Demographic Shifts and their influence on the economy - Part 2
Part 2 – What has
been the Japanese Experience
In this, the second part of
the series, we take a look at Japan. Japan was one of the dominant economies of
the last century (it still is the 3rd largest economy in the world) and has consistently enjoyed high levels of per capita income. However, during
the last 30 years, the economy has hardly grown while it has rapidly aged.
At the beginning (not too
long ago; just about 150 years ago) most countries had high birth and high
death rates resulting in slow population and low economic growth. Countries that had industrialized rapidly had
started growing faster (though some may argue that colonialization played a
part too). There is no doubt that industrial society harnessed labour and
capital more effectively than a purely agrarian society could.
After some time, economic
growth results in better public health and a decrease in death rates, thereby
stimulating population growth and, with a lag, faster economic growth. The rise
in education and the formation of an educated middle class played their part in
this development and demanded better service from their establishments. These
developments started a virtuous cycle and promoted better education, which,
especially when experienced by women, lowers birth rates, and population growth
thereby increasing per capita incomes and wealth. Urbanization created a
nuclear family structure and reduced the stranglehold of patriarchy. Education
made people more conscious of their rights and also reset their priorities in
life. Life was no longer about having a large family, rather women started
going for higher education and joining the workforce. Technological progress
made contraception available and domestic gadgets further reduced the burden of
household chores. Fertility rates in cities started dropping quickly. As
countries moved from about 15-20% urbanization rates to 80-85% urbanization rates,
these effects became more pervasive. Of course, all of this played out over a
few decades.
This stage (different
countries reached this stage at different points in time) is characterized by
low birth and death rates and hence slower population and economic growth.
However, the wealth accumulation of society starts rising during this phase.
However, now these countries start experiencing increasing death rates in aging
populations. This is resulting in negative population growth and shrinking
population size which impacts economic growth. By all accounts, Japan became
the first country to reach this phase. Japan is now the oldest country in the
World. This is the result of the highest longevity (or life expectancy) in the
world combined with the earliest post-war reduction in fertility.
Japan had a high fertility
rate of around 5 during the 1920s, and it was high till around 1950 when it was
4. It then started declining sharply, but was still at 2.13 in 1975 (at
replacement rate). Since then it fell precipitously to 1.3 by 2005, and has
since gone up slightly the current estimates being 1.37.
The Japanese miracle economy
was from the 1950s to the end of the 1980s. These were periods of high demographic
dividend. The population rose from around 80 million to over 120 million
without making a big dent in the dependency. It was during the seventies that
the proportion of the elderly started growing as life expectancy increased and
fertility started dropping. By the year 2000 the proportion of the aged had
become very large and today it is at over 28% The population has now started
shrinking (the last 7-8 years). From a peak of 128 million in 2010, the
population is expected to fall to 94 million by 2065, which is around the same
level as 1965, but with probably around 40-45% elderly!
Unlike Europe and The United States, Japan has never been open towards immigration. Whereas immigrants helped to provide the working-age population northing of the sort happened in Japan. The impact on the economy was inevitable and Japan has experienced virtually no growth during the last 20 odd years. As healthcare costs for the elderly have mounted the fiscal has come under immense strain. Social consequences have followed. Can Japan overcome this hurdle? It’s a tough ask. Immigration seems to be the only option but it’s not something that can be switched on at will. It takes decades for immigration to gain momentum. It’s unlikely that life spans will shorten or fertility rates will climb in any meaningful way to address the balance.
Fifty years ago, life
expectancy at birth was about 72 years; it has since climbed to 84 years. With
the fall in labour, some of Japan’s big industries — like motor vehicles and
electronics — do not possess the manpower to continue at the current level of
production. If Japan cannot maintain its levels of production, it may
subsequently lose its spot as the third-largest economy in the world. One of
the areas where it has headroom is female participation in the workforce. Japan
has had some success in this area. Recent studies reveal that during the last
10 years female participation has increased from around 48% to 52%.
However, this also has limits. An area where Japan has demonstrated its
ingenuity is productivity growth. It has continued to grow which has
consequently maintained the levels of economic activity in spite of the fall in
working-age population. All of these are under stress though, with little
headroom left.
A study by the UN Population Division found that Japan would
need to raise its retirement age to 77 to maintain its worker-to-retiree ratio.
Currently, retirees are largely well off and are reaping the fruits of a long
employed life. However, it is unlikely that the benefits they enjoy now can be
sustained for future generations. Further, there are the rising expenses
associated with aging, like caregiving needs for the ill and the fact that
older people do require extra medication and hospitalization.
Social welfare, assistance for the ill or otherwise disabled
and the old, has long been provided in Japan by both the government and private
companies. Beginning in the 1920s, the Japanese government enacted a series of
welfare programs, based mainly on European models, to provide medical care and
financial support during the post-war period, a comprehensive system of social
security was gradually established. Needless to add, these were funded by tax
collections or company level welfare expenses.
The social policies of the 1960s and 1970s were made as a
compensation for failed industrial and economic policies. The social policy
became a platform of electoral strategies during in the 1980s and 1990s. Also,
social welfare programs extended to areas that were not productive and to
people like the elderly or disabled who were not productive. Finally, the
Japanese government provided social care programs to the elderly and children,
along with the policy that promoted general equality.
Japan will spend nearly one-fourth of gross domestic product
on social welfare in fiscal 2040, according to the government's first-ever
projections for that year, with nursing care expenditures to more than double
as a shrinking working-age population struggles with the cost of caring for the
elderly – A Nikkei Asia report of 2018.
The report further states – “In fiscal 2040, the 65-and-over
population will peak near 40 million people -- around a third of the overall
population. More than 10 million seniors will be 85 or older, nearly double the
current figure. More than half of those 85 and older require long-term care.
Japanese spending on nursing care is expected to shoot up 140% by fiscal 2040,
to 25.8 trillion yen from 10.7 trillion yen. Medical spending is projected to climb 75% to 68.5 trillion yen.
The working-age population -- those aged 15 to 64 -- will
decline by around 15 million between now and fiscal 2040, with the number of
workers actually supporting social security programs falling by 9.3 million.
Pension payouts will automatically decline as this figure falls, and spending
in this category is expected to rise just 29% to 73.2 trillion yen. Child care
spending is seen increasing by 66% to 13.1 trillion yen.”
It’s possible that actual reality maybe even worse than
these projections. It could even be a little better. But the inescapable
conclusion is that there are serious implications with no solution in sight. At
best, one might see mitigation of the bad effects, but this scenario has
already started to play out and is gathering momentum.
Part 1 – The key parameters that influence shifts
Part 2 – What has been the Japanese Experience
Part 3 – Greying and aging before it gets rich
Part 4 – The two dominant economies of the world over the last 150 years
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