Wednesday, July 27, 2011

Capitalizing demographic bonus to avoid middle-income trap

Asia is in the midst of a truly historic transformation. If it continues to grow on its recent trajectory, it could, by 2050, account for more than half of the global Gross Domestic Product, trade and investment, and enjoy widespread affluence.

“Its per capita income could increase six-fold to reach the global average and be similar to European levels today...” (Asian Development Bank document Asia 2050 — Realizing the Asian Century).

The document categorizes Asian economies into three groups. The first group consists of seven economies that have grown rapidly since the 1950s, avoiding the “middle-income trap” and becoming high-income developed economies in one generation.

The second comprises 11 economies, including Indonesia, that have demonstrated consistently high growth since 1990 and have already reached middle-income status, but now face the greatest risk of falling into the middle-income trap. Finally, the third group comprises 31 economies that have achieved only modest growth.

The document then postulates two scenarios of Asia’s future growth path, showing how the future of these economies may unfold: the Asian century and middle-income trap scenarios.

In the Asian century scenario, Asia’s GDP is projected to increase from US$16 trillion in 2010 to $148 trillion in 2050, or half of global GDP, with a per capita GDP of $38,600, similar to Europe today. It assumes that the 11 middle-income-status economies would maintain their momentum for another 40 years and adapt to the shifting global economic and technological environment by continually recreating their comparative advantage.

In the middle-income trap scenario, the report assumes that the current converging economies would fall into a middle-income trap over the the next five to 10 years and then follow the pattern of Latin America over the past 30 years.

The document warns that long-term projections of Asia through 2050 cannot rule out the possibility of a “perfect storm” scenario, whereby the combination of bad macro-policies, exuberance combined with lax financial sector supervision, conflicts, natural disaster, demographic factors and weak governance could cause a major setback to Asian growth. Under this worst case — or “doomsday” — scenario, Asia could stumble into a financial meltdown well before 2050.

The middle-income trap refers to countries that are stagnating and unable to grow to advanced country levels.

Many middle-income countries are caught in the middle-income trap — that is, they are unable to compete with low-income, low-wage economies in manufacturing exports and are unable to compete with advanced economies in high-skill innovations. Such countries cannot make a timely transition from resource-driven growth, with low-cost labor and capital, to productivity-driven growth.

To mitigate the risk of falling into the doomsday scenario, Indonesia must embark on policies that would, among others, make sustainable long-term economic growth more inclusive and equitable, radically reduce the intensity of energy and natural resource use, harness the full potential of entrepreneurship and innovation to create breakthroughs in science and technology, and improve governance.

Moreover, Asian population giants China and India will see very different demographic trends. By 2050, China’s population will represent a smaller share of the total global population than before.

India, on the other hand, will have grown, and its share of the total global population will grow to nearly 20 percent; while Indonesia’s population in 2050 will be 288 million. In the next decades, the list of the largest countries in the world will continue to be dominated by Asia.

The demographic figures for Asia in 2050 are impressive by the sheer numbers of its growing population: 40 years from now, Asia will have a population of nearly 5 billion. But the growing number of “elderly” people is just as impressive: In 2050, nearly 860 million Asians will be 65 years and older.

What is especially striking about this phenomenon is the relative speed of the process of aging in Asia at all levels of the economic spectrum.

A valid concern is that a rapidly aging population is antithetical to achieving high-income status and creates fear that a country might become too old before it becomes rich enough, and thus is trapped in a middle-income cycle.

Clearly, the ADB document suggests that population growth is no longer a “time bomb” threat to the economy. Instead, it is the driver of and a key factor in economic growth.

However, the Indonesian government has continued to believe that Indonesia still needs to curb its rapid population growth through a United Nations Population Fund (UNFPA)-sponsored “reproductive health” campaign targeting young people.

It has also promised to revitalize the national family planning program through the distribution of condoms and other contraceptives.

In a recent seminar in Jakarta sponsored by UNFPA, Vice President Boediono even stressed that the country’s rapid population growth is the main concern of the government. I suggest that the Vice President should read carefully the ADB’s Asia 2050 document.

Armida Alisjahbana, the National Development Planning Minister, however, is more enlightened by saying in a recent seminar on “Asia 2050: Realizing the Asian Century” organized by ADB in Jakarta that what Indonesia must do in order to achieve its long-term economic goal is to work hard on the implementation issues of what have been laid out in the master plan.

This means a new attitude towards policy implementation and a new generation with more capable and competent Indonesians who will eventually emerge from highly educated, skillful, healthy and large population.

South Korea, which has been singled out as a model of a middle-income country in the 1970s that succeeded in graduating to a highly developed and advanced economy at the beginning of the 21st century, offers great lessons for Indonesia to learn from. Among the indicators of South Korea’s first-world status is its ranking as the 13th most powerful economy in the world as its GDP crosses the $1 trillion threshold in 2011.

South Korea escaped the middle-income trap by following a double-track strategy in industrialization. It gave equal importance to export promotion and to the nurturing of a large domestic market.

Early in its development efforts in the last century after surviving the Korean War, its leaders had the wisdom to focus on rural and agricultural development. It was able to capitalize on its demographic dividend from the baby boom after the World War II through a labor-intensive, export-oriented industrialization strategy.

It escaped the middle-income trap by being able to compete with low-income, low-wage economies in manufacturing exports by investing heavily in higher education and research and development to move into higher-value and higher-technology industries.

Thus, there is no reason for the neo-Malthusian supporters to say that the world is already over-crowded and doomed to collapse. With its rapid population growth Indonesia’s economy must be able to fully realize its demographic dividend and, therefore, avoid the middle-income trap caused by a demographic winter.

Stefan S. Handoyo, CEO and chief economist of RAI Group and an expert on corporate governance.


  1. China will escape the middle-income trap and the other developing countries will not. This is my prediction.