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Here's why East Asia could be in big trouble

Zhang Peng | LightRocket | Getty Images

If stock market volatility, slowing economies, and low commodity prices were not enough of a problem for East Asia, many countries in the region now have to worry about losing as much as 15 percent of their working-age population by 2040, according to the World Bank.

In a report released Wednesday, the World Bank said aging population and low fertility rates are to blame as 36 percent of the world's population over 65 currently live in East Asia. That's 211 million people and it is projected to rise over time.

World Bank said rapid aging is a result of East Asia's breakneck pace of economic development in recent decades. Higher income and better education have led to longer life expectancy and lower fertility rates but also led to displacement of families and changing social values.

The report's lead author Philip O'Keefe told CNBC's "Capital Connection" on Wednesday when talking about policies to deal with rapid aging, it's not just old people who should be in focus.

"We start talking from early childhood, child-bearing age, working age, right through to older age," said O'Keefe.

To tackle the crunch in East Asian labor markets, the World Bank recommended policies such as encouraging more women to join the workforce, reforming existing pension schemes, and shifting healthcare focus from hospital care to primary care.

Unlike most Organization for Economic Co-operation and Development (OECD) countries, which grew old and wealthy at a gradual pace, many East Asian countries are experiencing "accelerated aging at relatively low levels of per capita income" the report noted, which would have major implications on the welfare of older people.

"East Asia Pacific has undergone the most dramatic demographic transition we have ever seen, and all developing countries in the region risk getting old before getting rich," said Axel van Trotsenburg, regional vice president of the World Bank's East Asia and Pacific region.

The pace of aging, the bank noted, varies according to the level of economic development in a country.

Richer countries such as Japan, Singapore, and South Korea already have 14 percent or more of their population that are at least 65 years old, the report said.

Rajiv Biswas, Asia Pacific chief economist at IHS Global Insight, told CNBC by email, "The impact of demographic ageing has already become severe in Japan, where the total population is projected to decline by 12 million people between 2012 and 2030."

As a result, Japan's economy is facing a "demographic crisis due to the rising share of the elderly in the population, imposing rising health care and social welfare costs on the Japanese government budget."

The largest expenditure in the Japanese government's 2015 budget was on social welfare - over 31 trillion yen ($252 billion).

Poor countries including Cambodia, Laos, and Papua New Guinea will begin to age rapidly in the next two-to-three decades.

But developing middle-income countries such as China, Thailand, and Vietnam face the biggest challenges in managing an aging population, which would require tough policy decisions.

Katrina Ell, an economist at Moody's Analytics, told CNBC an aging demographic breaks the traditional formula for success that many of these countries have previously relied on - a young population. Their governments lack the sophistication to deal with an older workforce.

"Asian governments have invested little in old-age support because children have traditionally looked after their parents in their twilight years," said Ell.

Some countries are beginning to take note.

Earlier this year, China announced it was doing away with its one-child policy that had been in place since 1980 to allow couples to have multiple children to boost its aging demographics.

O'Keefe said though the scrapping of the one-child policy is an important step in the right direction, the tricky part is once fertility rates fall to a certain level, it's difficult to reverse that anywhere in the world. "China would be no exception."

Other countries have turned to foreign labor to top up their declining workforce. In Singapore, for example, government data showed as of June 2015, 1.63 million out of the country's total population of 5.54 million people are non-residents.

But for countries such as Japan and South Korea, turning to a foreign workforce faces plenty of cultural resistance and language barriers.

Governments in East Asia are getting bits and pieces of the aging population story right, according to O'Keefe. In Japan, he said, the Abe government adjusted their pension system to account for longevity. In Singapore and South Korea, the governments have taken measures to extend active working life and make older workers more attractive to employers.

"[But] nobody's got everything right and many things are uncertain about the outcome of these policies."

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