A narrow window of opportunity

Thailand and China are at risk of growing old before they grow rich; India must grow its GDP at 8-9 per cent or more to avoid that fate

As several large economies in Asia age, will the world run short of industrial workers? Will it run short of savings, reversing the “global savings glut” that many believe was the root cause of record-low interest rates globally in recent decades? A team of 28 researchers at Credit Suisse studied 10 of the largest economies in Asia (the A-10: China, India, Indonesia, Japan, the Philippines, Vietnam, Thailand, Korea, Malaysia, and Taiwan), which between 2010 and 2019 were incrementally 50 per cent of the global gross domestic product (GDP), 60 per cent of goods exports and sent $5 trillion of capital to the rest of the world. We combined a survey of 6,000 respondents with exhaustive secondary research and analysis to try to answer these questions.

In this Tessellatum, we will explore the first of the major findings and the lessons from that for India: Not only is the demographic shift in the A-10 faster than the economic transition, but it is also accelerating.

It is normal for population growth to slow and average ages to rise as countries prosper. Better education for women, their higher workforce participation, and rising urbanisation are all not only linked to rising national incomes, but also drops in fertility. For example, in rural areas, children can start contributing economically at a very early age (say herding cattle or helping with crops), whereas there are very few child-appropriate jobs in urban areas. Moreover, given expensive real estate, which also inflates costs of services like education and healthcare, the cost of raising a child is higher in cities. Growing incomes also improve the quality of healthcare, which increases life expectancy.

But the factors driving fertility and incomes affect them at different speeds. A-10 economies have grown two to four times faster than the pace at which the EU/US grew at similar income levels. The A-10 countries have sustained high economic growth rates for several decades and the move from $3,000 per capita GDP (purchasing power parity or PPP-adjusted) to $15,000 has taken 20 to 45 years (it will take India 30 years), whereas developed markets did so over 80 to 110 years (195 years in the UK).

Illustration: Ajay Mohanty

However, this is still meaningfully slower than the pace of demographic transition. Most of the developed world moved from a total fertility rate (TFR: The number of children a woman has in her life) of 3 to a TFR of 2.5 over 40-75 years, whereas most A-10 countries saw this occur in 10 years or less (eight in India). The post-WWII baby boom in the US and Western Europe helped in prolonging their transition.

Most of the A-10 have also reached low fertility levels at a much lower per capita income levels: US TFR fell below 2.5 when its per capita GDP was $24,000, and for the UK at $17,000, but the A-10 crossed this threshold at PPP adjusted per capita GDP ranging between $3,000 and $7,000.

They are ageing faster as well: Whereas the average age in the EU/US rose from 30 to 40 over half a century, this occurred in just 17 years in South Korea and 22–24 years in Japan, China, and Thailand.

The pace of demographic transition has accelerated across the world, with factors affecting fertility spreading much faster than economic best practices. In the 19th century, death rates fell meaningfully over a hundred years. It took 60 years in the first half of the 20th century, and 35 in the second half. The pace of decline in birth rates has been even faster: What occurred in 100 years in the first half of the 19th century took just 10 years in the second half of the 20th century. Not only is this too rapid for income growth to keep up, the population ages much faster as well.

This creates two challenges: Slower subsequent growth and a prematurely ageing population. After all, demographics also significantly impact economic development. Falling TFR, for example, helps growth by giving more time for economically productive work, as also to consume the income generated from it; and human development (parents with fewer children can invest more in their physical and mental development). However, as the economy ages, the number of workers drops, and more workers are needed for elder care. Drivers of aggregate demand, like housing and infrastructure, also slow.

Like individuals saving for old age, countries also need to build a certain level of wealth to sustain their lifestyles when their populations have aged, if necessary, by importing labour and talent, like the European countries do currently. This wealth also reduces the burden on the youth. If retirement funds are insufficient, they may end up being excessively taxed so that the older population can be cared for.

Several of the A-10 rank poorly on the age versus per capita wealth score, though there is considerable diversity in this. Demographic transition is accelerating in Japan and Korea, but is remarkably slow in Indonesia and the Philippines. While China and Thailand run the risk of growing old before they become wealthy, India’s challenge would be in productively deploying its burgeoning workforce.

Thailand and China have a higher median age and a lower wealth per capita than all countries outside Eastern Europe (which also has a well-documented problem of ageing). In Japan and South Korea, there is a steep decline in births as the number of women of child-bearing age is now falling: Annual births are 60 per cent to 75 per cent lower than in 1970. At this demographic stage, confidence weakens. Just 30 per cent of young Japanese respondents in our survey expect to be better off than their parents, versus 80 per cent or more elsewhere. This is despite Japan’s high per capita wealth, and the best pension assets in the region.

While India’s TFR has now dipped below 2.1, the level at which population stabilises, population can keep growing for many years. GDP growth also tends to accelerate for two to three decades after TFR falls below 2.1. But the pace of growth in the three decades to 2053, when India’s average age is forecast to cross 40, would make a big difference. At 7 per cent average growth (in dollar terms), its per capita GDP would still be below $20,000 in 2053, but at 8 per cent growth it can reach $25,000, and $33,000 at 9 per cent. This would be the difference between being a middle-income country and a prosperous one: Important for state and central governments to keep in mind as they prepare for the centenary of India’s independence.

The writer is co-head of APAC Strategy, Credit Suisse