East Asia's Biggest Problem: Aging

East Asia's Biggest Problem: Aging

What you need to know

All three countries at this week's Trilateral Summit are facing a demographic crunch, but China may have it the worst.

By Lauren A. Johnston

Leaders from China, Japan and South Korea hold trilateral talks in Tokyo over the week of May 7, 2018. Probable topics for discussion include wartime comfort women, disputed islands and regional security, and contemporary hot topics including the Korean Peninsula and trade protectionism risks.

Ahead of the gathering, Chinese President Xi Jinping held a teleconference with Japanese Prime Minister Shinzo Abe – a sign that China sees its ties with Japan as important for its policy of building a goodwill community of "common destiny." During the summit, Chinese Premier Li Keqiang will also greet 84-year-old Emperor Akihito, who in April 2019 is due to become the first Japanese Emperor to abdicate in over 200 years.

Credit: AP / TPG
Japan's Emperor Akihito and Empress Michiko visit a tennis court at Tokyo Lawn Tennis Club in Tokyo, May 5, 2018.

The retirement of Emperor Akihito is especially symbolic for these three countries. Over the coming decades, China, Japan and South Korea will be confronted by the most daunting population aging scenarios ever seen.

More than a quarter of Japan’s population, or 26.6 percent, is now aged over 65. For comparison, the 2016 world average was 8.5 percent. For China, the same figure is 10.1 percent, and for South Korea it is 13.4 percent.

At the same time, the three countries are home to some of the world’s lowest fertility rates, and, unlike many other rapidly aging population OECD member countries, famously low immigration levels.

One of the big differences between the three cases of population aging is when demographic transition – the shift from a youth-filled population to an older demography – happened in the economic development cycle.

Japan was an advanced industrialized economy before it entered the population aging category (measured by 7 percent or more of the population aged 65 and over). The same goes for South Korea, although the number of years between its economic and demographic transitions were decades fewer than it was for Japan. China, meanwhile, famously confronts the challenge of "getting old before rich."

The importance of the timing of population aging in a country’s economic cycle has in general been given scant attention by the economics community – outside of China at least.

Within China, however, the fear that "getting old before rich" would make it challenging, if not impossible, to complete the industrialization process has led to a rich domestic literature on the relationship between early demographic transition and development. There is a negligible equivalent literature in countries that, like Japan, aged after getting rich. South Korea is a case of getting rich before getting old, but only just.

Credit: AP / TPG
An elderly man begs for money from visitors at a park in Chongqing, China on March 19, 2013. With the world’s population aging faster than ever before, families and governments are struggling to decide who is responsible for the care of the elderly.

And the timing of population aging in development may be a key element to understanding the consequences of aging for the economy. In Japan, for example, the educational gap between retirees and younger workers is less than in China, where educational standards have increased dramatically in very recent decades.

For China, this offers the potential of a leapfrog in human capital-led productivity. Japan, on the other hand, must rely on its diminished working-age population being able to almost exponentially push the frontiers of productivity in order to keep up with the growing costs attached to population aging.

Another difference lies in consumption and income differentials between cohorts. In Japan, today’s new labor force entrants can expect to see much less income growth over their lifetime than the same entrants in China, where the economy is growing more quickly and incomes are rising disproportionately.

With a quarter of the population already in the retirement category in Japan, there is an emerging issue of income expectations and inflation. It has been reported that since an increasing share of the population (moreover, a well-off share of the population) has flat lifetime income expectations, this is making it harder for companies to raise prices. This, in turn, affects dividends, pension sustainability, and the ability of companies to offer better conditions to existing workers.

In a further example of this trend, Tokyo Stock Exchange-listed hair dresser QB Net is reportedly shifting its expansion plans not to adding value for working-age Japanese consumers, but to home visits for older Japanese and to new frontiers abroad.

In China, however, the consumption of current and imminent retirees has played a limited role in the country’s recent growth miracle. It is not their consumption that is targeted by China’s increasingly sophisticated marketeers, but rather the more consumer-oriented youth for whom a prosperous China is taken for granted.

According to the World Bank’s World Development Indicators (WDI), over the period 1980-2016 (broadly China’s era of opening and reform), household final consumption expenditure averaged 45 percent in China, and 56.1 percent in Japan. If an increasing share of the population is experiencing flat income growth, this would thus be expected to have greater impacts on the economy of "old after rich" Japan.

Links between demography and the economy are starting to receive more attention within the economics community. Researchers need, however, to pay attention to the economic timing of the onset of different populations – that is, the specific economic weight and political influence of the older cohort within the economy. WDI data shows that more than 85 percent of world GDP is generated in the roughly one-third of countries which are confronting rapid population aging.

More than 85 percent of world GDP is generated in the one-third of countries with rapidly aging populations.

By the time Toyko hosts the 2020 Olympics, 14 percent of Japan’s population will be aged 75 and over. The extreme of Japan’s ‘old after rich’ aging is a canary in a coal mine for the rich world. The sheer scale of China’s demography and its importance to global growth make its experience of population aging as a developing country important to the world also. South Korea is something of the middle ground.

The entire OECD confronts rapid ‘old after rich’ population aging. Meanwhile, by 2030, some three-quarters of the world’s older population will be living in developing countries, not rich ones. This makes it essential that policymakers in these countries urgently learn from the experience of China in seeking to avoid the middle-income trap amid the particular challenges of "getting old before getting rich."

For the three giants of East Asia attending this week’s Trilateral Summit, a ready-made "win-win-win" area of collaboration would be to establish a common platform for economic demography research. This would take advantage of China’s deep literature on "getting old before getting rich" and draw better comparative lessons from the very different "old after rich" cases arising in Japan and South Korea.

The intent would not only be to enhance growth and provide for the rising number of elderly in all three cases. It would also be to provide lessons for understanding the economics of population aging around the world, in rich and poor countries, today and tomorrow.

Read Next: INFOGRAPHIC: Taiwan's Population Hits a Turning Point

Dr. Lauren A. Johnston is a consultant to the World Bank.

The News Lens has been authorized to publish this article from Policy Forum – Asia and the Pacific’s platform for public policy analysis, opinion, debate, and discussion.

TNL Editor: Morley J Weston