Asia: Ready or Not

• Author: Peter S. Heller
• Position: Deputy Director of the IMF's Fiscal Affairs Department

The world's most populous continent must prepare now for an aging population

The challenges faced by industrial countries in the West and Japan with the prospective retirement of the "baby-boom" generation are well recognized. Governments face a growing financial burden from pension costs, medical care, and possibly long-term care, implying either sharp increases in taxes or a reneging on the promised level of benefits. But less appreciated is the fact that many Asian countries also face their own demographic "time bomb." Although they lag two decades or so behind the industrial countries, the sharp decline in fertility rates and rising longevity will result in a growing proportion of elderly people, relative to both the overall population and the number of working-age people, by 2020-30.

Asian countries sit astride the "demographic transition" at various points (see chart). Some, such as Korea and Singapore, are much more advanced in the process, with the elderly dependency rate (EDR)-the ratio of elderly to the working-age population-converging to industrial country levels by 2030 and with further dramatic increases forecast in subsequent years. Korea, for example, is said to have the fastest rate of aging in the world. China and Thailand follow, with the so-called demographic dividend period (when there is a large share of working-age population) lasting through about 2035-40, but with the proportion of elderly rising quickly thereafter. Malaysia is close behind, with its demographic dividend period lasting through 2045. India, Indonesia, and the Philippines will see a high EDR beginning to emerge only sometime after 2050.

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China's situation is unusual in several respects. Its elderly population already dwarfs those of many industrial countries. But, more important, the pace of aging in its urban centers (where about a third of the population lives) has been far greater than in the rural areas, reflecting both sustained lower fertility and higher longevity. Even with migrants to the urban areas included in the urban population, the end of the demographic dividend period may emerge much earlier in urban China (say in 2025-30) and much later in rural China (2035-40). Many critical policy issues will rest on how urban-rural differentials are addressed (across and within provinces), at both the family and the policy level. The oft-mentioned gender gap-the shortage of women relative to men (because of differences in the birth and survival rates of boys and girls)-will also be an important issue to be reckoned with in China.

A higher EDR poses important challenges. Unless the elderly are prepared to work longer, they will either need to have accumulated retirement assets or receive financial support. In Asia, this is becoming increasingly relevant, with the gradual weakening of the traditional role of the family as caregivers for multigenerational support. The elderly will also require more access to medical care and, for many, long-term care services. How Asian countries are positioned to face these future challenges is a bit of a mixed bag. Certainly, decisions taken now could have a major impact on the scale of the problems to be faced later on. This article examines the state of readiness of Asian countries and discusses the issues they need to address to successfully cope with the demands of an aging population.

Getting rich before becoming old

The boom in Asia's economies has positioned it to take advantage of the demographic dividend and tap the region's high levels of savings (the focus here is on Asia's more developed economies outside of Japan: China, Hong Kong SAR, India, Indonesia, Korea, Malaysia, the Philippines, Singapore, and Thailand). The opportunities afforded by high savings and investment rates relate both to achieving a higher per capita income (PCI) by the time the population becomes aged and to building up a stock of assets, both real and financial (and both internal and external), that can be drawn upon to help finance the consumption needs of an elderly population.

Several Asian countries (for example, Hong Kong SAR, Korea, Malaysia, and Singapore) have successfully pursued a development strategy built on exploiting their demographic dividend. China, coming from much further behind in economic terms and despite its extraordinarily rapid growth and high savings and investment rates, is still challenged to create productive jobs for its large labor pool in coming years.

Looking ahead, Asian countries face a "double imperative" in considering their appropriate macroeconomic policy stance. Policies should continue to support rapid economic growth, given that growth rates will fall with a slowing, if not declining, labor force in the later stages of the demographic transition. Labor market pressures, reflected in higher real wages, will require new strategies to maintain external competitiveness. Policies should also be framed by the recognition that governments will eventually have to address the pension, medical treatment, and long-term care challenges associated with a substantial increase in the EDR. This underscores the importance of having a sound fiscal position, with low public debt levels, at the time the potential demands of an elderly population become particularly acute. The relative importance of each of these imperatives depends both on how close a country is to the time when its EDR rises and on the extent of its convergence to industrial PCI levels.

But there is also a microeconomic dimension to the aging problem. When a society ages, how will it meet the financial needs of its elderly? Will the elderly be dependent on...