Unfortunately, getting old can come with a stigma. Many people try to delay the inevitable with regular exercise, a healthy diet and a strict skincare regime. But time stops for no one.
Ageing can also be a problem for countries. Many developed markets are starting to struggle with ageing populations and their associated social and economic issues. By 2025, the number of “working age” people (15 to 64-year-olds) in high-income countries is expected to start declining, with Europe facing the most pronounced falls.
The emerging world will mostly still benefit from young populations, with rising numbers of working-age people. But several have exhausted their “demographic dividends” and can expect rising dependency ratios, which means fewer workers will need to support more retirees.
In society, we need to guard against ageism. That’s also true when thinking about economic growth.
As well as affecting the total size of an economy through the number of people and workers, a shifting demographic profile has the potential to influence economies in other ways – via investment levels, interest rates and inflation, for example.
Across major emerging markets, the boost from rising labour forces may be starting to slow, but Developing Asia (excluding China and Thailand), the Middle East and Africa are still set to enjoy meaningful gains from their labour force (see chart, below).
This helps provide some level of confidence that emerging markets will maintain stronger growth potential in the near term and further out. The abrdn Research Institute expects that emerging markets are likely to grow twice as fast as Developed Markets in 2023 and 2024.
However, there are important caveats when considering how demographics may shape growth.
The application of simplistic and outdated definitions of “working-age” populations – often taken as 15 to 64-year-olds – fails to accurately capture rising labour force participation from 60 to 70-year-olds (because of rising life expectancy and later retirement).
An “older” workforce affects the calculation of dependency ratios. On a per-worker basis, dependency ratios will continue to fall over the next three decades in India – meaning that more workers support fewer retirees.
Meanwhile, ratios in emerging Asia and Latin America are little changed, rather than appearing to move adversely.
Human capital – the economic value of a worker’s skills and experience – has room to grow as more people stay in formal education for longer. This is likely to offset the drag from having fewer workers (or from a slowing pace of workforce growth).
Lower-income countries will benefit more. For example, many countries in Africa, and to a lesser extent India, should benefit from more workers and a more capable workforce. China could still offset fewer workers with better-educated ones (see yellow bars versus green bars in the chart above).
What’s more, quality-adjusted labour input – that is, workers plus human capital – rarely accounts for more than one-third of potential economic growth.
The building blocks of long-term economic growth also include productivity and capital investment (that is, the buildings, equipment and software available to workers, and how efficiently workers can combine them with their time).
Emerging markets still have considerable infrastructure needs, which help to lay a solid foundation for future growth. Less-developed countries typically have relatively low urbanisation rates. As these countries build more cities, this will drive considerable construction activity.
Moreover, abrdn expects economic growth in emerging markets to require a large increase in all types of capital investment – buildings, plant and machinery, vehicles, software and other forms of information technology – on a per-worker basis.
Directing capital to productive uses is difficult, but emerging markets have lower debt levels than Developed Markets, which suggest some wiggle room to help smooth their path.
Even with some slowing of trend growth, emerging markets will account for more global consumption and the growth of the global middle class, in abrdn’s view.
In absolute terms, abrdn believes that China and India will increasingly dominate both the global and emerging markets landscape in 2050, given the size of their economies.
China’s economy could more than triple by 2050, while India’s could rise by a factor of 4, according to abrdn's research. But even by 2050, Chinese per capita income is likely to remain well below that of the US. This implies that with the right structural reforms, China’s growth engine may not have run out of steam.
Compositional changes within China, India and elsewhere are even more striking than the overall growth figures.
Should the Chinese and Indian economies expand as abrdn projects, the size of their financial and consumer markets will also rise notably.
As a simple thought experiment, holding the ratio of market capitalisation to gross domestic product (GDP) fixed, equity market capitalisation could expand in China from US$8.5 trillion now to almost US$30 trillion by 2050, and in India from US$2.2 trillion to more than US$9 trillion (on abrdn calculations).
The rise of middle classes in emerging markets will also become a dominant force in shaping global trends. Chinese consumers are expected to be increasingly important as China gradually pivots away from its investment-intensive growth model.
Indeed, by 2040, China’s consumer market may have overtaken the US, and by 2050 it could be 20% bigger, abrdn research finds. Both China and India could see a quadrupling of consumption from current levels.
Finally, while China’s long-term growth story is attractive to investors, there are still questions about how compatible this is with an increasing focus on environmental, social and governance concerns.
China is moving away from an industry-heavy economy to a more balanced one, with a greater emphasis on services, and on restoring and protecting the environment. But challenges remain and the road will not always be smooth.
abrdn believes that a strong focus on due diligence and active engagement at the firm-level can help drive positive change, helping to progress the sustainability agenda.