Asia’s demographic challenge

The ageing and shrinking of populations in many parts of East Asia will be a defining part of their economic and social development this century, just as the trade-fuelled economic boom was in the latter half of the previous one.

The ageing crisis will have a cascading effect on many aspects of national economic and political power, making it harder to staff militaries, increasing the burden on public finances and making it imperative to squeeze more productivity out of a smaller working-age population.

Japan’s Prime Minister Fumio Kishida captured the sense of the crisis when he declared in January 2023 that his country ‘is on the cusp of whether it can maintain its societal functions’ with a declining population. South Korea is in the exact same place, if not more so.

At the same time, major economies in developing South and Southeast Asia face the opposite challenge of creating enough jobs for the growing number of young people who need them — and getting enough of those people into the pool of taxpayers to fund the future liabilities of nascent welfare systems unprepared for the needs of a larger older-aged cohort.

The frustrated economic ambitions of India’s youth have been one element in the rise of a right-wing populism; in Indonesia, President Joko Widodo has repeatedly expressed his concern about having his country’s ‘demographic bonus’ turn into a ‘demographic burden’ and has thrown a lot of political capital at new industrialisation initiatives.

Add to this a third category of countries like Singapore, Australia and New Zealand, which face similar problems of low birth rates and ageing demographic profiles, but a less acute problem of a shrinking workforce on account of their long-term commitment to large-scale migration.

In this week’s lead article, George Magnus provides a data-rich survey of the state of these demographic challenges to national prosperity in Asia, accentuating the fact that the region’s governments have time to develop the policies needed to confront the risks to their economies and societies posed by their different demographic challenges.

The unambiguous subtext to his analysis: regardless of whether governments are facing the challenges of ageing and shrinking workforces or a glut of young people who need to be incorporated into productive jobs, governments of all political stripes will have to assemble the coalitions that can support rejigging tax, pension funds, welfare and immigration systems in response to those challenges.

These processes take time. As Peter Macdonald highlighted in the recent edition of the East Asia Forum Quarterly, while the impacts of China’s ageing and shrinking population are myriad, for the time being a shrinking workforce supporting more and more non-working elderly people need not be the harbinger of economic disaster: the younger workers are on average both more productive and consume more than those of older generations.

Still, the impact on industries that have underpinned growth for decades could be profound. Magnus points out that if China’s real estate industry woes weren’t bad enough now, ‘[t]he expected 25 per cent fall in the cohort of first-time property buyers over the next decade or two will crimp household formation and housing demand, forcing the sector to shrink’.

Faced with shrinking markets and shortages of workers at home, firms from Northeast Asia will intensify outsourcing to labour-abundant partners in Southeast Asia and South Asia, if they can get reforms right and embrace open economic policies.

In Japan and South Korea, a much bigger migration program will have to be part of the solution. Reforms in each of these countries have so far been piecemeal, focused more on doing the bare minimum necessary to address their acute labour shortages.

But that implies hard work for political elites to build a new consensus around the need to accept a much higher foreign-born share of the population as a natural element of national life and — whisper it — nudge their societies towards adapting to the multiculturalism that inevitably comes with mass migration.

Different population endowments across the region offer huge possibilities for regional growth and structural change. But a major transformation of the trade and investment landscape is required to seize them. With India’s lingering protectionist bent and the current international shift to inward-lookingness and self-sufficiency, can that potential for economic transformation through trade be delivered?

The challenges that the ageing and shrinking states of East Asia face shines a light on one thing that was once acknowledged across the political mainstream in the United States: the idea that the country’s openness to migration was a source of national greatness.

That consensus weakened in the Trump era. Trump’s demagogic response to irregular migration from Latin America, and his ‘Muslim ban’, dominated headlines — but a more insidious element of the nativist agenda he empowered was the undermining of the US skilled migration program.

Progress at rehabilitating the system has been made in the Biden era, but the US’ lottery-like skilled migration program is not fit for purpose. An over-the-top anxiety about the potential for Chinese students and migrants, particularly scientists, to be a vector for espionage is self-defeating.

As China faces the demographic problems of its near East Asian neighbours over the long run, with even less political room for mass migration than its neighbours have, the openness of US society to talent and ideas from abroad should surely be played for the crucial economic and soft-power advantage that it is.

This article was published by the East Asia Forum.