Joint event organized by Mumbai School of Economics & Public Policy and Meghnad Desai Academy of Economics
Andreas Bauer – Will Asia Become Old Before It Becomes Rich?
On the 31st of October, 2017, the Meghnad Desai Academy of Economics played host to Mr. Andreas Bauer, the International Monetary Fund (IMF)’s Senior Resident Representative for India, Nepal and Bhutan. Mr. Bauer addressed a diverse audience comprising of students, professionals and academics, as he presented the findings from a recent IMF report on the issue of demographic trends in Asia, an area of key concern recognized in the IMF’s recent Regional Economic Outlook for the Asia-Pacfic region (published in April, 2017). Drawing from the findings of this report, the discussion focused on the demographic trends of several Asian economies observed over the past few decades, and its potential long-term implications for growth, external balances and financial markets in the region.
According to Mr. Bauer, several Asian countries have experienced favorable demographic trends in the past few decades; in other words, they have reaped the benefits of what economists call the “demographic dividend”. This refers to a situation where a country’s labour force grows much faster than the number of dependents in the economy. However, this dividend is expected to come to an end for a number of Asian countries and is likely to give rise to a new crisis, that of aging too soon. Stated differently, these countries now face the risk of becoming old before they become rich. Mr Bauer pointed out that, compared to the experiences of older, more developed economies like the United States (and a majority of European countries) which aged very slowly, Asia has experienced an accelerated aging process, as a result of rising life expectancy rates, coupled with declining feritlity rates since the 1960s. From being the biggest contributor to the world’s working-age population, Asia is slowly becoming a region to account for a substantial decline (to the tune of hundreds of millions of workers) in the same. Some of the projections are alarming, as East Asia is expected to triple its current old-age dependency ratio by 2050. Thus, as noted by Mr Bauer, these fast-aging economies have limited time to adapt their economic policies to meet the needs of an increasingly dependent population.
Mr Bauer drew attention to the fact that there exists considerable variation within East Asian economies, with respect to the phase of the dividend that countries are currently experiencing. Following a World Bank (2015) report, he classified countries into three broad groups: the “post-dividend” economies, the “late-dividend” economies and the “early-dividend” economies, depending on changes in the size of the working-age population (and its share in total population) of a country. The demongraphic transition, or, the rapid aging observed is likely to impose a “demographic tax”, which is expected to influence the countries’ growth prospects differentially. In particular, projections indicate that countries such as China and Japan (the “post-dividend” economies) are likely to register a decline of 0.5 – 1 percent in their annual GDP growth; whereas other countries such as India and Indonesia (the “early dividend” economies), may add upto 1 percent to their annual growth. Taken together, these projections are indicative of a slightly negative overall impact of demographic trends on Asia’s growth prospects in the next few decades. He also discussed the case of the “late-dividend” economies such as Malaysia, Vietnam, Australia and New Zealand, which experienced an early demographic transition, but have maintained a sustained share of working-age population. This trend has been facilitated, in part, by liberal immigration policies pursued by these countries, which has contributed towards prolonging the demographic dividend.
The discussion also highlighted the impact of the demographic transition on various aspects of economic activity and performance. Among other factors, Mr. Bauer noted the negative impact that aging is likely to have on labour productivity growth and innovation, which can subsequently lead to low levels of total factor productivity in these countries over time. He stressed on the importance of increased labour market participation, especially female participation in the labor force, as one of the measures to offset the baseline growth impact of aging. He emphasized on the importance of this structural reform, while drawing reference to Japan, a country which has actively managed its labor shortage by increasing the female and older worker labor force participation, while also accommodating more foreign labour.
Mr. Bauer also discussed the impact of demographic trends on external balance. The projections based on the External Balance Assessment model indicate that the overall effect of demographics on global imbalances is likely to be minimal. The model further suggests that the demographic trends are expected to exert an upward pressure on current account balances in surplus countries (such as Japan and Korea) and a downward pressure in deficit countries (such as New Zealand), as a result of difference in the countries’ aging speeds. Moreover, it also predicted that demographic factors will contribute to strentghen capital flows to countries which are currently experiencing current account surpluses, while those in deficit are likely to continue to import capital. On the impact of demographic factors on financial markets, it is observed that, rising old-age dependency (in the “post-dividend” countries) and falling youth dependency (in the “early-dividend” countries) are expected to place a downward pressure on domestic real interest rates. However, he also added that the effect of demographic trends on interest rates is likely to diminish, in financially more open countries.
The last segment of his presentation discussed the role of structural reforms relevant especially for India, which could be implemented to reap the benefits of the demographic dividend. Drawing attention to the low levels of productivity in India, he stressed on the critical need to improve the quality of education and training, and also on the need to address structural rigidities in the country. He emphasized on increasing investment in production processes which are more labor-intensive in nature and simultaneously, the need to implement policies which can improve flexibility in the labor market. He also stressed on the role of macroeconomic-stability, which he observed, is a necessary condition to ensure a conducive environment for savings and investment. Finally, he mentioned that harnessing this dividend will require immediate action which can support and sustain high levels of growth rates for the next several years. In this regard, while he acknowlged that the NITI Aayog’s three-year plan is a significant step towards this target, he concluded by stating that the process of reform in India would have to be a “marathon”, and not a 100-metre dash.
International Monetary Fund (IMF) Regional Economic Outlook (Asia and Pacific) Report 2017: Preparing for Choppy Seas.
World Bank (2015): Global Monitoring Report 2015/16: Development Goals in an Era of Demographic Change. Washington, DC: World Bank.
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Bookings are closed for this event.
Date(s) - 31/10/2017
4:00 pm - 6:00 pm