Population aging: Success of past policies, or next big threats to economies?

Author: Michael Herrmann

Only two years ago, the world population will reach the 7 billion mark and by mid-century it will have growth to well over 9 billion, according to the latest projections. However, the global trend masks a large and increasing heterogeneity between countries. On the one end of the spectrum are the world’s least developed countries, which continue to have high fertility and high population growth, which is associated with a youthful age structure of their populations. These countries are concerned whether they will be able to upkeep spending on education for a rapidly expanding population of young people and whether they will be able to attain sufficiently high rates of economic growth to absorb a large and growing labor force in productive and remunerative employment. At the other end are the world’s richest countries, which have a low fertility and slow population growth, which is leading to an aging population. These countries are concerned whether they will be able to finance pensions and health care for more and more older persons and whether they will be able to upkeep past rates of economic growth amidst a shrinking of the working-age population.

Against this background, one may ask whether the aging of population – which is chiefly attributable to advances in health care and education, as well as economic progress and changes in employment relations and social protection systems — is a blessing or a curse. Recently someone suggested that policies which contribute to lower fertility and population growth are bad, as success in these areas will inevitably lead to the aging of populations. Such statements are nonsense. It would be the same as saying that it is better not to grow rich, because rich people often have buy fast cars, and driving a fast care bears risks. The demographic transition from a state of high mortality, high fertility and high population growth to a state of low mortality, low fertility and population aging, is a natural and necessary aspect of social and economic development. If countries conscientiously promote and utilize this transition, they can benefit from a demographic dividend, as was the case in the Republic of Korea, and if they are doing this well, they will be much better positioned to address the challenges that will come with an aging population.

Population aging is a relatively new phenomenon, and as many new phenomena is causes anxieties. Michael Herrmann, Senior Adviser on Population and Economics with the United Nations Population Fund argues that these anxieties are often exaggerated. In his article “The Economic Challenges of Population Aging in Emerging Markets” published in Modern Economy, 2014, No. 5, by Scientific Research Publishing, he examines the challenge of population aging in emerging market economies. While he underscores those population aging demands policy responses, including the establishment of more formal systems of social protection and pensions, he argues that many emerging market economies are well positioned to address the challenges of population aging. The most important yardstick for assessing whether countries are in trouble is not the demographic dependency ratio (the number of people in working age relative to those below or above working age) but the economic dependency ratio (the number of people who benefit from full and remunerative employment relative to all others), as well as labor productivity. Many of the poorest countries have a large and youthful working age population, but a large share of this population has no jobs or suffers from underemployment and is therefore able to care for only a small number of dependents. By contrast, some of the more advanced countries have a comparatively small and old working age population, but a large share of this population holds productive jobs and benefits from relatively high labor income and is therefore able to take care of a larger number of young and old dependents.

Furthermore, it makes little sense complaining that consumption expenditures by the increasing number of older persons, mostly on health care and pensions, will increase over the coming decades, as this will in fact create income for many businesses and households. The expansion of the health care sector at large, including the pharmaceutical industry, is a multi-billion dollar business that can contribute to economic growth and employment, just like the expansion of any other industry. Efforts to cut consumption expenditures by the elderly, on health care for example, would have negative effects the income of the working age population. From a macroeconomic perspective, consumption expenditures are but the flipside of income.

Population aging is most appropriately understood as a change in consumption which should, in a functioning market economy, encourage a change in production and lead to a process of structural change. This process of structural change is not dissimilar to the switch from typewriters to computers: Some industries will become less important — measured as a share in economic output — but other industries will flourish. There is no sense in dreading this change, as it does not need to have any negative net effects on economic development. The most reasonable thing countries can do is to embrace structural change and seek to seize first mover advantages by creating the economic conditions for companies to respond to changing demand for goods and services. Certainly, not all countries will be able to develop a large pharmaceutical industry — just like not all countries are able to produce computer chips — but many countries can potentially produce goods and services that support the pharmaceutical industry. While several emerging market economies are well positioned to respond to the changes that will come with an aging population, face troubles. However, rather than pursuing policies to increase fertility and postpone population aging – which are neither a timely nor an effective mean to address population aging – these countries should focus on promoting stronger economic development and full and productive employment. Efforts to pay for health care and pensions of a growing number of older persons by pursuing policies that promote a growing number of younger persons effectively amount to a nonsensical and very problematic Ponzi scheme.


Journal: Modern Economy
DOI: 10.4236/me.2014.52018 (PDF)
Paper Id: 42996 (metadata)

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