Growing old before getting rich

Ageing populations will restrict prosperity in many emerging markets

Slowing population growth means that some major emerging-world countries will grow old before they get rich. Most people will be aged over 40 before these economies' average incomes reach $15,000.

Germany and Japan are widely seen as having some of the most unfavourable demographics in the developed world, but China, Korea, Russia and Poland also have ageing populations and are not wealthy countries.

Ageing populations can drag down potential growth and strain government finances. Countries need to spend more on reforms and infrastructure as well as pensions and healthcare. Shrinking populations, or fewer workers relative to non-workers, can impact on politics, international standing, welfare, education and labour markets.

China is the most obvious case of an emerging market with poor demographics. Its working-age population will start shrinking this year with the median age expected to rise above 40 in 2024. Yet despite its high growth, the Chinese may not become 'rich' until the mid-2030s. Russia and much of Eastern Europe face the same fate.

By contrast, countries with fast-growing, young populations can stimulate productive capacity and demand, supporting global growth. However, these economies need to make sure they make the most of their populations.

For example, India's working-age population is growing by around 1.1m people a month but it is creating jobs at only half that rate. The declining employment-to-population ratio is hurting future growth prospects and labour-market reforms plus even faster growth may be needed to allow the country to fulfil its full growth potential.

And because India starts with such a low GDP per person, even it will get old before it gets rich.

On the other hand, there are good news stories. Malaysia, the Philippines and Mexico all have favourable demographics and/or sufficient potential growth to get rich before they get old. Peru and Argentina also look much more promising, with many Latin American economies having a reasonably high per capita GDP compared with their median age.

However, low fertility has become engrained across parts of Asia, including Korea and Singapore. Even if fertility rates can be raised, the impact on the population pyramid won't be seen for many years and the impact would be marginal unless rates rise well above the 2.1 replacement ratio compared with the current 1.6.

Some demographic declines are substantial. The working-age populations of Korea and Thailand, for example, are expected to fall by 26% in the next 35 years while pensioners increase threefold. Parts of Eastern Europe have even worse demographics: Poland's population is expected to fall by 14% by 2050 and Russia will have more pensioners than children by 2030.

The higher proportion of manual jobs in emerging markets is not conducive for coping with ageing populations. Raising retirement ages, for example, is less of an option than it is for office workers.

And if weak demographics lower the potential growth and hold back development and prosperity, the infrastructure to deal with an ageing population - such as robust pension systems and less labour- intensive employment - may not arise. Slower growth and ageing populations may sharply increase government debt, slowing future growth further if taxes need to rise.

But even faced with weak growth prospects, China should still have enough potential to escape the middle-income trap.

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