More than 80% of global GDP is generated by countries with rapidly ageing populations. How these seniors directly and indirectly shape their economies - especially in a political sense - will henceforth be an important factor when trying to understand global and domestic political economy trends.

North-east Asia is already head of that curve. Japan has the oldest population among the world’s high-income countries, while China - a developing country - is home to the world’s largest number of elderly citizens and its population is ageing increasingly rapidly.

Comparing these countries - both of which tend away from immigration - can help to shed light on the related economic challenges. That, in turn, may help other countries to avoid some of the potential pitfalls in this period of rapid population ageing across countries generating the majority of world GDP.

Rich old Japan

In June this year, Japan hosted the first-ever G20 summit to include a priority focus on demographics. Famous for its super-ageing population, Japan is second only to Hong Kong SAR in having an extremely low population share of children aged 0-14 years. An era not just of an ageing population but of population decline, and the alarming policy challenges that will result, lies ahead.

The former governor of the Bank of Japan, Masaaki Shirakawa, wrote recently about the fact that Japanese officials had long misdiagnosed the country’s persistent deflation as having primarily economic rather than demographic drivers. Since the delay in identifying that driver had aggravated the ensuing policy challenges, he urged other countries to learn from Japan’s mistake.

Recently published research by BNP Paribas, meanwhile, suggests that the ageing of the global population has shaved some 2.6% from the neutral rate of interest since 1990, with intensifying population ageing set to continue the trend.

The Economic Demography Matrix: countries can be split into four distinct demographic profiles Image: Lauren Johnston/World Bank

For high-income economies, and the many developing countries that are also home to rapidly ageing populations (those marked in red and yellow in the figure above), Shirakawa’s call should be heard with urgency. Similarly, since Japan is far from alone as a rapidly ageing high-income economy, it may be useful for other countries to use Japan’s case as something of an ageing population lighthouse – and make earlier policy adjustments accordingly.

Areas to explore could include interventions to support the productivity of the elderly, as well as adjustments to the taxation system to reflect the shrinking workforce and the heightened pressure on the working-age population caused by the costs of care for the elderly. The more extreme case of population decline brings a whole new level of complexity to policy-making again, as Japanese policy-makers are finding.

Poor old China

Following its one-child policy, which was ended in 2015 after more than 30 years, China’s fertility rate rapidly converged with the below-replacement-level fertility rates of the high-income north-east Asian economies – Japan, South Korea, Hong Kong, Taiwan and Singapore – even though China remains a developing country. Alongside rapid gains in life expectancy, the world’s largest population and a relatively early retirement age (55 for women and 60 for men), China is also home to the largest number of retirees; some 241 million Chinese were aged 60 and over in 2017.

China’s related policy discourse is as unique as its demographic profile. To that end, and in contrast to Japan, Chinese policymakers who fear for their country’s national development prospects have been studying – and adjusting for - the effects of demographic change on China’s economy for more than three decades.

Specifically, following the implementation of the one-child policy in the early 1980s, some Chinese researchers began exploring its possible ramifications. The aim was to assess the consequences, good and bad, for China’s development prospects. Economic modernization had become a political priority in late 1979 with the launch of the “Economic Opening and Reform” agenda by China’s then-leader Deng Xiaoping.

That research, thanks to the work led by demographer Cangping Wu, set out that China had no hope of getting ‘rich’ before it would get old. Fearing that first getting ‘old’ would itself derail national modernization, China’s policymakers have since tried to ensure that ‘premature ageing’ will not derail the country’s prospects of economic maturity.

For example, pension promises have been kept very modest to ensure these do not become a burden on the national finances or the next generation of taxpayers. In addition, every effort has been made to ensure the next generation of workers are better educated than their parents were. It was understood early on that when China’s population began to age rapidly, this would also reduce the workforce population share. This in turn would mean that those future workers would need to be more productive and ready to enter more sophisticated economic sectors as wage levels rose - just to maintain productivity levels, let alone increase them in the interests of national development. Today, China’s educational attainment statistics indeed reflect that the younger population are, on average, much better educated than the older cohort – a gap that is much less evident in the case of Japan and other fast-ageing high-income countries.

Similarly, China’s policymakers have been explicitly aware of shifting comparative advantage over time. In the 1980s and 1990s, when China’s wages were low and the labour supply abundant, policymakers offered incentives for foreign investment in labour-intensive manufacturing. As those advantages have faded, incentives have similarly shifted toward the services sector and higher-tech sectors, as well as towards research and development.

In other words, China’s policymakers did not just have an economic strategy, but an economic demography strategy. That is, China had realised early on that economic and demographic change are cointegrated – something all countries, rich and poor, young and old, might learn from.

The economic demography matrix

To begin with, all countries can be classified in one of four economic demography classifications: poor-young; poor-old; rich-young and rich-old (see below). These categories are useful in understanding the base scenario from which national economic demography transition strategies can be drafted.

Understanding where a country lies in the matrix is a useful starting point.

What happens next?

These are epochal demographic times. Last year, for the first time ever, the world was home to more people aged 65 and over than children under five. With globalisation entering a new and more fragmenting phase, and both the world’s population pyramid and geopolitical norms turning on their heads, it seems a good time for countries – rich and poor, and young and old – to truly grasp their economic demography.

Ideally, through the 2020s, as the elderly burden on most high-income countries continues its near-exponential increase, resources will be found to ensure societies and economies are able to adjust structurally to accommodate this dramatic reversal of the population pyramid. Those reforms may involve new taxation and welfare structures that account for the shifted population pyramid as well as its other effects. In Japan, for example, today’s older cohort mostly enjoyed very stable and high-salaried employment – unlike the next cohort of Japanese, and unlike China’s larger older cohort.

Such is Japan’s realisation of the error of its late accounting for demographic change that it is becoming something of a global missionary on the subject of ageing. Earlier this year, for example, Japan invested in supporting Viet Nam’s ageing-related preparations. In September, meanwhile, Japan held a side event at its Tokyo International Conference on African Development (TICAD) gathering to discuss ageing in African countries. While today just three African countries – Mauritius, Seychelles and Tunisia - are home to ageing populations (based on the population share older than 65), rising life expectancy may nonetheless mean Africa as a whole becomes home to far higher numbers of older persons over the coming decades.

To that end, it is perhaps never too early to prepare for getting old – for individuals, but also for countries. As with China, this could be a vital plank in African and South Asian countries’ ongoing development, but it is just as important for rich countries that must avoid the risks posed by a rising older population - such as a downward productivity spiral.