Analysis: Asia braces for its date with demographic destiny

BEIJING Mon Mar 28, 2011 11:41pm EDT

BEIJING (Reuters) - If demography is destiny, as the French philosopher Auguste Comte put it, then Asia faces daunting challenges in the coming decades.

Markets understandably track the rate and composition of gross domestic product to gauge short-term economic shifts.

But it is changes to the underlying productive capacity of an economy that count in the long run. Swing factors include openness to outside capital and ideas as well as the quality of education and governance.

Another is the impact of population trends on the supply of labor and on savings and investment rates. Witness North Africa and the Middle East. One reason behind the turmoil engulfing the region is the failure of governments to address a youth bulge, spawning large cohorts of angry, unemployed young men.

With the notable exception of India, most Asian countries have the opposite problem. The region is growing old, as harrowingly illustrated by the March 11 earthquake in northeast Japan.

Many elderly are among the 27,000 dead or missing in the double disaster. So are many of the survivors: the populations of many of the shattered coastal towns have been declining for years as the young have moved to big cities to find work.

How Japan helps the survivors to rebuild their lives may be a big first step toward finding out how to tackle the issue of an aging society with a low birth rate, Chief Cabinet Secretary Yukio Edano told Reuters.

POLITICS OF Aging

The rest of the world will be paying heed. Japan is the fastest-aging nation, but others are catching up.

By 2030, the share of the population aged over 60 in Japan will have grown to 37 percent from 30 percent last year. Germany and Italy will be just behind on 36 percent.

Just as striking, the proportion of elderly South Koreans is projected to double to 32 percent, according to the McKinsey Global Institute, the economics research arm of consultants McKinsey & Co.

Richard Dobbs, a director of the institute, said Japan had the advantage of a health system that was not as expensive as America's. But a lot hinged on whether politicians can rise to the challenge of extreme aging.

"Is Japan able to make these difficult decisions? The demographic cards you are dealt matter less than the ability of the political system to cope," Dobbs said.

Japan, at least, is a rich nation and can afford to grow old. China might not be able to. Thailand is asking itself the same question [ID:nMSGE71R09]

Right now, China has an old-age dependency ratio of 0.11, meaning there is just over one elderly Chinese for every 10 of working age. This will rise to 0.24 in 2030 and may exceed 0.43 by 2050, according to the Organization for Economic Co-operation and Development, a Paris-based forum for industrial democracies.

In an echo of northeast Japan, the increase in the dependency ratio will be much more pronounced in Chinese villages, passing 0.6 by 2050 compared with 0.3 in urban areas.

In short, according to the OECD, China will face an old-age problem as severe as that in Italy, Germany and Japan but without -- as yet -- the pensions, health care and welfare set-ups those countries can pay for.

Chinese pensioners might not be as rebellious as Arab youths, but the potential for friction is evident, especially as replacement rates -- the percentage of salary that a pension provides -- are projected to fall further from already low levels. Nearly 30 percent of urban retirees in China scrape by on less than half the median income.

"Poor coverage, even for those in cities, accentuates the problem of relative poverty amongst the elderly," the OECD said in a report. "This may be politically difficult to sustain in a rapidly aging society, where the elderly live less and less with their descendants."

OFFSETTING FACTORS

Not surprisingly, Beijing is aware of the problem. Like governments around the world, it is considering raising the retirement age, currently 60 for men, 55 for women civil servants and 50 for female workers.

"Delaying the retirement age is a very complicated issue and we will study it according to the situations of population and employment and consider different groups of people," Yin Weimin, minister of human resources and social security, said this month.

One problem, according to Richard Herd, who covers China for the OECD, is that the system is unduly generous to government officials. The bill for their pensions, which provide replacement rates of up to 80 percent, has jumped to almost 1 percent of GDP.

"They need considerable reforms to pensions, especially to the retirement age in the public sector," Herd said during a visit to Beijing.

China is not alone in facing a pensions bulge. In a report published last week, the World Bank said middle-income countries in East Asia can expect five times as many people as now to become eligible for a pension over the next two to three decades. Health care costs for a greying population will also jump.

Yet as uncertainty over the repercussions of Middle East unrest and Japan's post-quake nuclear crisis shows, complex events are never black and white.

Other factors will mitigate the economic impact of aging. As people live longer, they will work longer. As workers become better educated, productivity will rise.

So aging should reduce per capita income growth rates by at most half a percentage point a year on average in developing East Asian countries, the World Bank estimates.

"While favorable demographics of a young population fifty years ago had a significant positive impact on growth, unfavorable demographics of an aging population will have a much less important negative impact," it concluded.

(Editing by Mathew Veedon)

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