Demographic Shifts and Economic Challenges in Emerging Economies

The Impending Age Crisis

Advanced economies, such as Germany, Japan, and Italy, are experiencing notable shifts due to declining birth rates and increasing life expectancy. These changes have created labor shortages, strained family caregiving capacities for elderly relatives, and closure of schools due to dwindling student numbers.

The South Korean Example

A striking illustration of these trends is found in South Korea. In 2023, the nation reported a drastic decline in its total fertility rate, now at just 0.7 children per woman. This alarming statistic has been mirrored in consumer behavior, as sales of dog strollers surpass those of baby strollers.

Waves of Demographic Transition

The McKinsey Global Institute (MGI) has outlined these demographic shifts in three distinct waves:

1. First Wave: Already affecting advanced economies, Eastern Europe, and China, which have seen their working-age populations peak around 2010. Projections indicate that these economies will experience a slowdown in average annual per capita GDP growth by as much as 0.8 percentage points by 2050.
2. Second Wave: Soon to impact emerging economies over the next decade, except in Sub-Saharan Africa, where such effects are projected to occur later in this century. Many of these economies are already witnessing a decline in birth rates that will soon affect their financial structures as they face an aging population.
3. Third Wave: Predicted for Sub-Saharan Africa, where fertility rates remain higher, delaying the onset of demographic challenges seen in other regions.

Risk of Economic Stagnation

In nearly half of the 89 emerging economies outside Sub-Saharan Africa, fertility rates have dipped below the replacement level of 2.1 births per woman. The resulting demographic changes mean an increased burden on the working-age population. For instance, China currently has 4.8 workers for every retiree, yet this ratio is expected to plummet to 1.9 by 2050.

The Economic Implications

Despite their favorable past demographic trends, emerging economies are facing daunting challenges. India, for example, has enjoyed an average annual increase of 0.7 percentage points in per capita GDP over the last 25 years due to demographics, but projections show this figure might fall to a mere 0.2 percentage points moving forward, while Latin America anticipates an even steeper decline.

Strategies for Mitigation

To navigate these impending challenges, emerging economies must implement several strategic initiatives:

• Boosting Productivity: Addressing productivity levels, which currently average $13 per hour in emerging markets compared to $60 in high-income countries, is essential for economic growth.
• Increasing Workforce Participation: Efforts to raise labor force participation rates, particularly among women (currently around 60% in many emerging economies), can enhance overall workforce capacity.
• Investing in Human Capital: Education and skill development are vital to prepare young people for global competition. The private sector’s role in this is pivotal, as strong companies can foster economic resilience.
• Developing Social Support Systems: Transitioning from informal, family-based support for the elderly to more sustainable systems is critical as populations age.

Lessons from Developed Countries

Emerging economies can glean valuable insights from developed countries dealing with similar issues. The primary lessons include ensuring young populations are adequately educated and creating robust social safety nets that can address the needs of an aging citizenry without compromising economic stability.

Conclusion

Demographic change is a gradual shift rather than an immediate crisis. While time remains for emerging economies to adapt, proactive measures are essential to prevent long-term economic ramifications associated with an aging population. Policymakers must act diligently to ensure that their countries navigate this complex landscape effectively.

This article was inspired by trends discussed in the McKinsey Global Institute report on demographic changes.