Abstract WP08-04

Andrew Mason, Sang-Hyop Lee, and Ronald Lee, 2008 forthcoming "Will Demographic Change Undermine Asia's Growth Prospects", Emerging Asian Regionalism: Ten Years after the Crisis. Asian Development Bank (December).

Introduction: Demographic change is rapid throughout Asia with fundamental implications for both national and regional economies. Often population change is viewed with alarm – that economic prosperity will be undermined because population growth is too fast or too slow; because populations are too young or too old. On balance, however, demographic change is likely to provide a positive impetus for economic growth in Asia during the first half of the 21st Century especially if regional cooperation continues to improve. Of particular importance are policies that facilitate the flows of immigrants and capital between countries with young and growing populations and countries that are old and facing population decline. The prosperity of Asia’s aging countries will depend, as well, on domestic policies that encourage investment in human capital, flexible labor markets, well-functioning financial markets, and macroeconomic stability and discourage excessive reliance on large-scale transfer programs for the elderly.

The countries of Asia are experiencing two fundamental changes in their populations that will influence standards of living and regional economic forces. First, population growth is slowing but more rapidly in some countries than in others. Differential population growth will lead to regional shifts in population, labor force, the number of consumers, and related economic activity. Second, populations are experiencing important changes in their age structures. In all countries the percentage of children in the population is declining or has already reached low levels. The share of the working age population is increasing or has reached very high levels. This change has had a very direct and favorable impact on growth in per capita income called the first demographic dividend.

The large working share in the population is a transitory phenomenon, however. Low birth rates and increasing life expectancy are leading to an increase in the older population. The share of the working age population will decline and as that happens the first demographic dividend will turn negative. Eventually, the share of the population in the working ages will be no greater than early in the demographic transition. The key difference will be populations with many more elderly and many fewer children. Although children and the elderly are both referred to as dependents, they differ in a very important way. Children rely almost exclusively on transfers to the fill the large gap between what they consume and what they earn. The elderly, in contrast, rely on a combination of transfers and lifecycle saving to fill the gap between what they consume and what they earn. Thus, aging – and the anticipation of aging – will lead to an enormous increase in transfers and/or assets. Whether countries will rely on transfers or assets to fund the needs of a growing elderly population will depend on policies, culture, and institutions. As compared with European and Latin American countries, Asia has relied less on public PAYGO pension programs. But health care for the elderly is a large and increasing cost that is often heavily subsidized by the public sector. Moreover, familial transfers to the elderly may be very important in Asia. Thus, aging in Asia may lead to large implicit debts that are shared by taxpayers and the adult children of elderly. If the needs of a growing elderly population are met through greater reliance on lifecycle saving, population aging will lead to an increase in assets with favorable implications for economic growth. Previous studies and the analysis presented below show that through this mechanism changes in age structure can lead to a second demographic dividend – higher standards of living that persist long after the favorable effects of the first dividend have ended. The economic effects are not confined by national borders. Divergent demographic trends in the region are likely to generate international capital flows from those countries experiencing the most rapid increase in saving rates to countries which are aging more slowly (but have rapidly growing labor forces).

The demographic processes described here – known as the demographic transition – are general to almost every country in the world. However, important details of the transition vary from country to country. Some countries in Asia have experienced very rapid transitions. Japan, Korea, China and some members of ASEAN are examples of countries in which changes in age structure are particularly dramatic. Moreover, the timing of the demographic transitions varies across the region. Japan is furthest along, while India and some ASEAN countries are relatively early in the transition. As a consequence, the impact of age structure for any particular decade varies considerably from country to country. Moreover, the differences in the transition create the demographic divergence that leads to differences in factor shares with implications for trade, foreign investment, and immigration.

The remainder of this paper addresses these issues in more detail. In keeping with the approach of this study, we contrast the experiences and prospects in Japan, Korea, India, ASEAN, and greater China – consisting of the PRC, Hong Kong, and Taipei, China. Demographic trends are discussed in Section I. The information presented there is based on the most recent estimates and projections prepared by the United Nations (United Nations Population Division 2007). The economic implications of demographic changes are addressed in section II following the broad outlines discussed in the introduction. We discuss research on the relationship between population and economics and we present new analysis of how demographic change will influence key macroeconomic variables in ASEAN, greater China, India, Japan and Korea. The final section discusses the implications of the analysis for policy. First, we discuss social and economic policies that respond to or accommodate the expected changes in population in the region. Second, we discuss population policy itself.

An earlier version of this paper was titled “Asian Demographic Change: Its Economic and Social Implications”, WP08-04.