Asia in Search of the Second Demographic Dividend

An elderly woman in the Philippines.
An elderly woman in the Philippines.

By Arup Kumar Chatterjee

The sheer speed and scale of Asia’s demographic transition will deprive the region of one of the main drivers of its past economic success.

Asia is undergoing one of the most profound demographic shifts in its recent history. The sheer speed and scale of this transition will deprive the region of one of the main drivers of its past economic success – the demographic dividend.

A steep fall in birth rates is likely to further worsen the problem. In Japan alone, the number living in poverty has almost tripled since the country's economic downturn brought huge cuts in welfare assistance. In South Korea—where nearly half of the population over 65 lives in poverty—the suicide rate among the elderly has more than doubled in the past decade. And the People’s Republic of China (PRC) will actually lead the world population of centenarians by 2050, with over 450,000.

On the other hand, for other Asian countries like India, Indonesia, Pakistan, the Philippines and Viet Nam tackling the problem of aging remains a distant priority, reflecting the demographic reality that their population is aging much more slowly. Asian countries enjoying the demographic dividend face several challenges related to population aging.

Today, many of the men and women who built up Asia's economies and middle-class societies live in a state of poverty and neglect, suffering chronic illness and disability, or with insufficient savings to meet their retirement needs. Per capita incomes are very low and most adults are engaged in agriculture or the informal sector, which doesn’t provide any scope to accumulate savings for later on in life. Government safety nets for the elderly are either not enough or nonexistent, the health insurance system doesn’t cover many catastrophic illnesses, and informal family-based networks provide little relief.

Asian culture emphasizes respect for the elderly, but younger generations are less willing than before to take care of their old parents, and thus bear the brunt of preparing for the unprecedented demographic shift – despite middle-class families today being wealthier than in past generations.

The role that individuals play as economic agents in a national economy varies over their lifetime. Typically, an individual would be a net consumer when he/she is too young to work, a net saver in his/her work life, and something in between in older age. The total dependency ratio—the ratio between net consumers (children and elderly) and net producers (working age population)—has been falling in many Asian countries, indicating an increase in the number of savers relative to consumers. This positive contribution of demographics to income per capita is called the first demographic dividend (FDD).

How long is the FDD going to last in Asia? While the positive contribution to income growth in terms of FDD has begun to cease in the PRC and Thailand, demographics will support income growth until after 2040 in India and the Philippines. Indonesia now has the lowest positive contribution of demographics to income, and FDD will continue to add to it until almost 2030. As a consequence, the fear that social security and pension systems liabilities might deplete government coffers by diverting resources from other necessary budget lines is not misplaced.

While aging does present genuine policy challenges, many wonder if demographics will be a net burden in most Asian countries in the next 50 years. I don’t think so. If the right conditions are put in place, these countries may experience a second demographic dividend (SDD), whose success will hinge on the effectiveness of policies implemented to transform the earnings of the FDD on sustainable growth and accumulation of wealth.

In other words, the first dividend yields a transitory bonus, and the second dividend is the result of transforming that bonus into greater assets and sustainable development.

How much of the SDD is realized shall therefore depend on building sound institutions and carrying out crucial financial, social security and labor market reforms. Developing contractual savings schemes, life insurance and pensions —with increased savings opportunities for workers and rising public sector pension coverage for long-term sustainability—can make population ageing a positive experience in terms of capital per worker, productivity growth, and per capita income.

When working adults begin to save to support themselves during retirement, population aging can lead to a SDD. Just like governments have advance notice that their populations are aging, most individuals can hope and expect to live to an old age – and should plan accordingly. Their accumulated savings play a unique role in developing capital markets, reducing the cost of capital (both equity and debt finance and spurring economic growth. The spillover benefits can be seen in the form of increased funding of riskier (and higher yielding) infrastructure projects, economies of scale and scope, reduction of transactions costs, and enhanced financial innovation.

Asian countries that are right now experiencing favorable demographics must be aware that they will not last indefinitely. The demographic dividend offers them a unique opportunity to boost living standards, but they must act now to manage their older populations in the near future by implementing policies that ensure a safe and efficient transition from the FDD to the SDD.