Policymakers must keep in mind that demographic change does not hit like a tsunami; it happens gradually, like a tide. — The Jakarta Post
THE effects of falling birth rates and rising life expectancy are increasingly evident in advanced economies like Germany, Italy and Japan.
Labour markets are tightening, worker shortages are worsening and families are struggling to find care for ageing parents.
In some areas, declining student numbers are forcing schools to shut down. But population ageing is not limited to advanced economies. Within a generation or two, many emerging economies or emerging markets (EMs) will likely face the same demographic problems plaguing their developed-country counterparts – without the financial resources needed to cushion the blow.
In a new McKinsey Global Institute (MGI) report, we divide these demographic shifts into three distinct waves. The first wave has already swept advanced economies, as well as Eastern Europe and China, where working-age populations peaked around 2010, followed by steady declines.
As a result, per capita gross domestic product growth in those economies is projected to slow by 0.4 percentage points annually on average, or as much as 0.8 percentage points in some countries by 2050.
While around 30% of the labour income is currently used to fund pensioners’ consumption, this figure could increase to close to 50% by mid-century. The second demographic wave will hit emerging economies over the next decade, as working-age populations peak everywhere except Sub-Saharan Africa, where it is projected to peak when the third wave arrives in the second half of the century.
These economies have a narrowing window of opportunity before their demographic dividend diminishes and the financial burden of supporting an aging population rises sharply.
In nearly half of the 89 emerging economies outside Sub-Saharan Africa, fertility rates have already fallen below the replacement level of 2.1 births per woman, leading to a rapid decline in the ratio of working-age individuals (typically defined as 15-64) to those who are 65 or older.
China, an EM with the demographic profile of a developed one, currently has 4.8 working-age people per retiree – not far from the United States’ ratio of 3.6.
By 2050, China’s ratio of working-age people to pensioners is projected to fall to 1.9, below France (2.0) and the United States (2.6). Demographic transitions are unfolding at a slightly slower pace in other emerging economies.
Whereas Thailand’s ratio of workers to pensioners is projected to fall to 3.9 – the current average in first-wave countries – within five years, Brazil will reach that level in 16 years and India in 33.
In all three cases, however, gross domestic product (GDP) per capita remains significantly lower than that of high-income countries.
In purchasing-power-parity terms, Thailand’s GDP per capita is just 37% of the average in advanced economies, Brazil’s is 34% and India’s is 16%. These shifts present emerging economies with a daunting challenge: they must get rich before they get old.
Over the past 25 years, favourable demographic trends have led to an average annual increase of 0.7 percentage points in India’s per capita GDP and 0.5 percentage points in Latin America.
But India’s demographic dividend is now projected to drop to 0.2 percentage points of annual GDP growth over the next quarter-century, while Latin America’s is expected to vanish. So, what can emerging economies do?
For starters, they must boost productivity. GDP per capita is determined mainly by the size of the workforce relative to the total population and the productivity of individual workers.
Lagging behind
Productivity in emerging economies lags far behind that of wealthier counterparts, averaging US$13 per hour worked – or US$18 when excluding Sub-Saharan Africa – compared to US$60 per hour in high-income countries.
Given the right investments, emerging economies have an opportunity to create a “flywheel” effect, whereby investment fuels productivity gains.
This, in turn, would attract more investment, create meaningful employment opportunities, boost purchasing power and enable companies to increase productivity even further.
Beyond productivity gains, emerging economies can mitigate the impact of demographic shifts by increasing labour-force participation, particularly among women.
In the median emerging economy, the labour-force participation rate of women aged 20-49 hovers around 60%, compared to 80% in advanced economies.
To navigate demographic shifts effectively, governments and businesses in emerging economies must learn from the experiences and strategies of developed countries. Two key lessons stand out.
First, emerging economies must ensure that young people are positioned to compete globally.
In addition to improving their education systems, they must boost other investments in human capital and skill development.
Superstar companies
The private sector could play a crucial role in this effort. With global consumption and talent increasingly shifting toward the developing world, emerging economies have an opportunity to cultivate the next generation of superstar companies.
As MGI research has shown, developing economies that outperform their peers often have large, competitive firms to thank for it. But building such businesses requires a supportive ecosystem, including strong institutions, reliable physical and digital infrastructure, robust intellectual-property protections and access to investment and partnerships.
The second lesson for emerging economies is to develop effective and sustainable social support systems.
In many emerging economies, old-age support systems are still largely informal and family-based.
As these countries’ populations age, the growing share of elderly people will strain such traditional structures. Developed countries, currently grappling with mounting public debt associated with the costs of eldercare, should serve as a cautionary tale.
By improving financial inclusion and creating incentives for private savings and wealth accumulation, EMs could build systems that support ageing populations without undermining economic resilience.
Investing in health
Emerging economies can also avoid some of the fiscal challenges facing their developed-country counterparts by investing in the health and well-being of their young and middle-aged populations.
To ensure that workers remain active and productive well into old age, policymakers should seek to promote routine exercise, expand access to healthy food and provide high-quality health care, especially preventive care.
Most importantly, policymakers must keep in mind that demographic change does not hit like a tsunami; it happens gradually, like a tide.
While its predictability is an advantage, its slow pace makes it easy to overlook until the consequences become unavoidable.
Emerging economies still have time, but the water is already around their ankles. — The Jakarta Post/ANN
Anu Madgavkar is a partner at the McKinsey Global Institute in Newark while Marc Canal Noguer is a senior fellow at the McKinsey Global Institute in Barcelona. The views expressed here are the writers’ own.
