In the decade ending 2019, ten Asian economies, the so-called A-10, account for 50 percent of global GDP growth and 60 percent of incremental merchandise exports, and provide $5 trillion in capital to the rest of the world. As half of these countries are aging rapidly, how will the global labor and capital supply be affected?
Home to nearly 60 percent of the population, Asia’s economic rise over the past few decades has transformed the global economy. Asia has also proven to be a world manufacturing center and a net supplier of savings to support consumption in developed countries.
With the dynamism of Asia, and China in particular, so important to the wealth or profitability of the global economy, a key question going forward is what the impact of a significantly aging and shrinking workforce will be in this engine of growth, both within and outside the region.
Faster demographic change
As countries prosper, slower population growth and rising average ages are normal. However, demographic change in the A-10 has been faster than economic transition.
Over the past few decades, A-10 economies have grown two to three times faster than the EU/US at similar income levels, but their fertility rates have declined five to seven times faster.
Most A-10 economies have much lower levels of per capita income than the EU/US, but have reached low fertility levels.
They are also aging faster: over half a century, the average age in the EU/US has risen from 30 to 40 years, while it took only 17 years in Korea and 22-24 years in Japan, China, and Thailand. With higher median ages and lower per capita wealth than in all countries outside Eastern Europe, Thailand and China are likely to age before they get rich.
In Japan and Korea, birth rates have fallen sharply as the number of women of childbearing age has declined.
At this demographic stage, confidence wanes. Only 30% of Japanese respondents in our survey expect to be better off than their parents, compared to 80% in other countries we surveyed (such as India or China).
The infographic shows a low desire for children: 48% of those who do not yet have children want a child, 24% do not want to have children
Productivity is more important than the number of employees
The expected decline in Asia’s working-age population has implications not only for Asia, but also for the rest of the world. in 2010, the A-10 economies accounted for more than half of the global increase in the working-age population, but will have a smaller workforce by 2032.
Infographic showing the average increase in years of schooling for women in Japan, Korea, China, and India (1990 vs. 2015) versus the average decline in age at marriage (1990 vs. 2016)
However, a sustained shift away from agriculture can help liberate workers for industry and services. More importantly, the quality of the labor force may be more important than the quantity. Low-fertility A-10 economies have also experienced the strongest growth in average height and years of schooling.
Percentage of China’s working population with college and higher education 2.5% in 1990 26.5% in 2020
This translates into longer working lives (people with more education tend to retire at an older age), as well as higher productivity. Despite the growing preference for services employment, we find that the risk of supplying industrial labor from the A-10 economies to global value chains is not as great as feared, at least for the next decade.
Chart showing slowing population growth and plummeting working-age population in Asia’s 10 largest economies
Asia continues to provide capital
The A-10 economies are also major providers of world capital, with $15 trillion in net international assets. Given that A-10 dependency ratios (the number of children and retired seniors per 100 workers) are set to rise, many fear their savings will decline.
However, we believe this is unlikely to happen in the next decade for two reasons:
As our survey confirms, households are likely to continue saving for emergencies and retirement due to inadequate pensions and public health care in most A-10 economies. In addition, as people age, they become more cautious: Despite having the largest pension assets of any A-10 country, Japan has the lowest percentage of respondents who believe their pensions are adequate.
Rising dependency ratios mean weaker real house prices (we believe China, Japan and South Korea are most at risk): less real estate investment means a shift to financial assets. Most A-10 economies still need to increase their pension wealth, which means continued strong demand for assets traditionally seen as safe.
For example, Japan’s current account remains in surplus despite the fact that its labor force peaked in 1995 and its dependency ratio has been rising for the past 30 years. A key driver is the highly elastic primary income channel (this includes investment income from other countries). Without primary income, the Japanese economy would remain in a current account deficit. Thus, if a country accumulates wealth before it ages, the economy is better able to withstand demographic shifts.
Slower growth and lower real interest rates/inflation
We see future risks to A-10 growth as less correlated with labor supply and more correlated with slow growth in capital deployment, particularly in real estate and infrastructure investment.
Moreover, in several A-10 economies, total factor productivity growth (or the effective use of labor and capital) has declined in recent years, negatively impacting global growth. However, only when productivity growth slows by 4 percentage points in China does the A-10 labor supply experience a significant deficit.
Moreover, we do not believe that demographics will have a meaningful impact on inflation and the A-10 dependency ratio is unlikely to rise in the next decade (we assume that younger economies will increase their participation in global value chains). Combined with continued demand for safe assets and sluggish productivity growth, this will mean that interest rates will fall again once the current macroeconomic volatility subsides. A sharp rise in the A-10 dependency ratio, which could affect inflation, is only likely to occur after 2035.
