The Economic Challenges of Population Aging in Emerging Markets

While population aging is most advanced in the developed economies, as measured by the share of older persons in the total population, population aging is happening most rapidly in the developing world. Between now and 2050, the share of older persons in the total population will continue to grow in all regions, but until 2050 the growth of this share will be fastest in developing countries.

By Michael Herrmann United Nations Population Fund (UNFPA), New York, USA

However considerable differences between developing countries remain. In the developing countries of the Americas and Asia this share will grow faster than in the developed countries of Europe and North America,and in the developing countries in Africa in particular it will grow at a much lower rate.3 The differences in this growth rate are mostly attributable to differences in the fertility level. On average, emerging market economies have seen a considerably steeper and faster fall in fertility levels and are therefore more advanced in their demographic transitions than the least developed economies.

As declining fertility drives the increase in the relative number of older persons, it is also associated with a relative decrease in the number of younger persons. In the least developed countries the projected decrease in the number of younger persons per working-age adult (young-age dependency ratio) is considerably faster than the increase in the number of older persons per working-age adult (the old-age dependency ratio), leading to a fall in the total dependency ratio (the sum of all dependents per working-age adult) over the next forty years or so. However, this window of opportunity, which is provided by a fall in the number of dependents, will eventually close.

This paper focuses on the 20 countries, including mostly developing countries as well as a few developed countries, where population aging will grow fastest over the 2010-2050 period.4 In all these countries a rise in the old-age dependency ratio is at least partially offset by a fall in the young-age dependency ratio. In most countries the share of total dependents will increase by less than the share of old-age dependents. In accordance, higher spending by households and the public sector on goods and services that are mostly consumed by the elderly (e.g., health) can partially be compensated by lower spending by households and the public sector on goods and services that are mostly consumed by the younger generations (e.g., education) without decreasing spending per person. To evaluate the economic implication of any change in age structures, including the aging of population, it is therefore important to focus on the aggregate implications of all changes.

Furthermore, when evaluating future trends, it is often useful to put them into perspective with past developments. Whereas the total dependency ratio is projected to increase in almost all countries and country groups in the sample by 2050 relative to 2010, the total dependency ratio is actually projected to fall in several of these countries and country groups by 2050 relative to 1950. In other words, the number of dependents per adult in working-age in 2050 will frequently be smaller than the number of dependents per adult in working age in 1950. The relative number of dependents changes as countries go through their demographic transitions. It increases in the early stages, mostly because of an increase in youngage dependents, it falls in the middle stages, and it increases again in the third stage, mostly because of an increase in old-age dependents. However, dependency ratios do not perpetually increase thereafter. The rise in dependency ratios due to population aging will eventually be followed by a fall in dependency ratios.

An increase in dependency ratios is not a new phenomenon, and countries were able to cope with this phenomenon successfully in the past. However, contrary to the past, when a large and growing share of dependents were children, today a large and growing share of them are older persons. The distinct nature in the composition of dependents has distinct implications for the economy and policy making. Whereas the challenge during the early stages of the demographic transition is an essentially unlimited supply of labor5 , it is often argued that the challenge during the later stages of the demographic transition is a shortage of labor. Both developments can affect the returns to, and investments in, the factors of production, and therefore have far-reaching implications for income distribution and poverty, and the nature of economic development. The implications of an aging population for labor markets and economic development, as well as the financing of social protection, including health and pensions, are examined in the subsequent sections.

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