How ASEAN's Demographics Will Pay Big Dividends

If it's true that demography is destiny, then the Association of Southeast Asian Nations has a lot to look forward to.

The world's biggest demographic shift in history is happening right now. And there will be winners and losers because of it.

Many African countries are expected to see huge growth in their populations, although this may not necessarily translate into strong economic growth. But Europe and Japan are already feeling the effects of a rapidly aging population.

The ASEAN region, meanwhile, has a large, young workforce that should drive economic growth for decades. (ASEAN is a 10-member regional grouping that aims to promote trade and political cooperation among its members. It includes countries like Malaysia, Singapore, Vietnam, Indonesia and Thailand.)

Demographics is key to economic growth. Simply put, two factors affect economic growth: more people (and hours) being worked and higher productivity. Countries with a growing, productive workforce are more likely to see strong economic growth.

Outside of ASEAN, Asia's overall demographics are mixed.

Japan has horrible demographics: The population is getting older, and it has a low fertility rate. Plus, Japan continues to flirt with deflation and has too much debt, so its economy will struggle for years.

China's population is also forecast to fall. It could be 2% lower by 2050, at 1.3 billion people. More concerning is that China's working age population (people between the ages of 16 and 59) is also projected to fall. According to the World Economic Forum, China's working age population could fall to 700 million by 2050, down from 925 million in 2011.

This means that a shrinking pool of workers will have to support a growing number of nonworking elderly, either directly or through taxation. This will affect China's economic growth because it will mean less money being spent on consumption or investment in the economy.

But it's a different story for Southeast Asia. Unlike other parts of Asia, ASEAN's demographics could help its members' economies for decades.

The Demographic Dividend

The ASEAN region has a combined GDP of $2.43 trillion. This would make it the sixth-largest economy in the world. (If the European Union is counted as one economy, ASEAN would then be the fifth-largest economy.)

It's also home to more than 600 million people, more than the population of either North America or the EU. The size of its workforce is third to only China and India. This large population of potential workers is playing a large role in the region's rapid economic development.

From now until 2030, ASEAN will likely have an above-average proportion of working age adults. According to one estimate, 68% of ASEAN's total population will be of working age by 2025. In 1990, the figure was 60%.

Because of the growing working age population, the ratio of workers to dependents (people too young or too old to work) is dropping. When the work force grows faster than the number of dependents, there are more resources available to invest in the economy. And a higher number of people working, saving and paying taxes helps the economy grows.

But for the past 50 years, ASEAN has been seeing a slowdown in its population growth. In 1965, annual population growth was 2.8%. By 1990, it had dropped to 2.1%. And last year it was just 1.2%.

The United Nations predicts that ASEAN's population will grow to 717 million by 2030, up from 633 million people in 2015. By 2035 it could climb to 741 million people. This works out to an average growth rate of 0.85% per year, lower than the expected global growth rate of 0.98% over the same period. This indicates lower fertility rates in the ASEAN region.

For the moment, however, ASEAN is benefiting from a "demographic dividend." This describes how a population's changing age structure boosts economic growth. It normally occurs when there are falling fertility rates and a growing labor force participation rate. And that's precisely what's happening in ASEAN right now.

The Dividend Will Eventually Dry Up

However, a lower fertility rate, which means fewer young people and babies, combined with an aging population, will eventually cause a drop in the working age population. This is followed by a rising dependency ratio and lower GDP growth. (Like Japan, mentioned above.)

But this shouldn't be a concern for ASEAN for almost two decades. The UN predicts that ASEAN's dependency ratio will be 0.47 by 2020, down from 0.48 in 2015. This means that by 2020, there will be 47 dependents for every 100 working age people. Both the 2015 and expected 2020 figures are well below the 0.54 global average.

But, it's predicted that the ratio will begin to rise by 2030 and could reach 0.59 by 2035, in line with the rest of the world.

Singapore and Thailand will be most responsible for the coming increase in the region's dependency ratio. Both have older populations than other ASEAN countries. According to 2016 estimates, the median age for all other ASEAN countries is less than 30 (besides Vietnam, which is right at 30).

For comparison, the U.S. has a median age of 37.9 and China's is 37.1. Japan, with a median age of 46.9, is the old man of Asia. So, ASEAN has a demographic advantage over many bigger, more-mature economies.

But ASEAN's "demographic dividend" could end by about 2030. The Asian Development Bank predicts that by 2030 10.8% of the ASEAN population will be older than 65. That's much higher than 2010's figure of 6.8%.

Of course, a demographic dividend is no guarantee of higher economic growth. Bad economic and social policies can offset any demographic advantages. ASEAN members also have some major political differences, so the demographic dividend may not benefit every member in the same way.

Regardless, the region is taking steps to liberalize trade and increase worker mobility, which will help ASEAN's young, growing workforce to find productive work and help the region make money from its good demographics.

Kim Iskyan is the founder of Truewealth Publishing, an independent investment research company based in Singapore. Click here to sign up to receive the Truewealth Asian Investment Daily in your inbox every day, for free.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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