boozco new demographics
TRANSCRIPT
Leading Research Richard ShediacDr. Rainer BernnatChadi N. MoujaesDr. Mazen Ramsay Najjar
New DemographicsShaping a Prosperous Future as Countries Age
Booz & Company
Eva Kunigk, Rasheed Eltayeb, and Antoine Nasr also contributed to this Leading Research paper.
Contact Information
Abu DhabiRichard ShediacSenior [email protected]
Chadi N. [email protected]
AmsterdamDavid [email protected]
BeirutDr. Mazen Ramsay NajjarPrincipal+961-1- [email protected]
Buenos AiresAriel [email protected]
DCMarty BollingerSenior [email protected]
DohaNabih [email protected]
DubaiRasheed EltayebSenior [email protected]
FrankfurtDr. Rainer [email protected]
LondonDr. Shumeet BanerjiChief Executive [email protected]
Hugo Tré[email protected]
MadridDavid [email protected]
MoscowEkaterina [email protected]
Steffen [email protected]
MunichEva [email protected]
New DelhiSuvojoy [email protected]
ParisPierre Pé[email protected]
SantiagoFederico [email protected]
São PauloIvan de SouzaSenior [email protected]
ShanghaiHuchu XuInternational [email protected]
SydneyPeter [email protected]
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EXECUTIVE SUMMARY
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 work-ers pay for aging populations. But these assumptions are proving faulty and, potentially, economically debilitating.
At present, nations fall along a con-tinuum, 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 signifi-cant. 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 demo-graphics. 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 pro-cess; 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.
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 demo-graphic 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.
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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.
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
DEMOGRAPHICS SHAPE OUR WORLD
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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 demo-graphic 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, low-ered 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 long-term 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 care-fully considered approach.
Despite humans’ long history of trying to control the basic demo graphic components, our efforts often don’t work as planned.
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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 demo-graphic 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 demo-graphics 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 employ-ment, 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.
Source: Booz & Company
DemographicComponents
ImpactAreas
DemographicCharacteristics
DemographicComponents
ImpactAreas
DemographicCharacteristics
The Demographics CycleThe Demographics Cycle
Exhibit A The Demographics Cycle
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Today the world is being shaped by one demographic megatrend: increas-ing 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 DEMOGRAPHIC MEGATREND
1 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
Exhibit 1 The Dependent Population Is Growing, with the Aged Representing a Greater Majority
100+
Total = 2.5 Billion
5.2%
60.7%
34.1%
Male Female
0-45-9
10-1415-1920-2425-2930-3435-3940-4445-4950-5455-5960-6465-6970-7475-7980-8485-8990-9495-99100+
7.6%
65.5%
16.2%
26.9% 19.6%
64.1%
Dependency 65% 56% 9%+
Overall Youth Aged
53% 41% 12%+
Overall Youth Aged
56% 31% 25%+
Overall Youth Aged
Total = 6.9 Billion Total = 9.1 Billion
Male Female
0-45-9
10-1415-1920-2425-2930-3435-3940-4445-4950-5455-5960-6465-6970-7475-7980-8485-8990-9495-99100+
Male Female
0-45-9
10-1415-1920-2425-2930-3435-3940-4445-4950-5455-5960-6465-6970-7475-7980-8485-8990-9495-99
1950 2010 2050F
1
WORLD POPULATION PYRAMIDS(1950–2050F)
A paradigm shift in thinking and planning is necessary if nations are to sustain economic growth and main-tain standards of living as their popu-lations 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 equal-ity. 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 work-force put additional downward pres-sure 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 per-cent 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 acceler-ate 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).
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Today, the population of every coun-try 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 environ-mental 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 popula-tions, and devising strategies for emerg-ing 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 oppor-tunity 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 poli-cies that will make this population as productive as possible, thus propelling the country into economic growth at the optimal moment to do so.
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
Exhibit 2 The Number of Incipient Aging Countries Is Shrinking, While Advanced Aging Countries Are on the Rise
60
41012
4861
72
118
0–14
65+
15–64
3%
31%
8%
63%70%
35%
6%
61%
4%
22%
11%
66%
22%
17%
68%
15%
10%
67%
23%
13%
68%
20%
57%
40%
1950 2010IncipientAging
1950 2010ModeratelyAging
1950 2010ModeratelyAdvancedAging
1950 2010AdvancedAging
1950 2010IncipientAging
1950 2010ModeratelyAging
1950 2010ModeratelyAdvancedAging
1950 2010AdvancedAging
GLOBAL AGING LEVELS
AGE DISTRIBUTION NUMBER OF COUNTRIES
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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 CurveThe dependency curve is a country’s dependency ratio—i.e., the percentage of the population that is dependent on the working population—plotted
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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 depen-dency. 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
Youth Age
Working Age
Area of IncreasingYouth Dependency
Area of Decreasing Overall Dependency
Area of IncreasingAged Dependency
+ + + +DependencyDriver
Hig
hLo
wM
ediu
m
Time
Ove
rall
Dep
end
ency
1
DEPENDENCY CURVE
1 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
Potential Demographic Dividend
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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
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
India
Overall Trend
China
Japan
World
Brazil
Hig
hLo
w
Ove
rall
Dep
end
ency
Med
ium
Time
1965
19651965
2010
2010
2010
1965
2010
India
Overall Trend
China
Japan
World
Brazil
Hig
hLo
w
Ove
rall
Dep
end
ency
Med
ium
Time
1965
19651965
2010
2010
2010
1965
2010
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 GrowthA country’s position on the depen-dency 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 environ-mental 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 rela-tive position to other countries and, by inference, the societal, economic,
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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 character-ized 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 devel-opment and standards of living. These changes include such major advances as the industrial revolution, modern healthcare, and the computer age.
Companies, too, must take demo-graphics 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 there-after. Meanwhile, the share of housing and power, as well as luxuries (i.e., recreation and culture, restaurants, and hotels), as a percentage of spend-ing increases continuously as countries move along the arc from nascent to advanced developed.
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Low
Aging Index
199019851980
India
Low
Aging Index
Increasing Youth Dependency Decreasing Overall Dependency Increasing Aged Dependency
Hum
an D
evel
opm
ent I
ndex
Hig
hM
ediu
m
200520071990
1980
200520001995
19901980
20072005
20001995
200720051995
19901985
1980
2007
20051995
199019851980
2007
JapanGermany
U.S.
China
Pro
sper
ity a
nd E
qual
ity In
dex
Hig
hM
ediu
m
Exhibit 6 Analysis of Numerous Countries’ Arcs of Growth Shows That There Are Several Distinct Paths
COUNTRY DEVELOPMENT CURVES: EXAMPLES (1980–2007)
POTENTIAL PATHS ALONG THE ARC OF GROWTH
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
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)
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
U.S.U.K.
Russia
Norway
Nigeria
Japan
Indonesia
India
Germany
China
Brazil
Pro
sper
ity a
nd E
qua
lity
Ind
ex
Hig
hLo
wM
ediu
m
Aging Index
NASCENT COUNTRIES
MOMENTUMCOUNTRIES
DEVELOPED
ADVANCEDDEVELOPED
Africa
South Asia
SouthAmerica Ex-USSR
West EuropeGCC
Area of IncreasingYouth Dependency
Area of DecreasingOverall Dependency
Area of IncreasingAged Dependency
U.S. U.K.
Russia
Norway
Nigeria
Japan
Indonesia
India
Germany
China
Brazil
Pro
sper
ity a
nd E
qua
lity
Ind
ex
Hig
hLo
wM
ediu
m
Aging Index
Nascent Countries
MomentumCountries
Developed
AdvancedDeveloped
Africa
South Asia
SouthAmerica Ex-USSR
West EuropeGCC
Area of IncreasingYouth Dependency
Area of DecreasingOverall Dependency
Area of IncreasingAged Dependency
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Exhibit 7 Each Cluster on the Arc of Growth Must Plan for New Imperatives
Source: Booz & Company
Nascent
- Invest in basic education and healthcare infrastructure
- Pursue balanced regional development
- Develop physical infrastructure - Create employment opportunities- Ensure food security and water
access
Momentum
- Increase labor productivity- Enhance competitiveness- Develop skilled human capital- Introduce pension schemes - Reduce negative
environmental impacts
Developed
- 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
Advanced Developed
- 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
As employers, companies must also make policy adjustments to accom-modate 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 ChallengesThe power of new demographics, underpinned by the arc of growth, is that it is a predictive and action-oriented policy tool. By understanding this arc, decision makers can recog-nize 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 priori-ties. Governments and companies should address the needs determined by their current stage of develop-ment, 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 clus-ter and its challenges and priorities.
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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 StateToday 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 depen-dency is low. Generally, Southeast Asian countries have reaped more prosperity gains from their workers than African nations. They’ve man-aged this through better youth educa-tion 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 ChangesThe arc of growth analysis predicts that by 2020, several nascent countries, such as India, will be transitioning into momentum countries. This demographic trajec-tory 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?
ImperativesTo address these issues, nascent countries should create an educa-tional infrastructure that will lead to employment opportunities for the young and prevent talent emi-gration. 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 guar-antee food security and water access.
Case Study: IndiaIndia 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 unemploy-ment 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 competitive-ness by supporting key sectors and promoting increased labor productiv-ity through innovation. Failure to absorb such a large labor force poses important risks, in both lost demo-graphic dividends and social pres-sures. 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.
NASCENT COUNTRIES: LAY THE GROUNDWORK FOR GROWTH
How can fast-paced countries support urbanization, offer opportunities for the working-age population, and prevent emigration of talent?
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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 work-ers 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 accom-plished this success through a com-bination of regulatory and judicial reform that has created transparency, stamped out corruption, and gener-ally improved the business environ-ment, encouraging investment.
Looming ChangesThe 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 demo-graphic dividend? What role does the private sector play in the demo-graphic dividend equation? Can Latin American countries emulate the suc-cess of their East Asian counterparts?
ImperativesIn 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 popula-tion. 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
MOMENTUM COUNTRIES: SEIZE THE OPPORTUNITIES
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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: ChinaChina 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 sur-pass the United States in the coming
few decades. This rapid development has been due in part to a large genera-tion 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 one-child 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.
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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 govern-ment finances.
Looming ChangesThe 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
DEVELOPED COUNTRIES: FIGHT TO MAINTAIN PROSPERITY
Although these nations achieved a certain level of development, they did not fully exploit their demographic dividend.
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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?
ImperativesOn 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: RussiaRussia 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.
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This category consists of developed and affluent countries, from the U.S., with its relatively young popula-tion, 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 mid-20th century as the baby boomers entered the workforce. But by the 1960s, fertility rates in most of these nations started dropping quickly.
Current StateBy 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 ChangesBy 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 age-dependent population? How should the private sector react to changing consumer demographics?
ImperativesFirst 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 innova-tion will be vital.
Case Study: United States and JapanThe advanced developed category covers a wide spectrum—from the United States, which is still on the
ADVANCED DEVELOPED COUNTRIES: BOLSTER THE WORKFORCE
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young side with an open immigra-tion 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 his-torical 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 invest-ment, 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 rel-atively better shape, though not with-out 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 fertil-ity rates of U.S. boomers are lower than their parents’ generation, these rates are higher than other devel-oped 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-depen-dent population will climb from 13 percent in 2010–11 to 22 percent by 2050, propelling healthcare spend-ing by 6 percent per year, which will gobble up more and more of GDP. At this rate, by 2050 national health-care 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 productiv-ity through innovations and R&D, and encourage the private sector to innovate in this area. On the envi-ronmental 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.
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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 demo-graphic 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 high-quality and accessible, that immi-
grants and women are integrated into the workforce, and that social security and healthcare systems are transformed so large aging popula-tions do not overwhelm the work-force and stifle the economy.
The most important thing for coun-tries 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 trajec-tory 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.
CONCLUSION: THE RELEVANCE OF NEW DEMOGRAPHICS
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About the Authors
Richard Shediac is a senior partner with Booz & Company in Abu Dhabi. He leads the firm’s public-sector activities in the Middle East region, with a focus on public policy, socio-economic development, and organizational effectiveness.
Dr. Rainer Bernnat is a partner in Booz & Company’s Frankfurt office. He leads the firm’s public sector and IT work in Europe, and advises international clients on innovation, modernization, and restructuring initiatives, primarily at the interface between information and communication technology.
Chadi N. Moujaes is a principal with Booz & Company in Abu Dhabi. He focuses on public policy and socioeconomic development, with an emphasis on education reform.
Dr. Mazen Ramsay Najjar is a principal with Booz & Company in Beirut, specializing in financial economics. He focuses on public policy, socioeconomic development, and macro-economic and financial stability management.
Endnotes
1 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.)
2 All forecasts are the result of consensus analysis. They do not represent the views of Booz & Company and are not deterministic.
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