Demographics is one of the “big picture” themes that has a massive impact on the world’s economic growth patterns. And it’s going to be one of the many sources of growth for parts of Southeast Asia in coming decades.
(In coming days we’ll tell you about a way to invest in ASEAN’s powerful demographics… stay tuned.)
Humanity is in the middle of the biggest demographic shift in history. Population growth is being forecast to explode in many African countries – and decline in Europe and several other major regions. Broadly speaking, economic growth is a function of the number of workers, and their productivity. Shifting demographics in part drives economic growth.
As we’ve recently discussed, Asia’s demographic future is a mixed bag. With its ageing population and low fertility rate, Japan is having some severe problems that will affect its economy for a long time.
China’s population is also expected to fall by 2 percent by 2050. And according to think tank Brookings Institution, the share of China’s working age population is declining rapidly, which will hurt future economic growth.
Southeast Asia, on the other hand, has much more reason to be optimistic. Demographics in the Association of Southeast Asian Nations (ASEAN) will likely boost the region’s economic growth over the next several decades.
ASEAN’s demographic dividend
ASEAN’s total GDP of US$2.43 trillion makes it the sixth-largest economy in the world. The region is also home to over 600 million people – more than North America or the European Union. It’s a rapidly developing region thanks in large part to its large working age population. Only China and India have larger labour forces than ASEAN.
Indeed, ASEAN has a higher than average proportion of working age adults – and it will likely stay that way until 2030. One estimate suggests that the working age population in ASEAN will account for 68 percent of the region’s total population by 2025 – up from less than 60 percent in 1990.
And as ASEAN’s working age population has increased, the share of its population that is too young or old to work – its dependents – has fallen. As a result, ASEAN’s dependency ratio, which measures the share of the dependent population against the working population, has been declining.
But ASEAN’s population growth has been slowing for the past 50 years. In 1965, annual population growth was 2.8 percent. By 1990, it had dropped to 2.1 percent. And last year, it was a mere 1.2 percent.
Looking ahead, the United Nations expects ASEAN’s population to rise from 633 million people in 2015 to 717 million in 2030, and to 741 million people in 2035, for average growth of 0.85 percent per year. That’s lower than the expected global growth rate of 0.98 percent during the same period – indicating lower fertility rates.
In many ways ASEAN is enjoying what’s called a demographic dividend. This describes how a population’s changing age structure can help boost economic growth. It usually happens when labour force participation rises and fertility rates fall, which is what’s happening in ASEAN right now.
With the labour force temporarily growing faster than the dependent population, there are more resources available for investment in family welfare and economic development. And when countries have a greater share of people who can work, save and pay taxes, the economy benefits. And it leads to an increase in growth in income levels that can last for decades.
The dividend won’t last forever
However, eventually a rapidly ageing population – since there are fewer babies and thus fewer young people – causes the share of the working-age population to decline. Then the dependency ratio begins to rise. When the population to labour force ratio rises, GDP per capita income starts growing more slowly.
But this is years away for ASEAN. The UN predicts that ASEAN’s dependency ratio will start to drop over the next few years, from 0.48 in 2015 – meaning that for every 100 working age people, there will be 48 dependents – to 0.47 by 2020. This is well below the global average of 0.54.
However, the ratio will begin to rise by 2030, and then accelerate to reach 0.59 by 2035, which will be in line with the rest of the world.
Singapore and, to a lesser extent, Thailand, will drive much of the increase in the ratio, thanks to their older populations. According to 2016 estimates, other than Singapore, Thailand and Vietnam, the median age of ASEAN countries – that is, the age at which have the population is older, and half is younger – is less than 30:
This suggests that there are still lots of young, working-age adults in the region, especially when compared to other parts of the world. In the U.S., the median age is 37.9 years. In China, it’s 37.1 years. And in Japan, it’s a much older 46.9 years.
The remaining ASEAN nations will see only modest rises in dependency. But the “demographic dividend” for the region is expected to end by around 2030. By this point, the Asian Development Bank estimates, 10.8 percent of the ASEAN population will be above 65, much higher than the 6.8 percent recorded in 2010.
ASEAN’s demographic dividend doesn’t necessarily guarantee a boost in economic growth. A country can blow their demographic dividend with the wrong social and economic policies.
And since ASEAN members have some major political differences, favourable demographics may not benefit every ASEAN country to the same degree.
That being said, trade liberalisation and increased ASEAN worker mobility will help the region capitalise on its demographic dividend. And that makes the future success of the ASEAN Economic Community even more important.
For the next 15 years or so, demographics are going to play an influential key role in boosting ASEAN’s economic health. Shortly we’ll tell you about a way to invest in this trend that could dramatically increase the value of your portfolio – so stay tuned.