Based on the latest report of the International Monetary Fund (IMF) we conclude that Asia has great economic prospects for the next decade to come. However, aging populations and sluggish productivity - the reversal of the so-called "demographic dividend" - are threats that are expected to undermine the region's economic growth in the long run. We draw these conclusions from the Asia-Pacific Regional Economic Outlook 2017, a report released by the IMF on Tuesday (09/05). Indonesia, however, falls in the "safe category" due to its young population.
Over the past decades the population group aged between 15-64 years has contributed significantly to propel explosive economic growth in Asian markets. However, growing per capita GDP, better healthcare facilities (hence longer life expectancy), and slowing population growth give rise to aging populations and subsequent bleak economic growth.
The IMF states that the population growth rate will have fallen to 0 for Asia by the year 2050, while the share of the population that is of the working-age will have passed its peak. What makes the case especially challenging for Asia is that the speed of aging is remarkably high (compared to cases in Europe and the USA) and therefore Asian nations will have less time to address this issue.
The conclusions in the report imply that Asia is at risk of falling into economic stagnation if aging populations lead to excessive savings and low investment renders monetary policy ineffective. It may also lead to downward pressure on real interest rates and asset returns for most major countries in Asia.
In the report the IMF determined three categories of Asian countries according to the stage of aging: (1) early dividend, (2) late dividend, and (3) post dividend.
In the post dividend stage rapid growth in the old-age dependency ratio (this is the number of senior citizens [+65] relative to the productive population [15-64]) results in a decline in the absolute scale of the productive population. In other words, the demographic composition of nations that fall into this category is not conducive for economic growth. The IMF put South Korea, Japan, China, Hong Kong, and Thailand in this post dividend category.
IMF's Old-Age Dependency Ratio:
Source: International Monetary Fund (IMF)
To deal with these challenges the IMF advises Asian nations to implement structural reforms to sustain long-term economic growth and check the increase in the number of seniors in poverty before the aging trend takes root. The IMF also emphasizes the importance of changing the focus of tax policy from earned income to consumption taxes and maintaining the fiscal soundness needed to respond to medium and long-term fiscal demand. The report also recommends governments to increase workforce participation by seniors and women through reforms on the labor market and to the pension and retirement systems.
The positive news for Indonesia is that it falls in the early dividend category, meaning that it is one of the few Asian nations that is still very far away from the threat of the aging population.
However, being relatively safe does not mean Indonesia can take it easy. In 2016 the World Bank said Indonesia will start to see an ageing population from the year 2040, implying the start of lower labor-force participation and lower savings rates, as well as the likely possibility of slowing economic growth. Therefore, the Washington-based financial institution advises the Indonesian government not to wait too long with reforming the pension system.
Phillip O'Keefe, Chief Economist at the World Bank, said the greatest risk of an ageing population is the fiscal risk. If Indonesia does not reform its pension system well before 2040 then it may cause severe poverty among the elderly. This would mean that the government has to allocate a significant part of the annual state budget to support these people (financing their healthcare costs), hence the demographic bonus will have turned into a "demographic disaster" or burden.
Currently, few Indonesians set aside part of their monthly salaries for their retirement. Moreover, Indonesia has no pension scheme for informal workers (while informal workers may account for around 60 percent of the nation's labor force).
Asia remains a key engine for global economic growth. The IMF put its forecast for economic growth in Asia at 5.5 percent year-on-year (y/y) in 2017 and 5.4 percent (y/y) in 2018, well above the IMF's forecast for global economic growth at 3.5 percent (y/y) and 3.6 percent (y/y) in 2017 and 2018, respectively.
IMF's Macroeconomic Forecast for Asia:
Source: International Monetary Fund (IMF)