This “dividend” will drive growth in ASEAN for years to come

By Kim Iskyan

Demographics is one of the "big picture" themes that has an enormous impact on the world's economic growth patterns. And in the coming decades, it's going to drive growth in a number of countries of the Association of Southeast Asian Nations (ASEAN).

You see, we're in the middle of one of the biggest demographic shifts in history. Population growth is expected to skyrocket in many ASEAN countries (ASEAN is comprised of Indonesia, Malaysia, the Philippines, Singapore, Thailand, Cambodia, Brunei, Laos, Malaysia, and Vietnam.) - 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.

By 2050, China's population is also expected to decrease by 3.2 percent. And 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. Over the next few decades, demographics in the countries of the ASEAN will likely boost the region's economic growth.

ASEAN's demographic dividend

With an expected total GDP of nearly US$3 trillion in 2018, ASEAN is the fifth-largest economic region in the world. It's home to around 650 million people - more than North America or the European Union. It's a rapidly developing region, largely thanks to its significant and growing working age population. The only countries with larger labour forces are China and India.

Indeed, ASEAN has a higher than average proportion of working age grown-ups - and it will likely stay that way until 2030. One estimate suggests that by 2025, 68 percent of the population in ASEAN will be of working age, that's 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 too old to work - its dependents - has declined. As a result, ASEAN's dependency ratio, which measures the share of the dependent population against the working population, has been falling.

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 fallen to 2.1 percent. And last year, it fell to 1.8 percent.

Looking ahead, the United Nations expects ASEAN's population to rise from 647 million in 2017 to 726 million in 2030, and to 795 million people in 2035. That's an average growth of 0.69 percent per year. That's lower than the expected global growth rate of 0.98 percent during the same period, which indicates lower fertility rates.

In many ways, ASEAN is profiting from what's called a demographic dividend, which describes how a population's changing age structure can help boost economic growth. It usually happens when labour force participation rates rise and fertility rates fall. This is exactly what's happening in the ASEAN countries 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, manage finances and pay taxes, their economies benefit. That leads to an increase of 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 - will cause the share of the working-age population to decline. Then the dependency ratio will rise. And when the population to labour force ratio rises, GDP per capita income growth will slow down.

But this is decades away for ASEAN. The UN forecasts that the dependency ratio of ASEAN will start to drop over the next few years, from 0.48 in 2015 (this means 48 dependants for every 100 people of working age) to 0.47 by 2020. This is well below the global average of 0.54.

But the ratio will begin to rise by 2030, and then accelerate to reach 0.59 by 2035, which will be comparable to the rest of the world.

Singapore and, to a lesser extent, Thailand, will drive much of the increase in the ratio, due to their older populations. According to 2016 estimates, other than Singapore, Thailand and Vietnam, the median age of ASEAN countries (the age at which half of the population is older, and the other half is younger) is less than 30, as shown in the graph below.

This suggests that there are still lots of young, working-age grown-ups 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 much older at 46.9 years.

The other ASEAN countries will only see small rises in their dependency ratios. But the "demographic dividend" for the region is expected to end by around 2030. By this point, the Asian Development Bank estimates that 10.8 percent of the ASEAN population will be older than 65. That's significantly higher than the 6.8 percent recorded in 2010.

ASEAN's demographic dividend doesn't necessarily assure a boost in economic growth. A country can waste their demographic dividend by implementing the wrong social and economic policies.

And since the 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 worker mobility will help the region capitalise on its demographic dividend. And that makes the future success of the ASEAN economic bloc even more important.

In short, over the next 15 years or so, demographics are going to play a key role in boosting ASEAN's economic health.

 

Kim Iskyan
Kim Iskyan is the publisher of Stansberry Churchouse Research, an independent investment research company based in Singapore and Hong Kong that delivers investment insight on Asia and around the world. Kim has nearly 25 years of experience as a stock analyst, hedge fund manager, political risk consultant, and financial commentator in more than half a dozen emerging and frontier markets. He's been quoted in the Economist, The New York Times, the Wall Street Journal, Barron's, and Bloomberg, and has appeared on Fox Business News, China Central Television, and Bloomberg TV, and has written commentary for the Wall Street Journal, Slate.com, Salon, TheStreet.com, breakingviews.com, and other publications. For more of his insights, Click here to sign up to receive the Asia Wealth Investment Daily in your inbox every day, for free.

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