In the last twenty years BRIC countries, that is Brazil, Russia, India, and China, have played an increasingly relevant role as engines of global economic growth. From 1993 to 2007 they grew on average by 5.6% per year and by 5.3% from 2008 to 2012, as production contracted or stagnated in developed economies. Their demographic structure, dominated by people in ‘active age’ , has undoubtedly played an important role in their success. This advantage, however, is destined to rapidly disappear in the next decades as BRIC countries face the challenge of population aging.
The coming aging
A commonly used indicator in the analysis of the demographic structure of a country is the total dependency ratio, which is computed as the ratio between the dependent population (aged under 15 or above 64) and the active population (aged between the two cut-off). As shown in Figure 1, this index is expected to increase substantially in BRIC countries in the next four decades, reaching a level close to 0.6, on average, by 2050. It is noteworthy that even higher levels were reached in the sixties and the seventies, though this was not harmful to the economic performance of these countries. Which is the difference between these two periods?
In the past, the high dependency ratio was driven by the large share of the population under age 15 who could enter the labour market after reaching adulthood. The increasing number of people on the labour market boosted labour supply, moderated wage pressures and contributed to rapid economic growth. In contrast, in the next decades, the rise of the index will be entirely dominated by a large increase in the share of the population in older ages. This is described in Panel A of Figure 2. Starting from the very low levels observed up until now, the ratio of the number of people over 64 years and the number of people in working age is expected to experience a sharp increase in all BRIC countries.
The case of Russia and China is particularly relevant, as their ratio is projected to be even higher than in the US, a country which is expected to face important challenges caused by the aging and retirement of baby boomers. Overall, India seems to have more time to adapt to the changing structure of its population. In addition, it is well worth noting that Russia, China, and Brazil are also likely to experience a decline (in absolute terms) of the number of people in working age. These countries are approaching, or have already passed in the case of Russia, the so called Lewis’ turning point, that is the moment when their working age population stops growing and starts declining. If this implies a series of advantages, such as less pressure on the labour market for the creation of new jobs, it may also be a source of important challenges as wages are pressed upward and, according to the relative size of the two effects, the tax base possibly shrinks. Of course, this would have important consequences for the public budget, which would be subjected to increasing pressures to both sustain the income of older individuals through the pension system and finance the health care system.
The origins of aging
The rapid aging of the population is driven by two different phenomena: the progressive improvement of life expectancy and a remarkable decline of fertility.
Regarding the former, better living conditions, often associated with rising income and improved health care, had strong positive effects on life expectancy in these developing countries. Life expectancy at birth increased between more than 15 years in India and about 10 years in China since 1970. The rapid rise of this indicator has been likely driven by decreasing mortality at relatively young ages. This positive trend will also persist in the future according to US Census projections (Table 1), though at a slower pace, as gains in life expectancy are more concentrated in older ages. The only exception to this general trend is Russia, where the collapse of the Soviet Union and the dismantling of a considerable part of the Soviet production system as well as of the welfare state led to both a substantial worsening of living standards and a deterioration of health conditions .
As far as the latter is concerned, most countries have seen a rapid decline in total fertility rate (TFR) . This phenomenon is particularly pronounced in Brazil, China, and Russia, where the TFR is projected to increase only gradually over the next decades. India stands out of this picture with a more favourable position. Despite relevant declines in the past decades, its TFR still remains above the critical level of 2.1 births per woman. This could help India to prevent rapid population aging by counterbalancing the decline of the working age population over the next decades.
Challenges for pension systems and public budgets
The growing share of the older population will increase the pressure on public budgets substantially, especially through the pension system, which should undergo profound reforms in order to provide income security to the elderly.
The case of China, with its rapid population aging and its peculiar pension system, is of particular interest. First of all, it would be necessary to expand the coverage of the system which was initially developed to cover employees of government-controlled companies. This only provides partial coverage to workers in the private sectors. Herd (2013) has shown that in 2005 only a minority of independent workers had any pension coverage, and only about 50% of the workers of private or foreign-owned companies had pension coverage as compared to 88% of workers at firms owned by the government. In addition, the presence of a large number of schemes (about 2000), together with the impossibility of moving contributions across them made the system particularly fragmented. Recent reforms in 2005, 2009, and 2011 have brought about substantial improvements, such as the portability of contributions. More interventions are certainly needed; in particular, under the current rules, the system will be unable to deliver the target replacement rate of 60% .
However, China is not the only country which is likely to face such problems. Other countries’ pension schemes are severely underfunded. According to a study by Eich et al. (2012), the structure of the Russian pension scheme implies a discounted deficit of 105% of the GDP, whereas an IMF study computed a present value deficit close to 100% of the GDP for the Brazilian pension system.
Several reforms have already been proposed and implemented in these countries, but these have only partially solved the problem , and further adjustments are needed. In this respect, increasing the retirement age may appear as the most suitable policy intervention. As a matter of fact, it does not require increasing contributions (which may lead to distortions in the labour market), it does not lower pensions (which is essential to sustain the well-being of the retired, especially when traditional family safety nets become weaker), and it is justified by a higher life expectancy which should be matched by a longer working life.
Of course this is not the only way in which aging might affect the economy and the government budgets of these countries. The aging process could slow down growth as more resources are “diverted” towards the elderly and fewer workers are on the labour market. Furthermore, it will imply the allocation of more funds towards the health care system, which may put additional stress on the public budget.
Although this is only a partial representation of the problems related to aging in the most prominent developing countries, it is clear that it is one of the most formidable challenges BRIC countries will face in the future. Their policy responses will be crucial for their economic performance and the sustainability of their societies.
This article was originally published on Neodemos.it with the title “Il grigio futuro dei Brics”