Abstract
One of developing Asia’s foremost structural economic challenges is the need to rebalance demand and growth toward domestic sources in the face of one of its most significant structural shifts—the demographic transition to an older population. The scope for investment-led growth may be quite limited, so the key to growth is stronger domestic demand, and the key to stronger domestic demand is greater consumption. We examined the impact of the old-age dependency ratio on the share of consumption in the gross domestic products of 31 developing Asian economies and 122 from outside the region from 1998 to 2007. In addition, we tested for a possible difference in its effect in the Asian economies relative to the rest of the sample. The analysis suggests a positive relationship between population aging and consumption though evidence for developing Asia was weaker than that for the rest of the sample. This implies that the aging population may not be contributing as significantly to robust consumption and domestic demand as it does in the rest of the world. In order to rebalance their economies, developing Asian governments must therefore continue to pursue a wide range of policies to promote stronger domestic demand.
Highlights
While developing Asia’s financial systems were largely unscathed by the global financial crisis in 2008 and 2009, its real economies were hit hard by the deep recession in the European Union (EU) and the United States (US)
Since older populations are associated with lower savings rates, there should be a positive relationship between population aging and aggregate consumption rates because savings represent income that is not consumed
Existing studies examine the impact of demographic variables on the savings rate, but it is worthwhile to examine their impact on consumption, which has a more direct effect on rebalancing
Summary
While developing Asia’s financial systems were largely unscathed by the global financial crisis in 2008 and 2009, its real economies were hit hard by the deep recession in the European Union (EU) and the United States (US). Higher government outlays on health care and pensions may boost aggregate public consumption This is quite important for developing Asia because the population in the region as a whole is aging. While some countries are at a much more advanced stage of population aging than others, there is a clear, regionwide trend toward older populations driven by falling fertility and rising life expectancy To find out whether older populations led to higher consumption in the past, we examined trends in the old-age dependency ratio and the share of consumption in the gross domestic product (GDP) over time and measured the time-series correlation between the two. Just as youthful populations drove the high-savings, high-investment growth model, older populations that consume more and save less could lead to more vibrant domestic demand and to more balanced economies
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