Debt and Demography

Asian countries observing the Euroland mess and Japan’s coming fiscal crisis would do well to ponder the link between debt and demographics. It could be their turn to face similar problems in a few years if they fail to get to grips with fertility and immigration issues – and the expectations of women.

It isn’t just coincidence that Italy, Greece, Portugal and Japan face stupendous government debt challenges. They also happen to have among the lowest fertility rates and most rapidly aging populations in the world. Welfare excesses and retirement at 60 for many in Europe which once seemed affordable have long become unsustainable in the face of changing demographics.

Fertility -- births per woman of fertile age -- range from 1.3 in Portugal and Japan to 1.5 in Greece compared with a replacement need of 2.1 Some of these fertility declines started earlier than others but all of these countries face ever-greater demographic challenges. The median age in Italy is already 43, only just less than Japan at 44. Italy will reach 47 and Japan 48 by 2020, according the UN population projections.

The challenge for these nations in stabilizing debt levels, let alone reducing them, is stupendous and can only get worse as the working age population starts to fall – even assuming that retirement is delayed. A young country like Indonesia was able to halve its debt from almost 100 percent of gross domestic product in the immediate aftermath of the Asian crisis within a decade because its economy was growing at 5 percent or so and its working population by almost 2 percent a year. Italy and Japan are already very mature economies which face declining workforces. The challenges are frightening.

Fiscal restraint is of course one part of the answer to the coming challenge of aging. Korea and Taiwan both have government debt of less than 50 percent of GDP and perhaps they can hold it at that level even as their workforces start to shrink slowly, as will happen within a decade unless policies change. But it will not be easy. For Korea, where the fertility rate is just 1.4, the median age will hit Italy’s current level by 2020. Taiwan may be even worse off by then as fertility is now down to 0.9.

European countries’ demographic challenges would be even greater but for net immigration of around 0.3 percent a year for the whole EU, with even Greece experiencing, until recently, moderate annual inflow from outside the EU. But the situation in East Asia other than Singapore and Hong Kong which have very low fertility offset by significant immigration is very different. Korea has zero net migration and Japan and Taiwan very little.

Compared to East Asia, much of the west even looks to have relatively healthy demographics looking out 10 or more years ahead. The median age in the US, now 37, will increase only slightly due to a mix of 2.1 fertility rate and 0.3 percent immigration. The UK, France, Scandinavia and the Netherlands can look to their populations stabilizing at median ages no higher than Japan’s today. The biggest exception to this in Europe is Germany, whose age burden will soon be as heavy as Japan’s.

So what is it that enables some of the rich west to do better demographically than the rich east? Immigration is clearly part of the answer. However, given some of the integration problems that western societies have faced are a deterrent to ethnically conscious East Asians readily admitting large numbers of darker skinned persons from Southeast and South Asia. But presumably there are many mainland Chinese who would be attracted to move to their richer neighbors if allowed. Yet even in countries with formal policies to attract newcomers such as Australia, immigration is only a partial answer to rapid aging.

The nub of the East Asian problem appears to be attitudes to women. Large numbers simply do not want to marry, let alone have children because the opportunity cost of giving up their jobs, let alone paying for housing, children’s education etc, is so high. Indeed the fertility statistics would be even worse but for the huge trade in brides in the region, mostly from China and Vietnam. Imports are now over 20 percent of Taiwan brides and about 10 percent of Korean ones. Some 30 percent of Hong Kong brides are now from the mainland. Japan gets brides from China and Korea and also from the Philippines. China, which has the worst gender imbalance, is now looking to Vietnam.

This need for the bride trade is a disgraceful reflection of the fact that male-dominated institutions have failed to understand the needs of women and families in societies where women have equal education and many job opportunities. Bride imports will only make a small contribution to ending the marriage dearth.

It is no coincidence that the west’s best fertility rates are found in countries where women’s rights and children’s needs have high priority and where women’s participation in the workforce is also high. And the worst by those measures in Europe? Greece and Italy. In Asia however, the low fertility rates apply whether female workforce participation is high, as in China and Taiwan, or moderate as in Korea and Japan. This clearly shows that social and cost barriers to marriage and children are the problem.

Thus long-term solutions to East Asia’s future debt and demographic challenges lie in making women truly equal.