Asia's shrinking demographic dividend

Back in 1994, Paul Krugman enraged Asians with his foreign affairs article The Myth of Asia's Miracle. In it, he argued that seemingly remarkable growth in countries such as Singapore was not so remarkable after all. None of the expansion was the result of a rise in productivity, he said. Rather, all could be explained by an increase in measured inputs, namely of labour and capital.

Krugman's paper triggered not a little outrage. Leaders who had overseen what seemed to them like a startling transformation of their economies didn't take kindly to his arguments. They saw themselves as statesmen who had engineered economic miracles, not lucky beneficiaries of favourable demographics and of thrifty populations whose savings could be recycled into factories and roads.

Good demographics may be a precondition for high growth. But it is not enough. Countries in Latin America that had the same demographic profile as south-east Asia in the 1970s grew at a far slower pace. One needs at least a semblance of decent government, if only to persuade people their savings won't be confiscated or eroded by hyperinflation.

Likewise, when demographics turn less favourable, countries must rely on productivity gains to maintain growth. For that, says George Magnus, senior economic adviser at UBS and author of The Age of Aging, they need excellent education, good macroeconomic management and adequate regulation of labour markets. If not, they can all too easily fall into a middle-income trap.

These topics are of more than academic interest to Asia. As HSBC's Frederic Neumann points out, many countries in the region are reaching the end of their demographic free ride. China's workforce will contract from 2017, as will that of Hong Kong. The labour force of South Korea and Taiwan will start to shrink in 2016, while Singapore's will do so from 2018.

At least these economies, with the exception of China, are already fairly prosperous. But some less well-off countries will soon run out of steam. Thailand's demographics will turn in 10 years. Even Vietnam, whose workforce is growing apace, will see a sharp deceleration before too long.

If these are the hares – the countries that came out of the demographic traps first – Asia does also have some tortoises. Those that can look forward to years of favourable demographics include the Philippines, Malaysia, Indonesia and everybody's demographic darling, India. The latter will add the equivalent of Europe's workforce over the next 15 years.

So can the likes of India, the Philippines and Indonesia simply sit back and wait for their democratic dividend to kick in? Obviously not.

The Philippines shows how easily one can squander one's demographic birthright. Its natural resource is its people but because of a lack of good jobs at home, about 10 per cent of Filipinos work abroad, remitting cash on which their relatives – and the Philippine economy as a whole – relies.

Some Indians, too, fear their country could fritter away its democratic dividend. When Japan was in its fast-growth period – in the 1950s and 1960s – it funnelled literate and well-educated workers into its factories and offices. By comparison, India's education system is patchy. It produces some excellent elite students but fails tens of millions who attend state schools that are often devoid of the basics – including teachers. Some worry that India's demographic dividend could mutate into a demographic time bomb.

If countries that have favourable demographics cannot relax, then those with unfavourable ones need not despair. China's flow of youth entering the workforce will soon start to slow. But there are still tens of millions of potential workers in the countryside who can be mobilised.

Even Japan – to many, a cautionary tale of demographics turned sour – has maintained reasonable per capita growth by increasing labour participation. (There are, though, questions about sustainability given the high public debt.) Female participation has edged up to 60 per cent, according to Kathy Matsui of Goldman Sachs, while many Japanese work well beyond official retirement. About half of those aged 65 to 70 and a quarter of those 70 to 75 are still working.

On the other hand, Japan has been slow to accept immigrant workers. It has, for example, set ludicrously rigorous language requirements for Philippine nurses even though there is a desperate shortage of Japanese people willing to care for the elderly.

Demographics is not destiny, though it does set the parameters of possibility. Asia has grown used to a demographic tail wind. For many of its economies, that wind is about to start blowing the other way.

Copyright The Financial Times Limited 2012.