New demographics: Shaping a prosperous future as countries age
The world as a whole is being shaped by a demographic megatrend: increasing aging and dependency. To better understand aging and its effects, Strategy& introduces an approach that we call new demographics.
Shaping a prosperous future as countries age
Strategy& is part of the PwC network
About the Authors
Abu Dhabi Richard Shediac Senior Partner +971-2-699-2400 richartd.shediac @strategyand.pwc.com Frankfurt Rainer Bernnat Partner +49-69-97167-0 rainer.bernnat @strategyand.pwc.com
Richard Shediac is a senior partner and managing director of Strategy& in the Middle East. He has over 15 years of experience in management consulting. He has led public- and private-sector assignments covering strategy, operations, and organization projects in the Middle East, Europe, Asia, and the Indian subcontinent. Dr. Rainer Bernnat is a partner with Strategy& based in Frankfurt. He leads the European digital business and technology practice and the German public-sector business at Strategy&. He specializes in large IT transformation programs and supports public and private institutions in leveraging innovation and modern IT to improve efficiency and effectiveness. Chadi N. Moujaes was a partner with Booz & Company. Dr. Mazen Ramsay Najjar was a partner with Booz & Company.
This report was originally published by Booz & Company in 2011.
Eva Kunigk, Rasheed Eltayeb, and Antoine Nasr also contributed to this report.
Demographic trends are always at work within individual countries, shaping societies, economies, and the environment. But today the world as a whole is being shaped by a demographic megatrend: increasing aging and dependency. After decades of accelerating population growth, in which the global population zoomed from 2 billion to 6 billion in 70 years, growth is slowing down as fertility rates decline. As a result, aged citizens will become a larger percentage of populations and their dependency on slower-growing working populations will have serious economic consequences. In short, the next 50 years will look much different from the previous 50.
In the second half of the 20th century, governments, corporations, and individuals viewed their countries as forever young and growing. Based on these assumptions, systems were created and promises made, such as government pension schemes in which current workers pay for aging populations. But these assumptions are proving faulty and, potentially, economically debilitating. At present, nations fall along a continuum, with some countries already beginning to feel the effects of aging, and others anticipating those effects in the coming decades. The social, economic, and environmental impact of this aging process will be significant. Countries such as the U.S. and Japan must make their workforces more productive in order to cover the costs of social entitlements for an increasing number of aged dependents. Meanwhile, emerging countries such as India and China must understand how to harness the benefits of their relatively younger populations to create a demographic dividend. To better understand aging and its effects, Booz & Company introduces an approach to understanding this megatrend that we call new demographics. Through analytical concepts such as the dependency curve and the arc of growth, it’s now possible to see where individual countries are in their aging and development process; predict the societal, economic, and environmental challenges that lie ahead; and develop policies and actions. Governments and the private sector must both adapt. Some changes will be painful, but their importance cannot be underestimated.
Booz & Company
KEY HIGHLIGHTS • A paradigm shift in thinking and planning is necessary if nations are to continue economic growth and maintain standards of living as their populations grow to an estimated 9 billion in 2050 and become more aged. • By applying a more predictive approach to demographics, public policymakers and corporate strategists can pinpoint where individual countries are in their aging and development process; predict the societal, economic, and environmental challenges; and develop policies and actions accordingly. • Nascent, momentum, developed, and advanced developed countries are all facing different imperatives, but all will need to address the gradual aging of their populations.
DEMOGRAPHICS SHAPE OUR WORLD
Demographic trends control all aspects of our world and are always at work within countries—shaping societies, economies, and the environment. Indeed, much of our world’s great complexity stems from a few basic demographic variables: births, deaths, and migration. Even small percentage changes in these components can yield dramatic results. When the changes are significant, the results can reverberate for centuries. The most fundamental changes to our world over the last few hundred years—industrialization, urbanization, global warming—can all be traced to demographics. China, for example, wouldn’t matter nearly as much to the rest of the world if it didn’t have more than a billion people turning an economic engine that is now the world’s second largest. A bulge in the youth population has been a major factor in the recent unrest in the Middle East, as young people protest, among other issues, the fact that national economies have not
Booz & Company
provided them sufficient opportunities for employment or a voice in the development of their societies. Meanwhile Japan, a powerhouse in the second half of the 20th century, is grappling with an aging population, which—combined with low fertility and immigration rates—is putting enormous pressure on a working population that is called upon to support a relatively higher number of aged dependents. Even primitive societies innately understood the power of demographic components on their communities and in various ways tried to control them. In the past, in some societies—African, Asian, and European—scarcity of resources and a preference for boys sometimes led to the euthanizing of baby girls. In other
cultures, the elderly were expected to disappear into the wilderness and die when they became a burden. And abducting children and women from neighboring tribes was a form of forced migration to supplement a society’s population and ensure its continued viability. Despite humans’ long history of trying to control these basic demographic components, our efforts often don’t work as planned, and they almost always yield unintended consequences. For instance, China’s one-child policy has, as planned, lowered the fertility rate and prevented an estimated 250 million births since 1980. This policy has coincided with huge economic gains that were built
on a large pool of labor born before the policy began. Now, however, that pool of labor is rapidly aging, which will put stress on the relatively less numerous younger generation that must support them. Governments and companies must take notice of these trends. Only by studying demographic trends and trying to grasp their short- and longterm implications can governments design and implement policies in time to make a difference; only by doing so can companies position themselves properly for growth in their current and future markets. Taking advantage of demographic trends will require better information and a more carefully considered approach.
Despite humans’ long history of trying to control the basic demo graphic components, our efforts often don’t work as planned.
Booz & Company
The Demographics Cycle Fundamental to the study of demographics is the demographics cycle, which is a continuous circle of cause and effect between the basic demographic components (e.g., birth, death, and migration); demographic characteristics (e.g., split of urban vs. rural populations, gender balances, ethnic mix, education levels); and impact areas (social, economic, and environmental). These three dynamics continuously affect and change one another, creating further effects and changes and propelling the demographics cycle round and round (see Exhibit A). Societies feel the effects of the demographics cycle through the three impact areas mentioned above: The social aspect: Social development is linked to measures of employment, self-sufficiency, health, equality, enfranchisement, accountability, and social cohesion. In modern Western societies, higher standards of living and more women in the workforce have resulted in smaller families. The economic aspect: Human capital drives economic development: A region’s demographic profile, young or old, growing or shrinking, directly affects its ability to develop economically. If economies do not have adequate human capital, or productivity doesn’t increase enough to compensate for a declining workforce, economic growth will falter. If that happens, each person’s slice of the economic pie becomes thinner and thinner, eventually lowering standards of living. The environmental aspect: Our environment is both natural and man-made and is directly affected by human activity. For instance, the rapid urbanization of China has profound implications for the quality of its air and water, and thus the health of its population.
Exhibit A The Demographics Cycle
The Demographics Cycle
Source: Booz & Company
Booz & Company
A DEMOGRAPHIC MEGATREND
Today the world is being shaped by one demographic megatrend: increasing aging and dependency. The next 50 years will look very different from the previous 50: After decades of accelerating population growth, as the global population zoomed from 2 billion to 6 billion between 1930 and 2000, growth is now slowing down as fertility rates decline. As a result, aged citizens will make up a larger percentage of populations and their dependency on working populations, which are not growing as quickly, will have serious economic consequences.
A paradigm shift in thinking and planning is necessary if nations are to sustain economic growth and maintain standards of living as their populations grow to an estimated 9 billion in 2050 and become more aged. Looking back over the past 50 years, we can see that the post–World War II baby boom, as well as significant strides in healthcare, created a spike in population growth and reduced the death rate, respectively. These factors led to a larger workforce, higher standards of living, and greater equality. This influenced behavior and the structure of families. As standards of living rose, people began to have fewer children in order to maintain their standard of living more easily. Women’s mass entry into the workforce put additional downward pressure on the birthrate. This dynamic
began in Western countries but has since spread around the world: Between 1950 and 1980, average annual population growth globally was 1.89 percent; from 2010 to 2050, that rate is expected to fall by nearly two-thirds to 0.71 percent. The deceleration means that the global population will age over the next 50 years. In 1950, 34.1 percent of the planet’s population was younger than 15 and 5.2 percent was older than 64. Today, the young group has shrunk to 26.9 percent while the aged group has grown to 7.6 percent. That trend will accelerate sharply as baby boomers retire: By 2050, the young will slide to 19.6 percent of the population whereas the aged will more than double, to 16.2 percent (see Exhibit 1).
Exhibit 1 The Dependent Population Is Growing, with the Aged Representing a Greater Majority
WORLD POPULATION PYRAMIDS (1950–2050F)
1950 Male 100+ 95-99 90-94 85-89 80-84 75-79 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14 5-9 0-4 Total = 2.5 Billion Dependency 1 65% Overall 56% + Youth 9% Aged Female Male 2010 100+ 95-99 90-94 85-89 80-84 75-79 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14 5-9 0-4 Total = 6.9 Billion 53% Overall 41% + 12% Youth Aged Female Male 2050F 100+ 95-99 90-94 85-89 80-84 75-79 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14 5-9 0-4 Total = 9.1 Billion 56% Overall 31% + 25% Youth Aged
Overall dependency is defined as the sum of the youth and aged dependencies. Youth dependency is the ratio of youth (0–14) to working-age population (15–64), and aged dependency is the ratio of aged (65+) to working-age population. Source: UN Population Division, “World Population Prospects: The 2008 Revision”; Booz & Company analysis
Booz & Company
Today, the population of every country on earth is aging—although they are aging at different rates. In those countries categorized as “incipient aging,” 4 percent of their population is 65 and above, up from 3 percent in 1950. Countries with a moderately aging population have seen their older citizens grow from 6 percent to 8 percent of the population in that same period. Moderately advanced aging countries have seen a jump from 10 percent to 13 percent; while advanced aging countries have witnessed a rise from 11 to 17 percent (see Exhibit 2). The social, economic, and environmental impact of this aging process will be significant. The post–World War II baby boom created a mind-set among governments and companies that populations would be forever dominated by young, economically active people and they set policies,
strategies, and expectations based on this faulty belief. For instance, governments in developed countries structured pension systems so that today’s workers pay for today’s retirees. But many of these plans won’t work in their current form as there are fewer workers to support more retirees, and countries will need to adjust. In Russia, the number of workers supporting one retiree will drop from six today to just two in 2050. In Japan the problem will be even worse; there will be just one worker per retiree by 2050. As their populations age, governments must devise new ways to support their aging populations and at the same time stimulate continued wealth creation with relatively smaller workforces through innovation and productivity gains. Companies, for their part, need to adapt to these new demographic
trends to continue their growth—for example, by increasing their focus on products and services to aging populations, and devising strategies for emerging markets with different demographic profiles. Just as important, companies must look internally and put in place a more diverse workforce for maximum market impact. Not all countries are yet experiencing rapid aging. For some countries aging is part of the future rather than the present—and they still have the opportunity to plan for it. These countries are approaching or already enjoying the demographic “sweet spot” at which the working population is at its largest. They should seek to take advantage of this period with policies that will make this population as productive as possible, thus propelling the country into economic growth at the optimal moment to do so.
Exhibit 2 The Number of Incipient Aging Countries Is Shrinking, While Advanced Aging Countries Are on the Rise
GLOBAL AGING LEVELS AGE DISTRIBUTION 118 3% 57% 61% 4% 6% 8% 10% 13% 11% 17% 65+ 72 70% 67% 68% 66% 61 68% 15–64 48 60 NUMBER OF COUNTRIES
40% 35% 1950 2010 Incipient Aging
23% 20% 1950 2010 Moderately Advanced Aging
22% 15% 0–14 1950 2010 Advanced Aging 1950 2010 Incipient Aging 1950 2010 Moderately Aging
4 1950 2010 Advanced Aging
1950 2010 Moderately Aging
1950 2010 Moderately Advanced Aging
Note: A population’s aging level can be classified based on the ratio of aged dependency to youth dependency as Advanced Aging (with a ratio of >0.7), Moderately Advanced Aging (with a ratio of 0.5–0.7), Moderately Aging (with a ratio of 0.2–0.5), or Incipient Aging (with a ratio of <0.2). Source: UN Population Division, “World Population Prospects: The 2008 Revision”; Booz & Company analysis
Booz & Company
NEW DEMOGRAPHICS CAN SHAPE THE FUTURE
Demographics as traditionally practiced by public and private policymakers focuses on past trends and current effects. But given the magnitude of the changes created by aging, the different paces at which individual countries will witness this aging, and the major challenges governments and private enterprise face, this approach to demographics is too limited. What’s needed is a more predictive approach, one that uses past and present demographic trends to calculate the future trajectories for each country. We call this approach new demographics and it is underpinned by two analytical concepts: the dependency curve, and the arc of growth. By applying a more predictive approach to demographics, public
policymakers and corporate strategists can pinpoint where individual countries are in their aging and development process; plot a trajectory; predict the societal, economic, and environmental challenges; and develop policies and actions to improve that trajectory. This is an important point. A country’s current trajectory is not written in stone; practitioners of new demographics can make educated assumptions about the future and raise critical questions while there is still time to prepare and perhaps change course. The Dependency Curve The dependency curve is a country’s dependency ratio—i.e., the percentage of the population that is dependent on the working population—plotted
Booz & Company
over time. Population dependents are generally considered those younger than 15 (youth dependents) and those older than 64 (aged dependents). (See Exhibit 3.) The dependency curves illustrated in Exhibit 4 show us that the world is at an inflection point; the global dependency ratio is at a low point (which is good) and will start to increase as the global workforce
population ages (which presents a challenge). From 1950 to 2010, the global dependency ratio declined from 65 percent to a low of 53 percent as baby boomers grew up and joined the workforce. But from 2010 to 2050 that trend will reverse and the dependency ratio will quickly start increasing. Not all countries are in lockstep, of course. The dependency curve is
a way to characterize a country’s unique journey from high youth dependency through high aged dependency. Today, China’s dependency ratio is expected to begin climbing in 2015, Brazil’s in 2025, and India’s in 2040. Japan, by contrast, saw its dependency ratio turn upward in 1995. For all countries, however, peak earnings power occurs after youth dependency has started to decline but before the aged dependency has
Exhibit 3 The Dependency Curve Shows the Journey from Youth Dependency, to Decreasing Dependency, to Aged Dependency
DEPENDENCY CURVE Area of Increasing Youth Dependency Overall Dependency 1 High Area of Decreasing Overall Dependency Area of Increasing Aged Dependency
Potential Demographic Dividend
Time Dependency Driver + + + Youth + Age
Overall Dependency = (Aged + Youth) / Working-Age Group. Youth = people younger than 15; Aged = people older than 65; Working Age = people between the ages of 15 and 65. Source: Selected writings of David E. Bloom; Finance and Development, IMF, vol. 43, no. 3 (September 2006); Booz & Company analysis
Booz & Company
become too acute. This sweet spot along the dependency curve allows countries to reap a demographic dividend;1 but this can happen only if policies beforehand have readied the country’s workforce with the proper education, infrastructure, and policies to maximize their economic potential. Some countries may also try to prolong their time in this sweet spot by extending the definition of the working age by, for instance, increasing the retirement age past 60,
or 65, or 70. However, recent protests against raising the retirement age in western Europe make it clear that changing retirement benefits won’t be easy. The Arc of Growth A country’s position on the dependency curve determines where it falls on the aging index. The next step is to plot a country’s score on the aging index against its human development. (At this time, no perfect measure of human development exists; we have
used prosperity and equality as a proxy, but expect this metric to evolve over time—for instance, by taking into account well-being and environmental sustainability.) By tracking aging against human development, it is possible to see the country’s position on the arc of growth, which characterizes the journey countries take as they age and strive to create prosperity and equality. The arc of growth also shows a country’s relative position to other countries and, by inference, the societal, economic,
Exhibit 4 Japan Has Peaked in Its Progress on the Dependency Curve, While Countries in Emerging Markets Have a Way to Go
DEPENDENCY CURVE: EXAMPLES High
1965 1965 1965 1965 Japan China India 2010 2010 2010 Time 2010 Brazil World Overall Trend
Source: Selected writings of David E. Bloom; Finance and Development, IMF, vol. 43, no. 3 (September 2006); UN Population Division, “World Population Prospects: The 2008 Revision”; Booz & Company analysis
Booz & Company
1965 1965 Japan
and environmental issues it faces (see Exhibit 5). Globally, nations fall into four clusters on this arc of growth: • Nascent countries, in which the dependent population is dominated by people below the age of 15. These countries are also characterized by high marginal increases in prosperity and equality levels. • Momentum countries, in which the population is dominated by people in the working-age group. These nations also experience diminished marginal increases in prosperity and equality. Countries at this stage need to save and invest efficiently in order to gain a high development level before they age. • Developed countries, in which the dependent population is dominated by people above age 65. These countries also have moderately high levels of development, but minimal marginal increases in prosperity and equality. • Advanced developed countries, in which the dependent population is dominated by people over
65. These countries are also characterized by very high levels of development and minimal marginal increases in prosperity and equality. Over time, countries travel distinct paths on this arc of growth and experience different challenges along the way; the left side of Exhibit 6 shows the consensus analysis on how various countries are progressing.2 But as noted, these trajectories are not set in stone, which makes new demographics a powerful policy tool. Governments dissatisfied with their current arc of growth can use new demographics analysis to make policy decisions—such as improving the quality of the education system, increasing workforce productivity, raising the retirement age, or better integrating immigrants into society— to propel their countries to higher arcs of growth. The right side of the graph shows a few potential arcs of growth among an infinite number of possibilities. The arcs of growth charted in Exhibit 6 make it appear that some countries are bumping up against maximum development; however, this is not actually the case. In fact, the history
of human development is a history of innovative breakthroughs, some disruptive and many incremental, that propel countries to new levels of development and standards of living. These changes include such major advances as the industrial revolution, modern healthcare, and the computer age. Companies, too, must take demographics into account as they plot their corporate strategies. They will have to adjust their products and services for countries at varying points on the arc of growth. The challenge for companies that hope to operate globally is that different demographic profiles make for different consumer priorities: As countries move along the arc from nascent to momentum, for instance, households begin to spend money on goods and services beyond just the basics; the share of next-level necessities (i.e., furnishings, transport, and communication) as a percentage of consumer spending increases during this transition, but remains flat thereafter. Meanwhile, the share of housing and power, as well as luxuries (i.e., recreation and culture, restaurants, and hotels), as a percentage of spending increases continuously as countries move along the arc from nascent to advanced developed.
Booz & Company
Exhibit 5 All Countries Are Currently Somewhere Along the Arc of Growth
PROSPERITY AND EQUALITY INDEX VS. AGING INDEX (2007 FOR PROSPERITY AND EQUALITY INDEX; 2010 FOR AGING INDEX) MOMENTUM COUNTRIES High GCC Norway U.K. ADVANCED DEVELOPED
Prosperity and Equality Index
South America Indonesia South Asia India NASCENT COUNTRIES Africa Nigeria
Russia Medium Brazil
Aging Index Area of Increasing Youth Dependency Area of Decreasing Overall Dependency Area of Increasing Aged Dependency
Note: Countries in sample = 133; y = 0.1912ln(x) + 0.799; R2 = 0.76; the coefficients are significant at a 99% level. Source: UN Population Division, “World Population Prospects: The 2008 Revision”; UNDP , Human Development Report 2009; Booz & Company analysis
Exhibit 6 Analysis of Numerous Countries’ Arcs of Growth Shows That There Are Several Distinct Paths
COUNTRY DEVELOPMENT CURVES: EXAMPLES (1980–2007) 2005 1990 1980 1980 China 2005 2007 1995 2005 1990 2000 1985 1995 1980 1990 1985 1980 India Aging Index Increasing Youth Dependency Decreasing Overall Dependency 2007 POTENTIAL PATHS ALONG THE ARC OF GROWTH
2005 2007 2005 2007 Germany Japan
Prosperity and Equality Index Medium
Human Development Index Medium
U.S. 2007 1995
Aging Index Increasing Aged Dependency
Note: We have used the Human Development Index and the Prosperity and Equality Index in these analyses as proxies for an ideal measure of human development that does not yet exist—one that takes into account all areas of human advancement, including well-being and sustainability. Source: UNDP , Human Development Report 2009; Booz & Company analysis
Booz & Company
As employers, companies must also make policy adjustments to accommodate changing market dynamics and needs, developing a more diverse workforce that draws on the pool of younger workers in nascent and momentum countries. Preparing for Different Challenges The power of new demographics, underpinned by the arc of growth, is that it is a predictive and actionoriented policy tool. By understanding this arc, decision makers can recognize their current positioning along its curve, determine where they want to be, and take the steps necessary to achieve their goals.
Although each country is unique, countries in every cluster will face similar challenges and will need to address a corresponding set of priorities. Governments and companies should address the needs determined by their current stage of development, as well as plan for the new imperatives that will come with the incremental progression into more advanced clusters (see Exhibit 7). In each stage, a country’s development agenda will build upon the steps taken in previous stages. For example, consider employment and the labor market as one element of a country’s overarching growth
strategy. In the nascent stage, countries will be focused on creating job opportunities. As a country progresses into the momentum stage, it will need to develop a talent base to ensure that these jobs are filled. Once it reaches the developed stage, its focus will be on maximizing the productivity of these workers; and finally, in the advanced developed stage, the country will need to ensure that it is capitalizing on productivity gains from game-changing innovation and R&D. The following sections provide a more in-depth overview of each cluster and its challenges and priorities.
Exhibit 7 Each Cluster on the Arc of Growth Must Plan for New Imperatives
Advanced Developed Developed Momentum Nascent - Invest in basic education and healthcare infrastructure - Pursue balanced regional development - Develop physical infrastructure - Create employment opportunities - Ensure food security and water access
Source: Booz & Company
- Increase labor productivity - Enhance competitiveness - Develop skilled human capital - Introduce pension schemes - Reduce negative environmental impacts
- Innovate to boost productivity of local industries - Attract investment and improve business environment - Upgrade quality of education - Ensure sustainability of social security and healthcare systems
- Capture productivity gains from innovation and R&D - Modernize social security systems - Integrate migrant workforce - Incentivize private-sector contribution to development - Cater to aging consumers
Booz & Company
NASCENT COUNTRIES: LAY THE GROUNDWORK FOR GROWTH
Most nascent countries are in Africa and Southeast Asia and are characterized by the United Nations as less developed. There are 55 countries in this group, totaling 2.5 billion people, or 39 percent of the global population. Most have experienced exponential population growth over the past century and had low levels of development. Current State Today these countries have a large working-age population. By and large, they are youthful countries with relatively high fertility, so youth dependency is high while aged dependency is low. Generally, Southeast Asian countries have reaped more prosperity gains from their workers than African nations. They’ve managed this through better youth education and by reforming their business environment to encourage private enterprise. Meanwhile, most African nations are still struggling to put their youth to work and capitalize on their demographic dividend.
Looming Changes The arc of growth analysis predicts that by 2020, several nascent countries, such as India, will be transitioning into momentum countries. This demographic trajectory raises an important question: How can fast-paced countries provide the infrastructure and services needed to support increased urbanization, offer opportunities for a rapidly increasing working-age population, and prevent emigration of talent? Imperatives To address these issues, nascent countries should create an educational infrastructure that will lead to employment opportunities for the young and prevent talent emigration. Also, government should invest in a healthcare infrastructure that expands basic healthcare and improves access to family planning programs. Economic policies should support rapid economic growth, balanced regional development, controlled internal migration, and a sound physical infrastructure for urban development—namely roads, utilities, and telecommunications. Environmental policies should guarantee food security and water access. Case Study: India India is a prime example of a nascent country on its way up. Thanks to its huge working-age population, India is transitioning to a time of high economic growth and potentially
high demographic dividends. But managing that growth poses important policy challenges. By 2050 India will have more than one billion working-age people. If the government sets a target unemployment rate of 5 percent and counts on a 67 percent labor participation rate, that means the country needs to create about 7 million jobs per year. To pull that off, the government should boost economic competitiveness by supporting key sectors and promoting increased labor productivity through innovation. Failure to absorb such a large labor force poses important risks, in both lost demographic dividends and social pressures. If India’s unemployment rate rose to 15 percent and stayed at that rate through 2050, 110 million people would be unemployed. India’s development level is not optimal at this stage of the game. Further improvements in infrastructure, specifically in urban areas, are needed to support migration to cities while ensuring balanced regional development. The country must also improve the quality of basic education and access to higher education so skilled graduates replenish the workforce as the aging population retires. Besides these issues, the government should have an eye on financial resources to meet the liabilities of a large aging population, and tend to its natural resources, particularly access to clean water.
How can fast-paced countries support urbanization, offer opportunities for the working-age population, and prevent emigration of talent?
Booz & Company
MOMENTUM COUNTRIES: SEIZE THE OPPORTUNITIES
Most momentum countries are in Latin America and East Asia. There are 33 countries in this group with a total population of 2.6 billion, which makes up 41 percent of the world’s population. Current State Most of these countries had a recent period of high birth rates and enjoy a young working-age population that is large relative to the dependent population. This generation of workers could propel significant growth if the proper policies are in place. So far, East Asian countries have enjoyed stronger economic growth than Latin American countries. They’ve accomplished this success through a combination of regulatory and judicial reform that has created transparency, stamped out corruption, and generally improved the business environment, encouraging investment. Looming Changes The arc of growth analysis predicts that by 2030 several momentum
countries, such as China and some Latin American countries, will start bridging the development gap. As with nascent countries, this trajectory raises important questions for the future: How can governments ensure that policies are in place to create an environment that spurs economic growth and exploits their demographic dividend? What role does the private sector play in the demographic dividend equation? Can Latin American countries emulate the success of their East Asian counterparts? Imperatives In momentum countries, social policies should focus on education, particularly higher education, and the development of skilled talent to fulfill labor market needs. Now is the time to design pension mechanisms that can handle a future aging population. Also, as these countries generate greater wealth, it is important that income distribution is equitable to ensure social well-being and cohesion. Economic policies should promote
Booz & Company
labor productivity by, for instance, encouraging labor force mobility into the most productive sectors. Policies should spur competitiveness and support emerging high-value sectors, and encourage the private sector to satisfy and spur local consumption. As for environmental policies, these countries should work to reduce CO2 emissions and promote conservation of natural resources. Case Study: China China is the best example of a momentum country. Its dependency curve has hit a historical low, and its development is at a historical high. In 2010, China’s economy became the second-largest in the world, surpassing Japan, and some estimate it will surpass the United States in the coming
few decades. This rapid development has been due in part to a large generation of young, economically active people. But troubles loom. In the medium term, China will begin to feel the constraints of an aging population and low fertility—thanks to the onechild policy that has been in place for the last 30 years. In the long term, the workforce will age rapidly. If not managed correctly, this combination of low fertility and rapid aging could keep the country from achieving high development levels. The best response is to implement policies that encourage technology and innovation to boost productivity and competitiveness on both the export front (e.g., upgrading production quality to
sustain high export levels) and on the domestic front (e.g., encouraging local consumption fueled by the aging consumer). The government should improve access to higher education so workers will have the tools to perform high-value work, and should carefully manage social services to maintain them and plan for the large, aging population. Other policy considerations should include ensuring balanced regional development across China to avoid urban versus rural tensions and ethnic divides, and reducing the negative environmental impact of high economic growth. The country is already the number one emitter of CO2 in the world and its cities suffer high levels of smog.
Policies in momentum countries should spur com petitiveness and support emerging high-value sectors.
Booz & Company
DEVELOPED COUNTRIES: FIGHT TO MAINTAIN PROSPERITY
The developed category is by far the smallest. It consists of 19 countries, mostly eastern European, with about 320 million inhabitants, or 5 percent of the world’s population. These countries had a post–World War II baby boom but the state-driven economies prevented this large labor force from translating into robust economic growth. Although these nations achieved a certain level of development, they did not fully exploit their demographic dividend. Current State Today these countries face rapidly declining fertility rates and rising mortality rates, particularly since the collapse of the Soviet Union. The result is that these economies are threatened by not just a growth slow-
down, but a decline in population. Some governments have tried various schemes to encourage more births, including housing benefits, stipends, and lengthy maternity and paternity paid leaves. Unfortunately, these have not boosted birth rates significantly and have weighed heavily on government finances. Looming Changes The arc of growth analysis predicts that by 2040 many of these countries will, at best, maintain their current levels of prosperity. However, their relative prosperity compared to nascent and momentum countries may shrink or disappear, making them feel relatively less prosperous. Although these projections are not set in stone, these nations must address
Although these nations achieved a certain level of development, they did not fully exploit their demographic dividend.
Booz & Company
some very thorny problems if they are to escape this fate. Are governments doing enough to prepare for their respective demographic challenges? Is the health sector positioning itself to ensure delivery of effective medical care to an aging population? Imperatives On the social policy front, these countries must enhance education to improve development levels, and they must transform legacy healthcare and social security systems to meet the obligations to an aging population. Governments should consider immigration policies to bolster the workforce, but such policies would need to include strategies to integrate immigrants into society without threatening national identities. On the economic front, governments need a growing revenue base. To generate this, business environments
need to be generally improved—by streamlining rules and regulations and increasing transparency— to attract domestic and foreign investment. And policies should encourage research, development, and innovation to boost productivity and competitiveness. Case Study: Russia Russia is the poster child for the developed category. It faces important problems stemming from the Soviet Union’s policies and the promises made to its aging population. The bulk of Russia’s baby boom population is hitting retirement age—55 for women and 60 for men—while fertility has been well below replacement levels for years. This will put pressure on government finances by driving up pension costs as the ratio of pension contributors to pension recipients
decreases. In 2010, six workers supported each retiree. By 2050, just two workers will be supporting each retiree. This unfortunate confluence of factors could significantly impair Russia’s ability to grow its economy. Russia must take action quickly. Before the breakup of the Soviet Union, Russia was a leader in science and math. That is no longer the case, and to compete again on the world stage it must overhaul its education system. The government must also transform legacy labor and social security systems, and adapt the healthcare system to provide care to an aging population. On the economic front, policies should encourage innovation, productivity, and the competitiveness of local industries and diversify away from its reliance on natural resources.
Booz & Company
ADVANCED DEVELOPED COUNTRIES: BOLSTER THE WORKFORCE
This category consists of developed and affluent countries, from the U.S., with its relatively young population, to Japan, with a relatively older population. There are 24 countries in this category, mostly in Europe, with a total population of 952 million, representing 15 percent of the world’s population. Most of these countries saw their working-age populations grow from the late 19th to early 20th centuries, and then surge in the mid20th century as the baby boomers entered the workforce. But by the 1960s, fertility rates in most of these nations started dropping quickly. Current State By 2010 these countries enjoyed high development, but their low fertility rates and slowing population growth could threaten their continued levels of prosperity. The notable exception is the United States, which thanks to its immigration policies and relatively higher fertility rates will continue to grow. Looming Changes By 2050, these countries’ populations may continue to age and see prosper-
ity gains dwindle. Like the developed countries, these countries could feel relatively less prosperous as many nascent and momentum countries make prosperity gains. Policymakers must wrestle with the reality of an aging society dependent on a reduced working-age population. How can governments provide the support needed by an increasingly agedependent population? How should the private sector react to changing consumer demographics? Imperatives First and foremost, governments must reform social safety nets, as aging baby boomers take a greater toll on social security and healthcare systems. To bolster the workforce, governments can pursue immigration reform and gender equality initiatives that will draw more women into the workforce. On the economic front, productivity gains through innovation will be vital. Case Study: United States and Japan The advanced developed category covers a wide spectrum—from the United States, which is still on the
Booz & Company
young side with an open immigration policy and a growing workforce, to Japan, which has a quickly aging population with few immigrants and a shrinking workforce. In fact, Japan is the most aged country in the world and its high level of development is stagnating. Going forward, the country must increase productivity 2 percent per year to maintain its historical GDP per capita growth—and that is no small task. That is double the current productivity gains in the United States. To achieve those productivity gains, Japan must invest significantly in R&D. It must provide incentives to boost private-sector capital investment, and find ways to integrate other segments of the population— such as women or older workers— into the workforce. However, this approach has its limitations, and fails to consider some important means of
boosting productivity. For example, by tightly restricting immigration, Japan avoids some issues—such as the questions of national identity that are raised as immigrants become a large segment of the population—but gives up the major productivity gains that immigration can bring. Compared to Japan, the U.S. is in relatively better shape, though not without its own challenges. In the U.S., the country’s dependency curve is at a historical low and its development at a historical high. Although the fertility rates of U.S. boomers are lower than their parents’ generation, these rates are higher than other developed nations’; this, coupled with the country’s unique immigration policy will keep its population growing. However, this growth brings with it debate over immigration policy and the integration challenges associated with the new arrivals. Moreover, even
with immigrants flowing in, the U.S. will still get grayer. The age-dependent population will climb from 13 percent in 2010–11 to 22 percent by 2050, propelling healthcare spending by 6 percent per year, which will gobble up more and more of GDP. At this rate, by 2050 national healthcare spending is forecast to reach 23 percent of GDP. So much spending on healthcare creates a very unhealthy economic balance. The U.S. needs to reform these social security systems while at the same time push pro-growth policies that increase productivity through innovations and R&D, and encourage the private sector to innovate in this area. On the environmental front, policies should steer energy consumption into alternative and renewable energy sources and promote awareness.
Policymakers must wrestle with the reality of an aging society dependent on a reduced working-age population.
Booz & Company
CONCLUSION: THE RELEVANCE OF NEW DEMOGRAPHICS
Demographic trends are always at work within individual countries, shaping the society, the economy, and the environment, and these trends are better understood through the lens of new demographics. In particular, new demographics helps governments and companies to understand the demographic megatrend shaping all nations today: increased aging and dependency. Companies must respond to aging populations by seizing opportunities and confining risks. They must cope with changing preferences in current markets as consumers age, they must look abroad to develop new target markets as countries move through the arc of growth, and adjust to changing workforce patterns and shifting supply chains as countries develop. Companies must look beyond their sometimes narrow, immediate goals and consider how demographics are affecting their industry as a whole. Meanwhile, governments must select policies that improve their arc’s trajectory by encouraging economic activity and delaying the challenges related to aging. They must ensure that public infrastructure keeps up with demand, that education is highquality and accessible, that immi-
grants and women are integrated into the workforce, and that social security and healthcare systems are transformed so large aging populations do not overwhelm the workforce and stifle the economy. The most important thing for countries to bear in mind, no matter where they fall on the arc of growth, is that they are the captains of their destiny. The general consensus about many countries is that their future will be an extension of their present—that Japan’s hurdles are insurmountable, for instance, or that China’s trajectory of growth is unending. This is not the case. Countries that are pleased with their current circumstances will need to understand their demographic profiles and put in place the policies that will preserve their good fortune. Countries that wish to improve their lot will have to work even harder to formulate the policies that will change it. These challenges are daunting and inspiring at the same time. Through the lens of new demographics both governments and companies can glimpse the future, and influence its outcome, by addressing key priorities and seizing opportunities.
Booz & Company
The demographic dividend, a concept introduced by David Bloom, occurs when societies are able to create sufficient opportunity for their populations to maximize productivity. (From selected writings of David E. Bloom; and Finance and Development, a quarterly magazine from the IMF, vol. 43, no. 3, September 2006.)
All forecasts are the result of consensus analysis. They do not represent the views of Booz & Company and are not deterministic.
Booz & Company
Strategy& is a global team of practical strategists committed to helping you seize essential advantage. We do that by working alongside you to solve your toughest problems and helping you capture your greatest opportunities.
These are complex and high-stakes undertakings — often game-changing transformations. We bring 100 years of strategy consulting experience and the unrivaled industry and functional capabilities of the PwC network to the task. Whether you’re
charting your corporate strategy, transforming a function or business unit, or building critical capabilities, we’ll help you create the value you’re looking for with speed, confidence, and impact.
We are a member of the PwC network of firms in 157 countries with more than 195,000 people committed to delivering quality in assurance, tax, and advisory services. Tell us what matters to you and find out more by visiting us at strategyand.pwc.com/me.
This report was originally published by Booz & Company in 2011.
© 2014 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. Disclaimer: This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.