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Japan not alone in demographic conundrum

by Alex Martin

Second in a series

In a recent blog post on The New York Times Web site, noted economist Paul Krugman pointed out how much of Japan’s economic decline in the past two decades could be explained by demographics and said the drop in the working-age population has been severely hurting its share of global economic growth.

Although using demographics to explain changes in economic growth is nothing new, experts said the trend seemed especially relevant to Japan, as well as economic powerhouses China and South Korea. All three have experienced a surge in population and dropping birthrates over the past half-century.

And although the three account for over 20 percent of the world population and around 16 percent of total global GDP, all have recently witnessed signs of rapidly aging populations, raising concern over their future economic prowess.

Keiichiro Oizumi, a senior economist at the Center for Pacific Business Studies at the Japan Research Institute, said each nation’s aging was having a different impact. While Japan is currently suffering the most, South Korea and China will begin to feel the impact in the next 10 to 15 years.

Oizumi noted that the ratio of people aged 65 and over in relation to the overall population has been rising in all the three countries, standing at around 23 percent in Japan, 11 percent in South Korea and 8 percent in China.

And according to recent United Nations World Population Prospects statistics, the average total fertility rate between 2005 and 2010 was 1.27 in Japan, 1.77 in China (excluding Hong Kong and Macau), and 1.22 in South Korea — all three among the lowest in the world.

“In Japan, the working-age population peaked out at around 1994, and what followed was what we call the ‘lost decade’ or ‘lost two decades,’ when economic growth crawled,” he said, noting China and South Korea face the same fate in the next five to 10 years.

A term often used to describe the positive effects of population growth on an economy is the “demographic dividend,” which refers to how the rate of economic growth is closely attributed to the rise in the working-age population — those aged between 15 to 64 — coupled with a low number of children and a “dependent” elderly population.

When these two conditions converge, a special “window” of opportunity for economic growth emerges, but this won’t last forever.

Experts point out that in Japan, the baby boomers born in the late 1940s were responsible for the nation’s rapid economic development.

In the recent best-seller “The Truth Behind Deflation” (“Defure no Shotai”), Kousuke Motani, senior adviser of regional planning at the Development Bank of Japan Inc., explains how postwar Japan reaped the benefits of a demographic dividend from the late 1960s onward.

This was when the massive number of baby boomers began entering the workforce, while the total fertility rate — the average number of children expected to be born to a woman over a lifetime — steadily declined.

Once the baby boomers began having children in the mid-1960s to the mid-1970s, Japan’s population experienced another sharp boost.

Motani noted that while Japan’s economy continued to expand through the late 1980s, thanks to the baby boomers and their children’s generation working and increasing consumption and savings, the nation entered a period of “demographic onus” in the mid-1990s when, in contrast to the demographic dividend, the working population peaked and the elderly population increased.

Motani said Japan will be experiencing its “largest-ever demographic onus” in the next five years, when the baby boomers retire en masse, and estimates predict the working population will shrink by 4.48 million from current figures.

A similar phenomenon is also expected to take place in China and South Korea in the coming years.

China, with a population of over 1.3 billion, is known for its one-child policy, enforced since 1979 to prevent overpopulation.

But while the policy has proved successful in lowering its fertility rate, it has also created generational gaps in population, as well as an unbalanced gender ratio, with more male than females.

China experienced a boost in its population in the early 1960s, following the massive famine resulting from Mao Zedong’s failed Great Leap Forward campaign in the late 1950s.

This generation, currently in its late 40s, and its children were responsible in leading the subsequent decades of China’s economic rise, which continues to this day.

But in the book “The Truth Behind the Chinese Economy” (Chugoku Keizai no Shotai), economist Takashi Kadokura says China’s working age population will begin to peak at around 2015. He also voices concern about whether China will be able to increase its per capita GDP, currently below $4,000, in time to create a steady social security system in an aging nation.

Oizumi of Japan Research Institute shared similar concerns and said that while Japan, at $39,727, and South Korea, at $17,078, have been able to achieve a high per capita GDP during their growth periods, according to 2009 U.N. figures, as well as a relatively stable social security system, China still had a long way to go.

“Japan and South Korea both have national pension and health care systems, but I doubt whether China will be able to create a stable system that can protect its enormous population,” he said.

Oizumi said China’s numerous provinces will have to be responsible for establishing their own pension and health care systems, instead of relying on the state, considering the huge wealth gap that exists between rural and urban areas.

Even when looking at Guangdong Province, which is fairly developed, the wealth gap between the rich and poor is up to eight times different, he said.

“This is going to become a crucial issue,” he said.

South Korea is meanwhile in the middle of dealing with its own aging society.

Shin Yong Cheol, associate professor of public administration at the Hosei Graduate School of Regional Policy Design in Tokyo, said South Korea was aging in an unprecedented pace.

Shin explained that while Japan’s total population began falling in 2007, South Korea’s population, now around 48 million, was expected to start shrinking in 2018.

“It took France 150 years for its elderly ranks to increase from 7 percent to 14 percent (of the overall population),” Shin said.

“It took Japan only took 36 years, but for South Korea, this took place in 26 years, an astoundingly fast pace,” he said, noting the South was using Japan as a case study to set up countermeasures.

Shin explained that in South Korea, private-sector corporations, instead of the government, were traditionally responsible for employees’ well-being, taking care of their insurance and other social security-related concerns.

And while the nation’s social security system was generally similar to that of Japan, Shin said the government only recently introduced a national pension scheme.

This was because, traditionally, the oldest son was expected to take care of his parents after retirement, a system that proved effective before the fertility rate began dropping in the early 1990s.

With fewer children to depend on, Shin said there has been an increase in the number of elderly who have to rely on welfare.

And while the elderly population increases, South Korea’s workforce is expected to continue falling.

In 2009, Yonhap News reported that, according to the South Korean government, the “core” workforce population of those between 25 to 49 was expected to fall below 20 million by 2011, a decrease of 710,000 compared with 2007, when it was at its peak.