Leveraging the Age Gap

By GAUTAM NAIK, LESLIE CHANG and JOANNA SLATER

 THE WALL STREET JOURNAL, February 27, 2003

Developing Nations Benefit
From 'Demographic Dividend'

Young Populations Provide Cheap Labor,
Lower Costs for Pensions, Health Care

When Alan Greenspan testifies before Congress Thursday morning, he won't be discussing oil prices, interest rates or taxes. He'll be talking about getting old.

The Federal Reserve chairman, who is 76 years old, will be appearing before a Senate committee to explore the impact of global aging on economies. One big issue: the wide gap between the older populations of the West and the vast working-age populations of developing countries.

Far from being an arcane topic for demographers, this gap has enormous implications for economies, businesses and the competitiveness of individual countries. It means that while Europe and Japan struggle with pension schemes and the rising cost of health care, countries like China, Brazil and Mexico can reap the fruits of what's known as a demographic dividend: falling labor costs, a healthier and more educated population, and the entry of millions of women into the work force.

The demographic dividend is a gift of falling birth rates, and it causes a temporary bulge in the number of working-age people. Population experts have estimated that one-third of East Asia's economic miracle can be attributed to a beneficial age structure. But that only occurred because the governments there had policies in place to educate their people, create jobs and improve health.

The big question is whether China, India, Brazil, Mexico and the others can do the same. "It's a one-time-only chance for developing countries to benefit from their favorable age structure" and close the wealth gap with their richer counterparts, says Joseph Chamie, director of the United Nations population division.

According to a new report on population published Wednesday by the U.N., the less developed countries have an average median age of only 24.1, projected to rise to 35.7 by midcentury. By comparison, the median age of the developed world two years ago was 37.3 years, and it was projected to rise to 45.2 by 2050.

Richer countries are already feeling the pain. In Belgium, the average age of a soldier is a very high 40, and finding young recruits isn't easy. The French government is struggling to reform its pension system to prepare for an "age crunch" later this decade. Others are taking more aggressive action. Scotland's government said recently that it would launch a series of new measures to boost its shrinking -- and aging -- population by enticing foreigners to immigrate. Among its measures: Improving the look of its airports, promoting the charms of Scotland overseas, and urging foreign students to stay on after they graduate.

The U.S. is better off than Japan or western Europe, thanks to a higher birth rate and a more open immigration policy that lets it maintain a large pool of highly educated young people in its work force. But as its baby boomers age, the U.S. is facing the problem more squarely than many other developed nations, raising the age of retirement and increasing workers' responsibility to fund their own pensions.

China doesn't need to look abroad for workers. After two decades of a one-child policy, it has achieved a low fertility rate of 1.8 children per woman. But nearly a quarter of the country's 1.3 billion people are under the age of 15, and only 7% are over the age of 65. Huge numbers of Chinese youth are entering the work force, providing the country with a productive labor supply for years to come.

To exploit the demographic dividend, the government has made a steady push to better educate its people. Between 1998 and 2001, Chinese higher-education institutions increased student enrollment more than 20% each year. The government is also encouraging the growth of private schools.

But the picture isn't all rosy. Much of China's youth lives in the countryside, home to two-thirds of the country's population, and those young people are increasingly moving to the cities, creating huge employment and housing challenges. Chinese newspapers are full of articles about the anxiety and competitiveness of job hunting for the young. "Internationally, they talk about demographic dividends," says Gu Baochang, a Beijing-based demographer. "But how to turn it into reality is the issue."

In India, too, there are an unprecedented number of people between the ages of 15 and 59. By 2016, India will have 800 million people in that age bracket, a jump of more than 200 million in just 20 years. India's teeming northern states, in particular, continue to struggle with a rising population.

By comparison, the southern state of Kerala has moved quickly to exploit its falling fertility rate, which has slowed to below replacement level. Nearly all of its expectant mothers give birth in a hospital, drastically reducing infant mortality rates. Indeed, as the population pyramid starts to resemble that of developed countries, a new problem is arising: how to care for the aged.

Population experts in Mexico say their country has a 30-year window to cash in on a similar opportunity. But it's going to be tough. Mexico can't seem to produce the necessary number of jobs to provide for the 1.2 million Mexicans who enter the labor market yearly. As a result, it is exporting a large part of its "population dividend" -- younger workers -- to the U.S. In the 1970s, Mexico had a population of about 50 million, and 30,000 of them left annually for the U.S. Today, the population is about 100 million, and about 380,000 leave.

A few "young" countries are moving early to troubleshoot the woes faced by aging countries. Malaysia, which has one of Asia's youngest populations, also has one of the region's most progressive retirement savings schemes. Salaried Malaysians are required by law to sock away 23% of their monthly salary into the Employee's Provident Fund; employees put in 11% and employers remit another 12%. The EPF, which was set up in 1951 and now manages $53 billion. Contributors collect their net savings, plus accumulated dividends, as a lump sum when they hit 55.

Other countries are being thwarted by the sheer pace of change. It took 114 years before France's older citizens -- those 65 and above -- went from 7% of the overall population to 14%. Many developing countries -- including China, Brazil and Indonesia -- will make that transition in 25 years or less.

That reduces flexibility. Brazil has seen a plunge in birth rates, but its economy is hindered by a generous pension system. Already, the combined deficit of private- and public-sector pensions amounts to 5.4% of Brazil's GDP. All told, pension payments account for 45% of federal spending. The government wants to raise the retirement age and cap pensions for new civil servants, but it faces strong political opposition.

The differences in age structure among nations will bring more anomalies in the years ahead. Russia's population, for example, is expected to shrink from 145 million people today to about 104 million by 2050. Tiny Yemen's will jump from 20 million to 102 million, with a larger working population than Russia's.