Even skeptics of the demographic dividend have pointed to the success of the Asian Tigers as the exception to the global rule (there has been no such economic boom in the rest of the developing world despite falling fertility). Yet as a new Bank of Korea report confirms, the Aging Tigers, already eking out the last of the dividend, must now brace for the petering out of their workforce:

Korea’s working-age population ― those between 15 and 64 years of age ― will peak in 2016 before starting to decline rapidly for the next half a century…The share of the working-age population in the total population reaches a peak this year…

[A] decline in the proportion of productive people would slow economic growth by reducing labor input, which in turn would slow per capita income growth.  At the same time, it will shrink consumption as elderly citizens consume less than younger people. This would lead to downward pressures on prices.

The demographic change will also bring down the savings rate, as the burden of working-age people to support the elderly increases. It will also reduce corporate demand for investment funds as capital productivity falls due to the drop in the labor to capital ratio.

The drop in corporate demand for funds would put downward pressures on real interest rates. At the same time it will intensify competition among financial companies to secure customers, thus narrowing their interest margins.

On the asset front, the demographic shift has particularly serious implications. As elderly citizens need to dispose of their assets to finance consumption, asset supply will increase amid falling demand. This could trigger a sharp drop in real asset prices as properties account for about 90 percent of household assets in Korea…

[A]ll these repercussions from a declining share of the working-age population will ultimately result in a drop in the profitability and soundness of financial institutions.

Reprinted from C-FAM.


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