IMF report highlights Asia’s ageing crisis

Despite its status as the world leader in growth, the Asia-Pacific region must address its ageing population or else face the risk of growing old before becoming rich. This is the finding from the International Monetary Fund’s (IMF) Regional Economic Outlook for May 2017. While the outlook for the region remains robust, it also faces a near-term outlook full of uncertainty and “risks remain slanted to the downside”. These risks include volatility in capital flows and tightening of financial conditions due to economic uncertainty, while a shift towards protectionism in major trading partners (such as the US) “represents a substantial risk to the region”, states the report. Asia is particularly vulnerable to a decline in global trade because the region has a high trade openness ratio and significant participation in global supply chains. The longer-term challenge for the region though is to address its ageing population, states the IMF, which calls on the region to implement structural reforms to address its demographic challenges and to boost productivity. According to the report, population growth rate is projected to fall to zero for Asia by 2050 and the active population, now at its peak, will decline during the coming decades. The proportion of those aged 65 and older will increase rapidly and be almost 2.5 times the current level in 2050. Of critical importance is the speed of ageing, which is all the more remarkable when compared to the historical experience in Europe and the US. “As such, parts of Asia risk becoming old before becoming rich,” states the report. “The region’s per capita income relative to the United States stands at much lower levels than those reached by mature advanced economies in the past. In a global context, Asia is shifting from being the biggest contributor to the global working-age population to subtracting hundreds of millions of people from it.” Of course the impact of ageing could vary in different Asian countries, especially in relation to economic growth. Overall, after experiencing a demographic dividend for so many years, demographic trends could subtract 0.1 percentage point from annual global growth in Asia during the next three decades. In countries such as China and Japan where the issue is especially acute, there could be a subtraction of 0.5 to 1.0 percentage point. In contrast, they could add 1.0 percentage point to annual GDP growth in early-dividend countries, such as India and Indonesia, if the transition is well managed. In several Asian economies, such as Australia, Hong Kong SAR, New Zealand and Singapore, immigration could play an important role in softening the impact of ageing or prolonging the demographic dividend, states the IMF. The diversity of demographic trends in the region also creates an opportunity for cross-border risk sharing, whereby the economic surplus in some countries could be used to address capital shortfalls in younger countries, states the IMF. Although it also acknowledges that this mitigation would only be of material impact for a small number of countries. It is more likely that ageing demographics will reduce investment, keep interest rates down, put downward pressure on financial markets and raise the risk of a period of secular stagnation and economic underperformance. “These domestic effects are likely to be less important for countries that are financially open,” states the IMF. “For those, changes in the world interest rate – which may in turn be driven by global ageing trends – will likely matter more.”

IMF report highlights Asia’s ageing crisis

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