Mon, Aug 27, 2001 page21

• Asian economies count the cost of aging populations

  FUTURE DEVELOPMENT Populations in Asia are turning gray much more rapidly than Europe and North America, which could spell trouble for the region's labor markets

  • REUTERS
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  It took France 115 years and the US 71 years to make the transition from what the UN defines as an ageing society to an aged society.

  South Korea will make the jump in just 22 years.

  

  Chinese workers enjoy leisure time along a canal in Beijing yesterday. As China's labor population gets older, a host of new social and economic problems will emerge.

  PHOTO: REUTERS

  Much of Asia will experience similar growth-threatening greying in coming decades, posing stern challenges for fiscal and social policy as spending on pensions and healthcare mounts in countries that typically have only flimsy social safety nets.

  How policy makers can rise to that challenge is the topic of a conference in Tokyo this week organized by the Washington-based Center for Strategic and International Studies' Commission on Global Ageing, which is conducting a three-year study into the economic impact of demographic change.

  "With a high degree of consensus, the commission found that the challenges of global ageing are fundamental, unprecedented and potentially destabilizing to global prosperity," said Paul Hewitt, the director of the project. "Urgent corrective actions are needed in order to avert more painful consequences later on."

  The threat to growth from declining labor forces and populations is often perceived as a problem for the industrial world, especially for Japan and a number of European countries.

  But, as the South Korean example shows, Asia is in fact turning grey much more rapidly than Europe and North America.

  "This places an extra demand on policy makers to speed the adjustment process," said Peter Heller of the International Monetary Fund's fiscal affairs department.

  South Korea officially became an ageing society last year when the share of its population over 65 reached seven percent. That figure is set to double to 14 percent, the UN benchmark of an aged society, by 2022 as a result of a sharp drop in fertility rates and a 27-year rise in life expectancy since the 1950s.

  China's projected trajectory is similar. The elderly are expected to constitute 13.5 percent of the population by 2025, up from 7 percent in 2000; Thailand's proportion of pensioners will jump to 13.9 percent from 6.4 percent over the same period.

  "The situation will develop into a major crisis unless provisions are made for this expansion of the older generation," Christopher Eldridge, the Asia representative of HelpAge, a global network of non-profit organizations, said last month.

  Yet for now, social safety nets are rudimentary across much of Asia, where extended families have traditionally looked after the elderly. Even Korea and Japan are regularly urged by the IMF and other institutions to spend more on social protection.

  Given their many pressing tasks as they scramble up the development ladder, poor countries regard a social safety net with good reason as a relative luxury that can wait for later, said Stephen Pollard of the Asian Development Bank's Poverty Reduction Unit in Manila.

  "It's a matter of what developing countries can afford if they're developing their markets, their institutions are weak and inadequate and their economies are not growing and creating the surpluses that they need," Pollard said.

  That is not to say that governments are doing nothing.

  China is gradually deregulating pension management and shifting to a fully funded pension scheme from the present unsustainable pay-as-you-go system, which meets pensions out of current payments.

  The government has estimated the cost of the transition at US$218 billion over 25 years and plans to sell state assets and issue bonds to help foot the bill.

  The consequences for China's fledgling capital markets are likely to be significant. Joan Zheng, an economist with JP Morgan Chase in Hong Kong, expects the government will seek to raise US$7 billion a year in the stock market just to plug the pensions gap.

  In South Korea, the Organization for Economic Cooperation and Development (OECD) projects that public spending on pensions will soar to 10.5 percent by 2050 from 2.4 percent of GDP in 2000.

  "Successfully absorbing the fiscal impact of ageing, both for pensions and healthcare, is crucial for Korea's continued economic development," the OECD said in a recent survey on Korea.

  Because Korea's pension scheme is young and the economic burden of ageing will not be felt for at least another decade, the OECD said the country had a window of opportunity to institute a more sustainable system.

  According to the IMF, even Japan's pensions challenge appears manageable if appropriate policies are implemented in time.

  But it said Japan's task was substantially greater than other countries' because its population was both declining and ageing.

  By 2025, there will be roughly one pensioner for every two Japanese of working age, compared with about one in four now.

  To make matters worse, Japan's public debt is the largest in the world and its unfunded pension liabilities still amount to some 65 percent of GDP despite reforms last year.

  "Both the size of the current [budget] deficit and the demographic outlook indicate that the current fiscal situation is clearly unsustainable and requires strong adjustment measures in coming years," Hamid Faruquee and Martin Muehleisen wrote in a recent IMF Working Paper.
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