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May 1, 2024

Demographic Stagnation: The “new” Emerging Markets norm

Our guest blog discusses the demographic decline in China and other EMs, which is expected to impact global economic growth and financial stability. It highlights the shift from demographic dividends to increased dependency ratios and emphasizes the need for structural reforms to mitigate economic repercussions.
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In-house blogger
Guest blogger
Ahmet Akarli
Senior Research Fellow
London School of Economics
Former senior economist and managing director
Goldman Sachs
All opinions expressed in this content are those of the contributor(s) and do not reflect the views of Macrobond Financial AB.
All written and electronic communication from Macrobond Financial AB is for information or marketing purposes and does not qualify as substantive research.

The widely anticipated demographic decline in China is well documented and widely recognized. It is expected that the country's population will decrease at an accelerating rate in the coming few decades. This trend is not limited to China alone; it is a broader global phenomenon that will become increasingly apparent in many developing countries. It will have significant economic implications for emerging markets and the global economy, including reduced potential growth rates, increased fiscal pressures, heightened risks of monetary de-anchoring and the potential for high inflation. To counteract these adverse economic effects, emerging markets are prioritizing the implementation of productivity-enhancing structural reforms.

Secular Demographic Trends

Emerging markets (EMs) have experienced advantageous demographic trends for several decades. During the post-World War II era, the population growth rate in EMs remained around 1.7%, with the most substantial expansion occurring between 1950 and 1990.

This positive demographic dynamic was a contributing factor to the economic performance of EMs. It supplied an ample source of low-cost labour, which was essential in the development of modern manufacturing industries and their integration into the global economic system. The demographic dividends resulting from a predominantly youthful populace have not only considerably enhanced overall economic growth, but also alleviated the financial strain on pension and healthcare systems, thereby easing fiscal pressures. In this sense, favourable demographic forces served as a crucial pillar of the economic development of EMs throughout the post-WWII period.

This is set to change fundamentally in the coming decades. The growth rate of the population in EM economies has decreased in the last twenty years. As mentioned above, the average population growth rate for the 27 leading EM economies was around 1.7% per year during the post-World War II period. Now, the current growth rate is closer to 1% per year, which is slightly lower than the global average of 1.2%. It still remains higher than the 0.5% growth rate observed in leading developed economies (DMs). This slowdown is primarily due to the aging of EM populations, which is also affecting the growth rate of the labour force in these economies. Figure 1 shows the past and projected evolution of labour force growth trends in EMs and indicates a clear slowdown in growth rates from the 1990s onwards. It is projected that EMs will start to exhibit demographic characteristics like those of DMs in the coming years. By 2040s, the EM labour force is expected to start contracting, with the rate of contraction accelerating in the following decades.

Dispersion Patterns across Emerging Market Economies

Demographic stagnation is a pervasive phenomenon that extends across numerous EMs. This is highlighted in Figure-2, which reveals several crucial observations. Firstly, the downward shift of plotted scatter points below the indicated 45° line denotes a widespread deterioration in demographic dynamics across EMs. Secondly, the reversal in leading BRIC economies, namely Brazil, Russia, China, and to a lesser extent, India, is particularly noteworthy. Thirdly, the projected labour force contraction across Southeast Asia, Latin America, and Central and Eastern Europe appears to be significant. There are some exceptions, as the Middle Eastern and African economies, led by Nigeria, Egypt, and South Africa, will continue to enjoy favourable demographics for several decades. Elsewhere, the norm for EMs is likely to be one of stagnation and eventual demographic reversal.

Long Term Economic Implications

The most significant long term impact on EMs will be on economic growth. If left unchecked, demographic stagnation will dampen potential output growth across EMs, which currently accounts for approximately 65% of global economic output (measured in constant prices and adjusted for purchasing power parity). This, in turn, will weaken the demand impulses generated by rapidly growing EM economies and impose new economic constraints on the pace at which the rest of the global economy can expand.

The potential for demographic stagnation may have significant ramifications for financial stability. As a result of an aging domestic population, there will be a consistent rise in the "Total Dependency Ratios," which is the precise ratio of the economically active population to the inactive population. This structural transformation, although subtle, can be observed in Figure 3, which depicts the upward shift and steepening of the 2020 and 2060 curves, which plot the projected dependency ratios against the median population age. It suggests a significant compression of the "demographic dividends" enjoyed by leading EMs in the past. While several large EMs, such as India, Indonesia, the Philippines and South Africa, will still be able to reap demographic benefits due to their exceptionally young populations, the remainder of the EMs will age rapidly and face serious higher dependency ratios. It also implies a gradual yet potentially notable increase in fiscal pressures, specifically from rising social transfers and health expenditures. Again, if left unchecked, this secular trend may exacerbate financial and monetary stability issues and dampen the ability of EM governments to allocate resources to other development objectives, such as infrastructure and human capital investment to provide incentives to strategically important industries.

Although a gradual process, it will almost certainly have long-term economic and financial consequences. It is essential to recognize that measures aimed at addressing potential imbalances will require time to produce results. EMs that can implement structural reforms to enhance productivity growth in areas such as human capital, technology, and infrastructure development, while also consolidating long-term fiscal balances that alleviate future fiscal pressures, will be better positioned to attain higher potential growth rates and maintain financial stability. The heavy weight BRIC economies, led by China, are facing significant challenges in this respect and bear a disproportionate burden of demographic stagnation, necessitating urgent action.

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