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Asia's ageing problem gives India an opportunity

Singapore : The cost of ageing populations is a growing headache for policy makers across much of Asia, but one country stands out as an exception to the trend-India.

For financial markets that jump to decisions in seconds, the impact f demographic shifts over decades night seem irrelevant.

But just as Japan's rapid ageing appears to have induced a rundown in savings by pensioners that has boosted spending and contributed to the country's recovery, economist Huw McKay at Westpac Bank in Sydney says it would be a mistake to ignore the economic repercussions of India's population profile.

By 2010, China will have largely exhausted the impetus to growth from an expanding labour force. Its age structure will become a drag on growth.

India, by contrast, will be entering an extended sweet spot and will enjoy the benefits of a swelling labour force for many decades to come, McKay said.

The consequences for China's status as workshop of the world could be far reaching. Its "input-led" model based on copious capital and inexhaustible pool of labour will have to give way, as it has in rich nations, to productivity-led growth.

"It means China will be very challenged to maintain its competitiveness at the labour-intensive end of manufacturing. At the same time, as its workforce does get smarter, it's going to start to complete in other sectors where greater value is added," McKay Said.

A spate of recent policy initiatives underlines how ageing is impinging on Asia's economic agenda:

1) China said on June 15 it would allow its $16 billion National Social Security Fund to invest abroad as it seeks higher returns to plug a looming pensions gap.

2) Japan pushed through legislation in June that will raise pension contributions to a national 18.35 per cent of salary by 2017 from a maximum 13.58 per cent now. Employers and workers will each pay half. Benefits will also be cut to around 50 per cent of salary by 2023 from about 60 per cent at present.

3) Lawmakers in Taiwan, also facing a pensions black hole, passed a law on June 11 requiring employers to deposit a minimum of 6 per cent of their workers' salary into a retirement fund.

4) Officials said concern about the cost of an ageing society was one reason why South Korea last week decided to spend no more than $3.9 billion on an extra budget to boost its ailing economy. The share of South Korea's population over 65 is projected to double to 14 percent between 2000 and 2019. This is substantially faster than in any other member country of the organisation for Economic Cooperation and Development and prompted the Paris-based forum to warn this month that an overhaul of the South Korean pension fund was essential to ensure its sustainability.

India might have more helpful demographics that these North Asian nations, but that is no guarantee of economic success.

Younger workers save more, providing the fuel in theory for rapid growth. But Kalpana Kochhar of the International Monetary Fund said this assumes the Indian economy will create enough jobs to provide gainful employment for the new armies of workers.

Unfortunately, India's rate of job creation slowed to a little over one per cent a year between 1994 and 2000 form 2.75 per cent a year between in the 1983-1994 period.

"Thus notwithstanding generally favourable demographic trends, India's medium-term economic prospects depend critically on progress with the closely inter-twined tasks of fiscal consolidation and structural reform," Kochhar said in a paper prepared for a recent conference on India's fiscal policy. Education is another crucial ingredient.

New prime minister Manmohan Singh has promised to double education spending to six per cent of national output.

But even if the money used wisely, the results will not show up for years.

(Ref : TOI, June 28 2004)