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Size of working population shrinking in China

Industry News 2013-04-25

LAST year, the number of people of working age in China, defined as those aged between 15 and 59, shrank by 3.45 million or 0.6% to 937.27 million compared to 2011, according to data released by the National Bureau of Statistics in January.

This is the second time that the working age population, which accounts for 69.2% of the country's total population of 1.354 billion in 2012, has fallen. The working age population first showed a drop, of 0.1%, in 2011. The share of China's population 65 and above has also risen.

Also in January, Eurostat, the statistical office of the European Union (EU), released population statistics which showed that the working age population, defined as those aged between 20 and 64, will start to shrink this year from last year's peak of 308.2 million amid a rapidly aging population. The working age population of the 17-member eurozone began to shrink last year.

This aging problem, according to Fitch Ratings analyst Eugene Chiam in a January report, will have an impact on the finances of the developed economies in the decades to come.

He says without the implementation of mitigating reforms, EU and Organisation for Economic Development and Cooperation members will experience escalating government debt-to-gross domestic product (GDP) ratios with the average EU debt-to-GDP projected to rise by 6.9% by 2020 and 119.4% by 2050.

“Without reforms to boost labour productivity and/or participation rates in many other advanced economies, population ageing will cause potential GDP growth to decline over the long-term, exacerbating the fiscal challenge,” Chiam says.

He adds that while few countries face an imminent problem, the rating agency will take negative rating actions over the next decade on the countries facing the most pressing ageing pressures.

Chiam warns that countries facing the worst ageing problem and with a “no policy response” scenario may be hit with a 1.5-notch downgrade by 2030 and a five-notch downgrade by 2050.

On the other hand, Bangkok-based World Bank economist Frederico Gil Sander says the emerging markets including China already have the mitigating factors.

He argues that while East Asia has experienced a demographic dividend from expanding labour forces over recent decades, even more important contributions have come from a combination of high savings, investments and the dramatic improvements in educational attainment, which have also enhanced worker productivity.

“Another demographic shift that has been at work is urbanization. These young workers have been demanding more housing in cities, which has contributed to the growth in construction that we see in places like Thailand and Malaysia,” Gil Sander says in an email to StarBizWeek.

No more population bulge buffer for China and EU

The population statistics of China and the EU reveals that both may start to see less of an impact from the benefits of the “demographic dividend” in the coming years.

The situation for Asean and India is the exact opposite of what is happening to China and the EU as populations remain young and growing albeit at a slower pace.

What is a demographic dividend? This is a period of time, measured perhaps over a generation or two, in which a country's population growth stabilizes as fertility rates decline while the number of young adults of working age grows and those of non-working age shrinks.

When combined with effective policies and a favourable economic environment, growth can rise exponentially as the experience of China, Asean and to an extent, India, has shown.

Studies have shown that favourable demographic trends as well as rising incomes stemming from well-implemented policies can really boost economies with the sources of growth coming from domestic demand and in particular private consumption and investment trends.

This is especially true of the economies of the Asian emerging markets, where policymakers, through well-crafted measures, have been able to turn growth in the working age groups into a demographic dividend instead of a “demographic bomb” as experienced by countries in North Africa and the Middle East.

Gil Sander says the immediate drivers of economic growth are usually split into four - investments of new buildings and machines; growth in the number of workers; growth in the skill levels of workers; and productivity growth, which has to do with technology and innovation.

“The demographic transition will affect the number of workers, so governments need to focus on the other three factors to maintain a solid rate of growth given the demographic transition,” he adds.

According to OSK Research analysts, Indonesia and Malaysia will be reaping demographic dividends in the 2010 to 2020 period as the number of those in the working age group, classified as 15 to 60 years, grows.

They say the Indonesian working age population is expected to grow 11% to 172 million people, a 0.8 percentage point gain to 66% of the total population in 2020. For Malaysia, the working age population is expected to grow by 17% to 21 million, a 0.6 percentage point gain to 63% of the country's total population in the same period.

China, often cited as an example of the impact of the demographic dividend on economic growth, posted average GDP growth of 10.49% from 2001 to 2010, according to data from the Economist Intelligence Unit and International Monetary Fund. From 1991 to 2000, GDP growth averaged 10.44%.

It is interesting to note that China's population started to stabilise in the 1970s when measures were taken from early in the decade to control population growth culminating in 1979 in the draconian one-child policy.

Tough going

But the costs of that policy, coming at a time when the birth rate will have naturally decreased as the economy opened up, is high. It will accelerate population aging and therefore the old-age dependency ratio in the coming years as the latest statistics reveal.

What the data shows is that China and the EU may find the going tougher with economic growth targets that much harder to achieve in the decades to come. For the EU, the debt crisis and the austerity measures of recent years will mean a long drawn-out decline.

“If investments in productive capital, skills and productivity are undertaken, then the resulting higher income can indeed mitigate the increased dependency ratio. In many parts of East Asia, savings and capital investment have historically been high compared to other regions, so that improving the investments in and quality of education is even more critical as a sustained driver of future growth and innovation,” Gil Sander says.

The OSK Research analysts say that besides China, other Asian economies such as Thailand and Singapore are likely to experience “demographic onus”, that is slowing growth due to ageing population profiles.

“China and Thailand are expected to face flattish growth in their workforce, which are likely to decline by 2 percentage points each to 66% and 65% of their total population respectively. Notably, Singapore is expected to face the worst contraction of around 5% in its 15 to 60 years-old group by 2020,” they add.

Number crunching: Malaysia's case

The Statistics Department released a report last November based partly on the 2010 census which shows that the Malaysian population will increase 35% or 10 million to 38.6 million for the 2010 to 2040 period.

It noted that the annual population growth rate will decrease from 1.8% in 2010 to 0.6% in 2040 in tandem with the targeted decline in fertility rate and international migration. The data shows that the population for the age group 0 to 14 is projected to decline to 19.6% from 27.4% in the same period. In the 2000 census, this same age group constituted one-third of the total population, which at that time numbered 23.3 million.

The population for the age groups 15 to 64 and 65 and above is expected to increase by 1.4 and 6.4 percentage points respectively. Based on the trend, the country will have an aging population in 2021 when those aged 65 and older will constitute 7.1% of the population.

This trend will also contribute to the increase in the median age to 36 years from 26.3. The median is the point in which half the population will be aged above 36 with the other half younger than 36.

Contrast this with India, where by 2040, the median age will be 35 and with China, where the median age will be 44. For Europe as a whole, the median age will peak at 46.5 according to United Nations data. Japan, already facing a population decline, will have a median age of 55.

Malaysia's total dependency ratio is projected to decline to 44.9 from 47.8 as the working age population (defined as those aged 15 to 64 years) rises in the 2010 to 2040 period.

This statistics provides a mixed bag for the country as while the young-age dependency ratio (that is, those below 15) declines to 28.3 from 40.4, the old-age dependency ratio will rise to 16.6 from 7.4 in the same period.

What this means is that with lower fertility in the coming years, there will be fewer children while the population ages and lives longer and those of working age will have to support the larger number of those aged 65 and above.

On the bright side, Malaysia will still be reaping the demographic dividend as the total dependency ratio is down while the population at large is still relatively youthful.

Gil Sander says that Malaysia can still enjoy a positive contribution to growth from a growing labor force at least for the next decade as the country's fertility rate is still notably above replacement rate and significantly higher than neighbours such as China, Vietnam and Thailand.

“However, the time to start planning for that switching point, when the contribution becomes negative, is sooner rather than later. The elderly dependency ratio starts to climb sharply in most countries well before the point at which the labour force starts to decline,” he adds.

Gil Sander says this preparation entails making investments in skills and productivity as well as setting up the appropriate safety nets and sustainable pension systems so that the costs of supporting an older population remain manageable and affordable to future generations with fewer workers.