By George Magnus

The former chief economist at UBS Investment Bank and author of The Age of Aging: How Demographics are Changing the Global Economy and Our World has spent five years researching the effects of declining fertility on the global economy.

In advanced countries, the financial crisis has made the problem more acute. It has brought forward a lot of issues that we would have had to have dealt with anyway, about the affordability of current laws governing age-related spending, mainly pensions and healthcare.

What about Asia?

The Chinese National Bureau of Statistics announced recently that China's working age population fell last year for the first time, by 3.5 million. It is a blip in their terms but it has huge symbolic value, because it signifies a relentless trend in the foreseeable future towards declining numbers of young and working-age people. It also emphasises other more immediate problems. Rapid ageing is symptomatic of the end of labour transfer -- young men and women moving from rural activity to urban manufacturing. There are still people who will make that transition, and there are Chinese companies who will go to the rural hinterland and try and find them. So the exploitation of rural labour is not over, but it's drawing to a close.

How will China cope with its ageing population?

China has an extremely low allocation of public money for social spending. It is only about 6 to 7 per cent of Gross Domestic Product, which is half of what the Brazilians and the Russians spend and a third of what the typical wealthy country in the OECD spends. That raises the question, if you're going to spend more money on social income security, health care and so on, who pays? And this is in a country that is one of the worst for income inequality.

Aren't the Chinese very thrifty?

They are, and there are many reasons why their household savings rate is about 25 to 27 per cent of GDP. They save a lot because they have to pay for their own health care and support their elders. Sixty per cent of Chinese households pay for their own medical bills, for example. China is an immature welfare state. The 'iron rice bowl', set up under Mao Zedong, has been more or less dismantled and not replaced. It's only now that China is starting to spend on income security, pensions, and health care; it is a slow process from a very low base.

Does ageing mean China will no longer be the workshop of the world?

This kind of demographic transition means that China, bit by bit, is going to lose its competitive edge. As the labour transfer from rural areas to urban areas begins to wind down over the next three to six years, the upward pressure on wage rates is going to gather momentum. For the past five years, minimum wages in China have been growing at about 20 per cent per annum, with manufacturing wages not quite as high, in the region of about 12 to 13 per cent. This is beginning to chip away at China's competitive edge and is going to favour other countries in the region such as Cambodia and Vietnam, and Myanmar (Burma) perhaps in the future, and maybe Bangladesh. Who knows, maybe even Pakistan. I think these countries could benefit and the Chinese probably wouldn't care too much, provided that they can substitute low value-added manufacturing with growing prowess in high technology goods and services. This is what they intend to do, but not without competition from the United States and Europe.

You wrote that the future belongs to Asia. But your latest research talks of the 'fading Asian miracle'. What has gone wrong?

The growth in the world and the enrichment of the middle class is clearly going to be in Asia. But the fading miracle that I have alluded to is this: what do Asian countries do for an encore when they get to the point where they have exploited labour transfer? They have joined the World Trade Organization. They have got 98 per cent of their children enrolled in primary and secondary education. They have exploited the benefits of foreign direct investment and foreign technology. How do they get over the brick wall they will hit? When you get to be, let's say, Malaysia, with an income per head of about $12,000 to $14,000? Or, when you are China in 2020 and you have reached that kind of level? How do you become a high-income country? And what are the critical ingredients for success? These questions hark back to Paul Krugman's infamous essay in Foreign Affairs in 1994 called 'The Myth of Asia's Miracle', where he articulated, rather trenchantly and to his personal disadvantage in Asia, that it was perspiration not inspiration that was behind the catch-up of developing countries. That is still true.

India is expecting a 'demographic dividend'. Is it in a position to take advantage of this?

During the next 20 to 25 years, the increase in India's working-age population is going to be bigger than the stock of working-age people in western Europe today. It is going to rise by about 350 million. That is a potentially huge advantage for India -- provided that they can all be found productive jobs. And there's the rub. There are so many obstacles for the Indian state to overcome, and some Indian thinkers have actually spoken quite openly about what they regard as the degradation of their own state institutions being one of the biggest problems behind India's stalling growth. Of course, India is still growing at 5.5 to 6 per cent a year but not enough for a country that needs to create a huge number of jobs and to raise health standards and income security.

What can the Indian government do?

There may be issues about re-allocation of public expenditure. India is a huge military power; it is a nuclear power. Also, the Government could do something about changing the structure of very complex and archaic labour legislation. There are something like 200 to 300 laws that affect the hiring and firing and conditions of labour. And something has to be done about the bureaucracy, the kickbacks, the allegations of corruption, the failure to provide proper power infrastructure, the backwardness in promoting manufacturing. Obviously India has some manufacturing and a few major companies like the Tata Group, but the number of people employed in manufacturing is not that big. And yet in software and IT and medical technology, India is a world-class power. Sixty per cent of the world's vaccines are made in India. But these are not labour intensive, and that's the problem; the service-producing industries just don't employ that much labour.

How do you see the future of sub-Saharan Africa?

A lot of people think that recent growth of 5 to 6 per cent is breaking the mould. Unfortunately, I'm not quite comfortable about extrapolating this. A lot of it still has to do with China and commodities. China has been a catalyst for Africa, or certainly those African countries where it has established bilateral trade deals and stronger political relationships. And foreign direct investment has clearly been for the good. But it has been effectively to support the commodity-centric nature of those economies. They are hostage to what happens if China's growth rate slows down over the next five or 10 years. Whatever happens, the commodity composition of China's growth is going to be much smaller than it has been, and prices will fall.

In your book you conclude that the role of the state will have to expand to cope with the pension crisis. Since then, states have been running out of money. Where does that leave us?

I do think still that the state will have a very important role in making sure that we avoid things like pensioner poverty and that, at least in advanced countries, we don't allow the economic implications of rapid ageing to undermine our potential for economic growth completely. But there is no avoiding the fact that self-provision of pensions will have to become more important, because of the inability of the state to be able to fund all the promises which were built up during the past 40 years.

So how are we all going to save for retirement?

In Britain today, and actually in most other developed nations, probably between 40 and 60 per cent of people do not save at all or do not save enough for their long years in retirement. If we've grown up thinking that the state will pay our pension and medical insurance, or the NHS will fund everything, we are going to have to reboot our ideas. There will be a growing tendency for government to discriminate in favour of low-income and disadvantaged people. Middle and upper middle-income people will have to fund more themselves. And we will have to be taught how to save. Asset management companies will have to drag people into the savings habit without necessarily convincing young people that this is about pensions, which makes most people's eyes glaze over.

Do you foresee inter-generational war between the Baby Boomers and the younger generation?

There is an undercurrent among young people that the Baby Boomers had it all -- and there is some truth in that. It sticks in the throat of younger people that if you bought your house in 1970 or 1980, then house price inflation has made you very wealthy without you having to lift a finger. Now, of course, getting on to the property ladder is clearly very difficult. I understand this but I pull back from the idea that I owe something to my children or to their generation. We all have to make our own way in the world. But at the same time, they should not be punished with an excruciating tax burden to pay for the ageing of society. That is clearly something that would be unfair and unproductive. We have to find different kinds of coping mechanisms.

Such as what?

There are other ways, and they are more complex and difficult. You might consider, for example, a more open immigration policy. That is obviously difficult politically. You could take a different way. The two groups of workers who are typically under-represented at work are older workers, aged 55 and above, and women. If we could make progress in the next 10 or 20 years in getting a higher proportion of older citizens to stay on at work or to come back to work, and for women to be able to have easier choices when it comes to childcare, this would expand the pool of labour. The economic effect of having people in work until 66 or 69 is quite powerful.

What if we don't want to work longer?

Who could blame individuals who say they have worked all their life and they want to retire at 58 or 59? But actually we have to recognise that rising life expectancy has changed the financial metrics of providing security in old age. In some countries even where official retirement ages are going up, there is still a big gap between the mandated age of retirement and the de facto age of retirement. If people want to retire early, they will have to provide for themselves.

Is the EU too old to recover from its economic crisis?

The biggest thing that worries me about Europe is that we are obsessed with having created this austerity zone and the less austere you are, the more austere you need to be. The thinking in Europe is still a little bit backwards on growth and the sources of growth, which are essential when you are trying to win over political consensus for tough political decisions, as the recent Italian elections have demonstrated. I think we still have a long way to go.

You write about the crisis of ageing, but what do you feel personally?

Luis Bunuel said: 'Age is not important unless you're a cheese.' As I sit here talking with you as individuals, I think it's a perfect motto. But once you think about this as a social and economic issue rather than our expectations in retirement, then the perspective changes. Population ageing is a fundamental economic problem.


© Tribune Media Services, "The Age of Aging"


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