently at 73%, providing plenty of workers to fuel the Asian tiger’s massive growth plans. But the next few decades will see a sudden and steep dive to around 54% in 2107. Many experts wonder how that fall will affect the country’s seemingly endless economic energy; some say that China will grow old before it grows rich. In a February 2018 report, Labor 2030, consultancy Bain and Company’s Karen Harris, Austin Kimson and Andrew Schwedel argue that China's huge boost to global labour productivity growth “will likely fade much as it did in Japan and South Korea when those economies moved past the catch-up phase”.

The third nation, India, is currently on an enviable side of the working-age growth curve, with people of working age now making up around 64% of the total population. This figure will continue to grow to a peak of almost 68% by 2047. Only then will India’s working age population begin to age. By 2107 India’s working population will have dropped – not as suddenly as Japan’s has or China’s will – to 58%.

The September 2017 Voice of Asia report from Deloitte Insights spells out the changes this will impose on the world. “India will account for more than half of the increase in Asia’s workforce in the coming decade,” it says. “The consequences for businesses are vast: An Indian summer is coming, and it will last half a century.”

While India’s rise might have the largest impact on the world, it isn’t the only economy set to surge, with Indonesia and the Philippines on track to enjoy similar trends. Both of these nations have a relatively young population, mainly because they still have birth rates in excess of the global average. This makes demographics a tailwind rather than a headwind for their growth across at least the next 20 years.”

And while nations such as India, Indonesia and the Philippines may have a positive few decades ahead, it’s how these countries’ leaders manage the wealth of workers during those decades that will guarantee or destroy their longer-term prosperity.

After the dividend

At some point, all countries find their demographic dividend has passed and their working-age population is shrinking as a share of the population, as has happened in Japan and now China. Oxford University’s George Magnus, author of 2008’s The Age of Aging: How Demographics are Changing the Global Economy and Our World, says that change in direction can be tough. “One of the central macroeconomic problems of an ageing population is the stagnation or decline in the labour force,” Magnus says. “You might run into labour shortages or skill shortages.”

Noted economist Charles Goodhart and colleague Manoj Pradhan see the coming period as a reversal of the huge surge of developing world labour into the world economy since the 1980s. In a paper published last August, they predict similarly dramatic changes as things go into reverse. “As the world ages,” they write, “real interest rates will rise, inflation and wage growth will pick up and inequality will fall.” Bain’s report plays a variation on this theme, predicting greater volatility in growth rates, inflation, interest rates and unemployment.

As Magnus notes, the first obvious solution to a shortage of people is to automate, using robotics, artificial intelligence and digital technology in an investment boom. Bain’s analysts see the process already underway: they report that in one factory alone, Chinese electronics giant Foxconn “was able to replace 60,000 factory workers, or 55% of the total workforce, with robots last year”.

Migration can also help. Right now we’re seeing China opening its doors to certain professions. At the same time, Japan’s doors appear relatively closed. “Japan has had challenges because in-migration of foreign peoples is not a natural for that society,” Harper says. Japan and India will both face some pressures to expand the participation of women in their paid workforce.

 

Mixed-age workforces are successful. To have many generations alive at the same time absolutely benefits business and society
Professor Sarah Harper Professor of Gerontology at University of Oxford and founding director of the Institute of Population Ageing

 

What it all means for business

How can businesses prepare for population ageing? Magnus outlines several practical solutions. As Australians and New Zealanders age, he notes, their needs and desires will likely turn towards leisure and consumption, “rather than fast cars and gadgets and things Millennials want”. And firms will have to start worrying about keeping older people at work or replacing them. Bain, which expects volatility, says businesses should make resilience a higher priority than it has been, and prepare for higher rates.

Sarah Harper points out that Australia, in particular, has been preparing itself for its own ageing. During the period before its baby boomers started to retire, the country developed the necessary infrastructure, created a superannuation system and put in place its Future Fund. These, she suggests, will help ensure the aged population doesn’t come as too much of an economic shock.

But the bigger changes will happen in the region’s mega-economies of Japan, China and India, altering export priorities for Australia and New Zealand. The Deloitte paper points out the coming scale of the Asian over-65 market. “The number of over-65s in Asia will exceed one billion just after the middle of this century. In fact, by 2042 – in just a quarter of a century – there will be more over-65s in Asia than the populations of the Eurozone and North America combined.”

Finally, it’s important to realise that an ageing population is not all doom and gloom. Some research suggests improving health is opening up a new life stage where many people beyond today’s working age remain free of the disability that once marked our 70s. And of course, for individuals, ageing beats the alternative. “From a pure humanity point of view, it is a massive success if you can get a population to the stage where the majority of people are born, grow up healthy and live long lives that head towards a century,” Harper says. “In addition, we know that mixed-age workforces are successful. To have many generations alive at the same time absolutely benefits business and society.”

Related: The new ASEAN common market

ASEAN is working to become a common market, which presents new opportunities for Australasian businesses in sectors such as food, financial services and fintech.

Chris Sheedy is a Canberra-based journalist and communications consultant.