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Leading Research   Richard Shediac                   Dr. Rainer Bernnat                   Chadi N. Moujaes                ...
Contact InformationAbu Dhabi                        DC                                Madrid                        ParisR...
EXECUTIVE        Demographic trends are always at work within individual                 countries, shaping societies, eco...
KEY HIGHLIGHTS• A paradigm shift in thinking and  planning is necessary if nations  are to continue economic growth  and m...
provided them sufficient opportunities    cultures, the elderly were expected      on a large pool of labor born beforefor...
The Demographics Cycle    Fundamental to the study of demographics is the demographics cycle,    which is a continuous cir...
A DEMOGRAPHIC                                              A paradigm shift in thinking and                               ...
Today, the population of every coun-                       strategies, and expectations based                         tren...
NEW              Demographics as traditionally                 practiced by public and private                            ...
over time. Population dependents are                      population ages (which presents a                         a way ...
become too acute. This sweet spot                            or 65, or 70. However, recent protests           used prosper...
and environmental issues it faces (see        65. These countries are also            of human development is a historyExh...
Exhibit 5  All Countries Are Currently Somewhere Along the Arc of Growth  PROSPERITY AND EQUALITY INDEX VS. AGING INDEX  (...
As employers, companies must also               Although each country is unique,                 strategy. In the nascent ...
NASCENT                                     Looming Changes                                            The arc of growth a...
MOMENTUM        Most momentum countries are in                Latin America and East Asia. There                          ...
labor productivity by, for instance,      few decades. This rapid development        sustain high export levels) and onenc...
DEVELOPED    The developed category is by far the             smallest. It consists of 19 countries,                      ...
some very thorny problems if they are     need to be generally improved—by        decreases. In 2010, six workersto escape...
ADVANCED      This category consists of developed              and affluent countries, from the U.S.,                     ...
young side with an open immigra-          boosting productivity. For example,       with immigrants flowing in, the U.S.ti...
CONCLUSION:     Demographic trends are always at                work within individual countries,                         ...
Endnotes1 The demographic dividend, a concept introduced by DavidBloom, occurs when societies are able to create sufficien...
The most recent             Worldwide Officeslist of our officesand affiliates, with        Asia                Brisbane  ...
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Booz co report: New Demographics: Shaping a Prosperous Future as Countries Age

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New Demographics: Shaping a Prosperous Future as Countries Age

Publish Date:
May 31, 2011

Author(s):
Bernnat, Rainer; Moujaes, Chadi N.; Najjar, Mazen Ramsay; Shediac, Richard

Abstract:
The world as a whole is being shaped by a demographic megatrend: increasing aging and dependency. To better understand aging and its effects, Booz & Company introduces an approach that we call new demographics.

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Transcript of "Booz co report: New Demographics: Shaping a Prosperous Future as Countries Age"

  1. 1. Leading Research Richard Shediac Dr. Rainer Bernnat Chadi N. Moujaes Dr. Mazen Ramsay NajjarNew DemographicsShaping aProsperous Futureas Countries Age
  2. 2. Contact InformationAbu Dhabi DC Madrid ParisRichard Shediac Marty Bollinger David Suarez Pierre PéladeauSenior Partner Senior Partner Partner Partner+971-2-699-2400 +1-703-905-4003 +34-91-411-8457 +33-1-44-34-3074richard.shediac@booz.com marty.bollinger@booz.com david.suarez@booz.com pierre.peladeau@booz.comChadi N. Moujaes Doha Moscow SantiagoPrincipal Nabih Maroun Ekaterina Kozinchenko Federico Leighton+971-2-699-2400 Partner Partner Principalchadi.moujaes@booz.com +974-44026-777 +7-495-604-4100 +56-2-4455100 nabih.maroun@booz.com ekaterina.kozinchenko federico.leighton@booz.comAmsterdam @booz.comDavid Wyatt Dubai São PauloPartner Rasheed Eltayeb Steffen Leistner Ivan de Souza+31-20-504-1940 Senior Associate Partner Senior Partnerdavid.wyatt@booz.com +971-4-390-0260 +7-985-368-7888 +55-11-5501-6368 rasheed.eltayeb@booz.com steffen.leistner@booz.com ivan.de.souza@booz.comBeirutDr. Mazen Ramsay Najjar Frankfurt Munich ShanghaiPrincipal Dr. Rainer Bernnat Eva Kunigk Huchu Xu+961-1- 985-655 Partner Principal International Directormazen.najjar@booz.com +49-69-97167-414 +49-89-54525-509 +86-21-2327-9878 rainer.bernnat@booz.com eva.kunigk@booz.com huchu.xu@booz.comBuenos AiresAriel Fleichman London New Delhi SydneyPrincipal Dr. Shumeet Banerji Suvojoy Sengupta Peter Burns+54-11-4131-0432 Chief Executive Officer Partner Partnerariel.fleichman@booz.com +44-20-7393-3502 +91-124-499-8700 +61-2-9321-1974 shumeet.banerji@booz.com suvojoy.sengupta@booz.com peter.burns@booz.com Hugo Trépant Partner +44-20-7393-3230 hugo.trepant@booz.comEva Kunigk, Rasheed Eltayeb, and Antoine Nasr also contributed to this Leading Research paper. Booz & Company
  3. 3. EXECUTIVE Demographic trends are always at work within individual countries, shaping societies, economies, and the environment.SUMMARY But today the world as a whole is being shaped by a demo- graphic megatrend: increasing aging and dependency. After decades of accelerating population growth, in which the global population zoomed from 2 billion to 6 billion in 70 years, growth is slowing down as fertility rates decline. As a result, aged citizens will become a larger percentage of populations and their dependency on slower-growing working populations will have serious economic consequences. In short, the next 50 years will look much different from the previous 50. In the second half of the 20th century, increasing number of aged dependents. governments, corporations, and Meanwhile, emerging countries such individuals viewed their countries as as India and China must understand forever young and growing. Based on how to harness the benefits of their these assumptions, systems were created relatively younger populations to and promises made, such as government create a demographic dividend. pension schemes in which current work- To better understand aging and its ers pay for aging populations. But these effects, Booz & Company introduces assumptions are proving faulty and, an approach to understanding this potentially, economically debilitating. megatrend that we call new demo- graphics. Through analytical concepts At present, nations fall along a con- such as the dependency curve and the tinuum, with some countries already arc of growth, it’s now possible to beginning to feel the effects of aging, see where individual countries are in and others anticipating those effects their aging and development pro- in the coming decades. The social, cess; predict the societal, economic, economic, and environmental impact and environmental challenges that of this aging process will be signifi- lie ahead; and develop policies and cant. Countries such as the U.S. and actions. Governments and the private Japan must make their workforces sector must both adapt. Some changes more productive in order to cover will be painful, but their importance the costs of social entitlements for an cannot be underestimated.Booz & Company 1
  4. 4. KEY HIGHLIGHTS• A paradigm shift in thinking and planning is necessary if nations are to continue economic growth and maintain standards of living as their populations grow to an estimated 9 billion in 2050 and become more aged.• By applying a more predictive approach to demographics, public policymakers and corporate strategists can pinpoint where individual countries are in their aging and development process; predict the societal, economic, and environmental DEMOGRAPHICS Demographic trends control all aspects of our world and are always challenges; and develop policies and actions accordingly. SHAPE at work within countries—shaping• Nascent, momentum, developed, OUR WORLD societies, economies, and the environment. Indeed, much of our and advanced developed world’s great complexity stems from countries are all facing different a few basic demographic variables: imperatives, but all will need to births, deaths, and migration. Even address the gradual aging of small percentage changes in these their populations. components can yield dramatic results. When the changes are significant, the results can reverberate for centuries. The most fundamental changes to our world over the last few hundred years—industrialization, urbanization, global warming—can all be traced to demographics. China, for example, wouldn’t matter nearly as much to the rest of the world if it didn’t have more than a billion people turning an economic engine that is now the world’s second largest. A bulge in the youth population has been a major factor in the recent unrest in the Middle East, as young people protest, among other issues, the fact that national economies have not2 Booz & Company
  5. 5. provided them sufficient opportunities cultures, the elderly were expected on a large pool of labor born beforefor employment or a voice in the to disappear into the wilderness and the policy began. Now, however, thatdevelopment of their societies. die when they became a burden. pool of labor is rapidly aging, whichMeanwhile Japan, a powerhouse in And abducting children and women will put stress on the relatively lessthe second half of the 20th century, is from neighboring tribes was a form numerous younger generation thatgrappling with an aging population, of forced migration to supplement must support them.which—combined with low fertility a society’s population and ensure itsand immigration rates—is putting continued viability. Governments and companies mustenormous pressure on a working take notice of these trends. Only bypopulation that is called upon to Despite humans’ long history of studying demographic trends andsupport a relatively higher number trying to control these basic demo- trying to grasp their short- and long-of aged dependents. Even primitive graphic components, our efforts term implications can governmentssocieties innately understood the often don’t work as planned, and design and implement policies in timepower of demographic components on they almost always yield unintended to make a difference; only by doingtheir communities and in various ways consequences. For instance, China’s so can companies position themselvestried to control them. In the past, in one-child policy has, as planned, low- properly for growth in their currentsome societies—African, Asian, and ered the fertility rate and prevented and future markets. Taking advantageEuropean—scarcity of resources and an estimated 250 million births since of demographic trends will requirea preference for boys sometimes led to 1980. This policy has coincided with better information and a more care-the euthanizing of baby girls. In other huge economic gains that were built fully considered approach.Despite humans’ long history oftrying to control the basic demographiccomponents, our efforts often don’twork as planned.Booz & Company 3
  6. 6. The Demographics Cycle Fundamental to the study of demographics is the demographics cycle, which is a continuous circle of cause and effect between the basic demo- graphic components (e.g., birth, death, and migration); demographic characteristics (e.g., split of urban vs. rural populations, gender balances, ethnic mix, education levels); and impact areas (social, economic, and environmental). These three dynamics continuously affect and change one another, creating further effects and changes and propelling the demo- graphics cycle round and round (see Exhibit A). Societies feel the effects of the demographics cycle through the three impact areas mentioned above: The social aspect: Social development is linked to measures of employ- ment, self-sufficiency, health, equality, enfranchisement, accountability, and social cohesion. In modern Western societies, higher standards of living and more women in the workforce have resulted in smaller families. The economic aspect: Human capital drives economic development: A region’s demographic profile, young or old, growing or shrinking, directly affects its ability to develop economically. If economies do not have adequate human capital, or productivity doesn’t increase enough to compensate for a declining workforce, economic growth will falter. If that happens, each person’s slice of the economic pie becomes thinner and thinner, eventually lowering standards of living. The environmental aspect: Our environment is both natural and man-made and is directly affected by human activity. For instance, the rapid urbanization of China has profound implications for the quality of its air and water, and thus the health of its population. Exhibit A The Demographics Cycle Demographic Components The Demographics Cycle Impact Demographic Impact Areas Characteristics Areas Source: Booz & Company4 Booz & Company
  7. 7. A DEMOGRAPHIC A paradigm shift in thinking and planning is necessary if nations are to began in Western countries but has since spread around the world:MEGATREND sustain economic growth and main- Between 1950 and 1980, average tain standards of living as their popu- annual population growth globally lations grow to an estimated 9 billion was 1.89 percent; from 2010 to 2050, in 2050 and become more aged. that rate is expected to fall by nearly Looking back over the past 50 years, two-thirds to 0.71 percent.Today the world is being shaped by we can see that the post–World Warone demographic megatrend: increas- II baby boom, as well as significant The deceleration means that theing aging and dependency. The next strides in healthcare, created a spike global population will age over the50 years will look very different from in population growth and reduced the next 50 years. In 1950, 34.1 per-the previous 50: After decades of death rate, respectively. These factors cent of the planet’s population wasaccelerating population growth, as led to a larger workforce, higher younger than 15 and 5.2 percentthe global population zoomed from 2 standards of living, and greater equal- was older than 64. Today, the youngbillion to 6 billion between 1930 and ity. This influenced behavior and the group has shrunk to 26.9 percent2000, growth is now slowing down structure of families. As standards while the aged group has grown toas fertility rates decline. As a result, of living rose, people began to have 7.6 percent. That trend will acceler-aged citizens will make up a larger fewer children in order to maintain ate sharply as baby boomers retire:percentage of populations and their their standard of living more easily. By 2050, the young will slide to 19.6dependency on working populations, Women’s mass entry into the work- percent of the population whereas thewhich are not growing as quickly, will force put additional downward pres- aged will more than double, to 16.2have serious economic consequences. sure on the birthrate. This dynamic percent (see Exhibit 1).Exhibit 1The Dependent Population Is Growing, with the Aged Representing a Greater MajorityWORLD POPULATION PYRAMIDS(1950–2050F) 1950 2010 2050F Male Female Male Female Male Female 100+ 100+ 100+ 95-99 95-99 95-99 90-94 90-94 90-94 5.2% 85-89 7.6% 85-89 16.2% 85-89 80-84 80-84 80-84 75-79 75-79 75-79 70-74 70-74 70-74 65-69 65-69 65-69 60-64 60-64 60-64 55-59 55-59 55-59 50-54 50-54 50-54 45-49 45-49 45-49 40-44 40-44 40-4460.7% 65.5% 64.1% 35-39 35-39 35-39 30-34 30-34 30-34 25-29 25-29 25-29 20-24 20-24 20-24 15-19 15-19 15-19 10-14 10-14 10-1434.1% 5-9 26.9% 5-9 19.6% 5-9 0-4 0-4 0-4 Total = 2.5 Billion Total = 6.9 Billion Total = 9.1 Billion Dependency 1 65% 56% + 9% 53% 41% + 12% 56% 31% + 25% Overall Youth Aged Overall Youth Aged Overall Youth Aged1 Overall dependency is defined as the sum of the youth and aged dependencies. Youth dependency is the ratio of youth (0–14) to working-age population (15–64), and ageddependency is the ratio of aged (65+) to working-age population.Source: UN Population Division, “World Population Prospects: The 2008 Revision”; Booz & Company analysisBooz & Company 5
  8. 8. Today, the population of every coun- strategies, and expectations based trends to continue their growth—fortry on earth is aging—although they on this faulty belief. For instance, example, by increasing their focus onare aging at different rates. In those governments in developed countries products and services to aging popula-countries categorized as “incipient structured pension systems so that tions, and devising strategies for emerg-aging,” 4 percent of their population today’s workers pay for today’s ing markets with different demographicis 65 and above, up from 3 percent retirees. But many of these plans profiles. Just as important, companiesin 1950. Countries with a moderately won’t work in their current form as must look internally and put in place aaging population have seen their older there are fewer workers to support more diverse workforce for maximumcitizens grow from 6 percent to 8 more retirees, and countries will need market impact.percent of the population in that same to adjust. In Russia, the number ofperiod. Moderately advanced aging workers supporting one retiree will Not all countries are yet experiencingcountries have seen a jump from 10 drop from six today to just two in rapid aging. For some countries agingpercent to 13 percent; while advanced 2050. In Japan the problem will be is part of the future rather than theaging countries have witnessed a rise even worse; there will be just one present—and they still have the oppor-from 11 to 17 percent (see Exhibit 2). worker per retiree by 2050. tunity to plan for it. These countries are approaching or already enjoyingThe social, economic, and environ- As their populations age, governments the demographic “sweet spot” atmental impact of this aging process must devise new ways to support their which the working population is atwill be significant. The post–World aging populations and at the same time its largest. They should seek to takeWar II baby boom created a mind-set stimulate continued wealth creation advantage of this period with poli-among governments and companies with relatively smaller workforces cies that will make this population asthat populations would be forever through innovation and productivity productive as possible, thus propellingdominated by young, economically gains. Companies, for their part, need the country into economic growth atactive people and they set policies, to adapt to these new demographic the optimal moment to do so.Exhibit 2The Number of Incipient Aging Countries Is Shrinking, While Advanced Aging Countries Are on the RiseGLOBAL AGING LEVELS AGE DISTRIBUTION NUMBER OF COUNTRIES 118 6% 8% 10% 13% 11% 17% 65+3% 4% 57% 61% 72 63% 61 70% 67% 68% 66% 60 68% 15–64 48 40% 35% 12 31% 10 22% 23% 20% 22% 15% 0–14 4 1950 2010 1950 2010 1950 2010 1950 2010 1950 2010 1950 2010 1950 2010 1950 2010 Incipient Moderately Moderately Advanced Incipient Moderately Moderately Advanced Aging Aging Advanced Aging Aging Aging Advanced Aging Aging AgingNote: A population’s aging level can be classified based on the ratio of aged dependency to youth dependency as Advanced Aging (with a ratio of >0.7), Moderately AdvancedAging (with a ratio of 0.5–0.7), Moderately Aging (with a ratio of 0.2–0.5), or Incipient Aging (with a ratio of <0.2).Source: UN Population Division, “World Population Prospects: The 2008 Revision”; Booz & Company analysis6 Booz & Company
  9. 9. NEW Demographics as traditionally practiced by public and private policymakers and corporate strategists can pinpoint whereDEMOGRAPHICS policymakers focuses on past trends individual countries are in theirCAN SHAPE and current effects. But given the magnitude of the changes created by aging and development process; plot a trajectory; predict the societal,THE FUTURE aging, the different paces at which economic, and environmental individual countries will witness challenges; and develop policies and this aging, and the major challenges actions to improve that trajectory. governments and private enterprise This is an important point. A face, this approach to demographics country’s current trajectory is not is too limited. What’s needed is a written in stone; practitioners of new more predictive approach, one that demographics can make educated uses past and present demographic assumptions about the future and trends to calculate the future raise critical questions while there trajectories for each country. We call is still time to prepare and perhaps this approach new demographics and change course. it is underpinned by two analytical concepts: the dependency curve, and The Dependency Curve the arc of growth. The dependency curve is a country’s dependency ratio—i.e., the percentage By applying a more predictive of the population that is dependent approach to demographics, public on the working population—plottedBooz & Company 7
  10. 10. over time. Population dependents are population ages (which presents a a way to characterize a country’sgenerally considered those younger challenge). From 1950 to 2010, the unique journey from high youththan 15 (youth dependents) and those global dependency ratio declined dependency through high aged depen-older than 64 (aged dependents). from 65 percent to a low of 53 dency. Today, China’s dependency(See Exhibit 3.) percent as baby boomers grew up ratio is expected to begin climbing and joined the workforce. But from in 2015, Brazil’s in 2025, and India’sThe dependency curves illustrated 2010 to 2050 that trend will reverse in 2040. Japan, by contrast, saw itsin Exhibit 4 show us that the world and the dependency ratio will quickly dependency ratio turn upward inis at an inflection point; the global start increasing. 1995. For all countries, however, peakdependency ratio is at a low point earnings power occurs after youth(which is good) and will start to Not all countries are in lockstep, dependency has started to declineincrease as the global workforce of course. The dependency curve is but before the aged dependency hasExhibit 3The Dependency Curve Shows the Journey from Youth Dependency, to Decreasing Dependency, to Aged DependencyDEPENDENCY CURVE Area of Increasing Area of Decreasing Area of Increasing Youth Dependency Overall Dependency Aged Dependency HighOverall Dependency 1 Medium Potential Demographic Dividend Low TimeDependency + + + Youth + AgeDriver Working Age1 Overall Dependency = (Aged + Youth) / Working-Age Group. Youth = people younger than 15; Aged = people older than 65; Working Age = people between the ages of 15 and 65.Source: Selected writings of David E. Bloom; Finance and Development, IMF, vol. 43, no. 3 (September 2006); Booz & Company analysis8 Booz & Company
  11. 11. become too acute. This sweet spot or 65, or 70. However, recent protests used prosperity and equality as aalong the dependency curve allows against raising the retirement age in proxy, but expect this metric to evolvecountries to reap a demographic western Europe make it clear that over time—for instance, by takingdividend;1 but this can happen only if changing retirement benefits won’t into account well-being and environ-policies beforehand have readied the be easy. mental sustainability.) By trackingcountry’s workforce with the proper aging against human development,education, infrastructure, and policies The Arc of Growth it is possible to see the country’sto maximize their economic potential. A country’s position on the depen- position on the arc of growth, which dency curve determines where it falls characterizes the journey countriesSome countries may also try to on the aging index. The next step is take as they age and strive to createprolong their time in this sweet to plot a country’s score on the aging prosperity and equality. The arc ofspot by extending the definition of index against its human development. growth also shows a country’s rela-the working age by, for instance, (At this time, no perfect measure of tive position to other countries and,increasing the retirement age past 60, human development exists; we have by inference, the societal, economic,Exhibit 4Japan Has Peaked in Its Progress on the Dependency Curve, While Countries in Emerging Markets Have a Way to GoDEPENDENCY CURVE: EXAMPLES High 1965 1965Overall Dependency 1965 Japan 1965 China Medium India 2010 2010 Brazil 2010 World 2010 Low Overall Trend TimeSource: Selected writings of David E. Bloom; Finance and Development, IMF, vol. 43, no. 3 (September 2006);UN Population Division, “World Population Prospects: The 2008 Revision”; Booz & Company analysisBooz & Company 9 High 1965 1965ncy 1965 Japan
  12. 12. and environmental issues it faces (see 65. These countries are also of human development is a historyExhibit 5). characterized by very high levels of innovative breakthroughs, some of development and minimal disruptive and many incremental, thatGlobally, nations fall into four clusters marginal increases in prosperity propel countries to new levels of devel-on this arc of growth: and equality. opment and standards of living. These changes include such major advances• Nascent countries, in which the Over time, countries travel distinct as the industrial revolution, modern dependent population is dominated paths on this arc of growth and healthcare, and the computer age. by people below the age of 15. experience different challenges along These countries are also character- the way; the left side of Exhibit 6 Companies, too, must take demo- ized by high marginal increases in shows the consensus analysis on how graphics into account as they plot prosperity and equality levels. various countries are progressing.2 their corporate strategies. They will But as noted, these trajectories are have to adjust their products and• Momentum countries, in which the not set in stone, which makes new services for countries at varying points population is dominated by people demographics a powerful policy on the arc of growth. The challenge in the working-age group. These tool. Governments dissatisfied with for companies that hope to operate nations also experience diminished their current arc of growth can use globally is that different demographic marginal increases in prosperity and new demographics analysis to make profiles make for different consumer equality. Countries at this stage need policy decisions—such as improving priorities: As countries move along the to save and invest efficiently in order the quality of the education system, arc from nascent to momentum, for to gain a high development level increasing workforce productivity, instance, households begin to spend before they age. raising the retirement age, or better money on goods and services beyond integrating immigrants into society— just the basics; the share of next-level• Developed countries, in which the to propel their countries to higher necessities (i.e., furnishings, transport, dependent population is dominated arcs of growth. The right side of the and communication) as a percentage by people above age 65. These graph shows a few potential arcs of consumer spending increases during countries also have moderately of growth among an infinite number this transition, but remains flat there- high levels of development, but of possibilities. after. Meanwhile, the share of housing minimal marginal increases in and power, as well as luxuries (i.e., prosperity and equality. The arcs of growth charted in Exhibit recreation and culture, restaurants, 6 make it appear that some countries and hotels), as a percentage of spend-• Advanced developed countries, in are bumping up against maximum ing increases continuously as countries which the dependent population development; however, this is not move along the arc from nascent to is dominated by people over actually the case. In fact, the history advanced developed.10 Booz & Company
  13. 13. Exhibit 5 All Countries Are Currently Somewhere Along the Arc of Growth PROSPERITY AND EQUALITY INDEX VS. AGING INDEX (2007 FOR PROSPERITY AND EQUALITY INDEX; 2010 FOR AGING INDEX) ADVANCED MOMENTUM DEVELOPED Norway U.K. COUNTRIES U.S. West Europe Germany GCC High Japan SouthProsperity and Equality Index America China Ex-USSR DEVELOPED Russia Indonesia Brazil Medium South Asia India NASCENT COUNTRIES Nigeria Africa Low Aging Index Area of Increasing Area of Decreasing Area of Increasing Youth Dependency Overall Dependency Aged Dependency Note: Countries in sample = 133; y = 0.1912ln(x) + 0.799; R2 = 0.76; the coefficients are significant at a 99% level. Source: UN Population Division, “World Population Prospects: The 2008 Revision”; UNDP Human Development Report 2009; Booz & Company analysis , Exhibit 6 Analysis of Numerous Countries’ Arcs of Growth Shows That There Are Several Distinct Paths COUNTRY DEVELOPMENT CURVES: EXAMPLES POTENTIAL PATHS ALONG THE ARC OF GROWTH (1980–2007) 2005 U.S. High High 2000 2005 1990 2007 1995 2005 2007 1980 1990 1995 2007 1990 Germany Japan Prosperity and Equality Index 1980 1985Human Development Index 1980 China Medium Medium 2007 2005 2007 1995 2005 1990 2000 1985 1995 1980 1990 1985 1980 India Low Low Aging Index Aging Index Increasing Youth Dependency Decreasing Overall Dependency Increasing Aged Dependency Note: We have used the Human Development Index and the Prosperity and Equality Index in these analyses as proxies for an ideal measure of human development that does not yet exist—one that takes into account all areas of human advancement, including well-being and sustainability. Source: UNDP Human Development Report 2009; Booz & Company analysis , Booz & Company 11
  14. 14. As employers, companies must also Although each country is unique, strategy. In the nascent stage,make policy adjustments to accom- countries in every cluster will face countries will be focused on creatingmodate changing market dynamics similar challenges and will need to job opportunities. As a countryand needs, developing a more diverse address a corresponding set of priori- progresses into the momentum stage,workforce that draws on the pool ties. Governments and companies it will need to develop a talent baseof younger workers in nascent and should address the needs determined to ensure that these jobs are filled.momentum countries. by their current stage of develop- Once it reaches the developed stage, ment, as well as plan for the new its focus will be on maximizing thePreparing for Different Challenges imperatives that will come with the productivity of these workers; andThe power of new demographics, incremental progression into more finally, in the advanced developedunderpinned by the arc of growth, advanced clusters (see Exhibit 7). stage, the country will need to ensureis that it is a predictive and action- that it is capitalizing on productivityoriented policy tool. By understanding In each stage, a country’s gains from game-changing innovationthis arc, decision makers can recog- development agenda will build upon and R&D.nize their current positioning along the steps taken in previous stages.its curve, determine where they want For example, consider employment The following sections provide ato be, and take the steps necessary to and the labor market as one element more in-depth overview of each clus-achieve their goals. of a country’s overarching growth ter and its challenges and priorities.Exhibit 7Each Cluster on the Arc of Growth Must Plan for New Imperatives Advanced Developed Developed Momentum - Capture productivity gains from Nascent - Innovate to boost productivity of innovation and R&D - Increase labor productivity local industries - Modernize social security - Attract investment and improve systems- Invest in basic education and - Enhance competitiveness business environment - Integrate migrant workforce healthcare infrastructure - Develop skilled human capital - Upgrade quality of education - Incentivize private-sector- Pursue balanced regional - Introduce pension schemes - Ensure sustainability of social contribution to development development - Reduce negative security and healthcare systems - Cater to aging consumers- Develop physical infrastructure environmental impacts- Create employment opportunities- Ensure food security and water accessSource: Booz & Company12 Booz & Company
  15. 15. NASCENT Looming Changes The arc of growth analysis predicts high demographic dividends. But managing that growth posesCOUNTRIES: that by 2020, several nascent important policy challenges.LAY THE countries, such as India, will be transitioning into momentum By 2050 India will have more thanGROUNDWORK countries. This demographic trajec- one billion working-age people. If theFOR GROWTH tory raises an important question: How can fast-paced countries government sets a target unemploy- ment rate of 5 percent and counts provide the infrastructure and on a 67 percent labor participation services needed to support increased rate, that means the country needs urbanization, offer opportunities to create about 7 million jobs per for a rapidly increasing working-age year. To pull that off, the government population, and prevent emigration should boost economic competitive-Most nascent countries are in of talent? ness by supporting key sectors andAfrica and Southeast Asia and are promoting increased labor productiv-characterized by the United Nations Imperatives ity through innovation. Failure toas less developed. There are 55 To address these issues, nascent absorb such a large labor force posescountries in this group, totaling countries should create an educa- important risks, in both lost demo-2.5 billion people, or 39 percent of tional infrastructure that will lead graphic dividends and social pres-the global population. Most have to employment opportunities for sures. If India’s unemployment rateexperienced exponential population the young and prevent talent emi- rose to 15 percent and stayed at thatgrowth over the past century and had gration. Also, government should rate through 2050, 110 million peoplelow levels of development. invest in a healthcare infrastructure would be unemployed. that expands basic healthcare andCurrent State improves access to family planning India’s development level isToday these countries have a large programs. Economic policies should not optimal at this stage of theworking-age population. By and support rapid economic growth, game. Further improvementslarge, they are youthful countries balanced regional development, in infrastructure, specifically inwith relatively high fertility, so youth controlled internal migration, and urban areas, are needed to supportdependency is high while aged depen- a sound physical infrastructure for migration to cities while ensuringdency is low. Generally, Southeast urban development—namely roads, balanced regional development. TheAsian countries have reaped more utilities, and telecommunications. country must also improve the qualityprosperity gains from their workers Environmental policies should guar- of basic education and access tothan African nations. They’ve man- antee food security and water access. higher education so skilled graduatesaged this through better youth educa- replenish the workforce as the agingtion and by reforming their business Case Study: India population retires. Besides theseenvironment to encourage private India is a prime example of a nascent issues, the government should have anenterprise. Meanwhile, most African country on its way up. Thanks to its eye on financial resources to meet thenations are still struggling to put their huge working-age population, India liabilities of a large aging population,youth to work and capitalize on their is transitioning to a time of high and tend to its natural resources,demographic dividend. economic growth and potentially particularly access to clean water.How can fast-paced countries supporturbanization, offer opportunitiesfor the working-age population, andprevent emigration of talent?Booz & Company 13
  16. 16. MOMENTUM Most momentum countries are in Latin America and East Asia. There countries, such as China and some Latin American countries, will startCOUNTRIES: are 33 countries in this group with bridging the development gap. AsSEIZE THE a total population of 2.6 billion, which makes up 41 percent of the with nascent countries, this trajectory raises important questions for theOPPORTUNITIES world’s population. future: How can governments ensure that policies are in place to create Current State an environment that spurs economic Most of these countries had a recent growth and exploits their demo- period of high birth rates and enjoy graphic dividend? What role does a young working-age population the private sector play in the demo- that is large relative to the dependent graphic dividend equation? Can Latin population. This generation of work- American countries emulate the suc- ers could propel significant growth cess of their East Asian counterparts? if the proper policies are in place. So far, East Asian countries have enjoyed Imperatives stronger economic growth than Latin In momentum countries, social American countries. They’ve accom- policies should focus on education, plished this success through a com- particularly higher education, and the bination of regulatory and judicial development of skilled talent to fulfill reform that has created transparency, labor market needs. Now is the time stamped out corruption, and gener- to design pension mechanisms that ally improved the business environ- can handle a future aging popula- ment, encouraging investment. tion. Also, as these countries generate greater wealth, it is important that Looming Changes income distribution is equitable to The arc of growth analysis predicts ensure social well-being and cohesion. that by 2030 several momentum Economic policies should promote14 Booz & Company
  17. 17. labor productivity by, for instance, few decades. This rapid development sustain high export levels) and onencouraging labor force mobility into has been due in part to a large genera- the domestic front (e.g., encouragingthe most productive sectors. Policies tion of young, economically active local consumption fueled by the agingshould spur competitiveness and people. But troubles loom. In the consumer). The government shouldsupport emerging high-value sectors, medium term, China will begin to feel improve access to higher educationand encourage the private sector to the constraints of an aging population so workers will have the tools tosatisfy and spur local consumption. and low fertility—thanks to the one- perform high-value work, and shouldAs for environmental policies, these child policy that has been in place for carefully manage social services tocountries should work to reduce CO2 the last 30 years. In the long term, the maintain them and plan for the large,emissions and promote conservation workforce will age rapidly. aging population.of natural resources. If not managed correctly, this Other policy considerations shouldCase Study: China combination of low fertility and include ensuring balanced regionalChina is the best example of a rapid aging could keep the country development across China to avoidmomentum country. Its dependency from achieving high development urban versus rural tensions andcurve has hit a historical low, and its levels. The best response is to ethnic divides, and reducing thedevelopment is at a historical high. In implement policies that encourage negative environmental impact of2010, China’s economy became the technology and innovation to boost high economic growth. The countrysecond-largest in the world, surpassing productivity and competitiveness is already the number one emitter ofJapan, and some estimate it will sur- on both the export front (e.g., CO2 in the world and its cities sufferpass the United States in the coming upgrading production quality to high levels of smog.Policies in momentum countriesshould spur competitiveness andsupport emerging high-value sectors.Booz & Company 15
  18. 18. DEVELOPED The developed category is by far the smallest. It consists of 19 countries, down, but a decline in population. Some governments have tried variousCOUNTRIES: mostly eastern European, with about schemes to encourage more births,FIGHT TO 320 million inhabitants, or 5 percent of the world’s population. These including housing benefits, stipends, and lengthy maternity and paternityMAINTAIN countries had a post–World War paid leaves. Unfortunately, these havePROSPERITY II baby boom but the state-driven economies prevented this large labor not boosted birth rates significantly and have weighed heavily on govern- force from translating into robust ment finances. economic growth. Although these nations achieved a certain level of Looming Changes development, they did not fully The arc of growth analysis predicts exploit their demographic dividend. that by 2040 many of these countries will, at best, maintain their current Current State levels of prosperity. However, their Today these countries face rapidly relative prosperity compared to declining fertility rates and rising nascent and momentum countries mortality rates, particularly since may shrink or disappear, making the collapse of the Soviet Union. The them feel relatively less prosperous. result is that these economies are Although these projections are not set threatened by not just a growth slow- in stone, these nations must address Although these nations achieved a certain level of development, they did not fully exploit their demographic dividend.16 Booz & Company
  19. 19. some very thorny problems if they are need to be generally improved—by decreases. In 2010, six workersto escape this fate. Are governments streamlining rules and regulations supported each retiree. By 2050, justdoing enough to prepare for their and increasing transparency— two workers will be supporting eachrespective demographic challenges? to attract domestic and foreign retiree. This unfortunate confluenceIs the health sector positioning itself investment. And policies should of factors could significantly impairto ensure delivery of effective medical encourage research, development, Russia’s ability to grow its economy.care to an aging population? and innovation to boost productivity and competitiveness. Russia must take action quickly.Imperatives Before the breakup of the SovietOn the social policy front, these Case Study: Russia Union, Russia was a leader in sciencecountries must enhance education to Russia is the poster child for and math. That is no longer theimprove development levels, and they the developed category. It faces case, and to compete again on themust transform legacy healthcare and important problems stemming world stage it must overhaul itssocial security systems to meet the from the Soviet Union’s policies education system. The governmentobligations to an aging population. and the promises made to its aging must also transform legacy labor andGovernments should consider population. The bulk of Russia’s social security systems, and adaptimmigration policies to bolster the baby boom population is hitting the healthcare system to provideworkforce, but such policies would retirement age—55 for women and care to an aging population. Onneed to include strategies to integrate 60 for men—while fertility has been the economic front, policies shouldimmigrants into society without well below replacement levels for encourage innovation, productivity,threatening national identities. On years. This will put pressure on and the competitiveness of localthe economic front, governments government finances by driving up industries and diversify away from itsneed a growing revenue base. To pension costs as the ratio of pension reliance on natural resources.generate this, business environments contributors to pension recipientsBooz & Company 17
  20. 20. ADVANCED This category consists of developed and affluent countries, from the U.S., ity gains dwindle. Like the developed countries, these countries could feelDEVELOPED with its relatively young popula- relatively less prosperous as manyCOUNTRIES: tion, to Japan, with a relatively older population. There are 24 countries in nascent and momentum countries make prosperity gains. PolicymakersBOLSTER THE this category, mostly in Europe, with must wrestle with the reality of anWORKFORCE a total population of 952 million, representing 15 percent of the world’s aging society dependent on a reduced working-age population. How can population. Most of these countries governments provide the support saw their working-age populations needed by an increasingly age- grow from the late 19th to early 20th dependent population? How should centuries, and then surge in the mid- the private sector react to changing 20th century as the baby boomers consumer demographics? entered the workforce. But by the 1960s, fertility rates in most of these Imperatives nations started dropping quickly. First and foremost, governments must reform social safety nets, as Current State aging baby boomers take a greater By 2010 these countries enjoyed high toll on social security and healthcare development, but their low fertility systems. To bolster the workforce, rates and slowing population growth governments can pursue immigration could threaten their continued levels reform and gender equality initiatives of prosperity. The notable exception that will draw more women into the is the United States, which thanks workforce. On the economic front, to its immigration policies and productivity gains through innova- relatively higher fertility rates will tion will be vital. continue to grow. Case Study: United States and Japan Looming Changes The advanced developed category By 2050, these countries’ populations covers a wide spectrum—from the may continue to age and see prosper- United States, which is still on the18 Booz & Company
  21. 21. young side with an open immigra- boosting productivity. For example, with immigrants flowing in, the U.S.tion policy and a growing workforce, by tightly restricting immigration, will still get grayer. The age-depen-to Japan, which has a quickly aging Japan avoids some issues—such as dent population will climb from 13population with few immigrants and the questions of national identity that percent in 2010–11 to 22 percent bya shrinking workforce. In fact, Japan are raised as immigrants become a 2050, propelling healthcare spend-is the most aged country in the world large segment of the population—but ing by 6 percent per year, which willand its high level of development gives up the major productivity gains gobble up more and more of GDP. Atis stagnating. Going forward, the that immigration can bring. this rate, by 2050 national health-country must increase productivity 2 care spending is forecast to reach 23percent per year to maintain its his- Compared to Japan, the U.S. is in rel- percent of GDP.torical GDP per capita growth—and atively better shape, though not with-that is no small task. That is double out its own challenges. In the U.S., So much spending on healthcarethe current productivity gains in the the country’s dependency curve is at a creates a very unhealthy economicUnited States. historical low and its development at balance. The U.S. needs to reform a historical high. Although the fertil- these social security systems whileTo achieve those productivity gains, ity rates of U.S. boomers are lower at the same time push pro-growthJapan must invest significantly in than their parents’ generation, these policies that increase productiv-R&D. It must provide incentives to rates are higher than other devel- ity through innovations and R&D,boost private-sector capital invest- oped nations’; this, coupled with the and encourage the private sector toment, and find ways to integrate country’s unique immigration policy innovate in this area. On the envi-other segments of the population— will keep its population growing. ronmental front, policies should steersuch as women or older workers— However, this growth brings with it energy consumption into alternativeinto the workforce. However, this debate over immigration policy and and renewable energy sources andapproach has its limitations, and fails the integration challenges associated promote awareness.to consider some important means of with the new arrivals. Moreover, evenPolicymakers must wrestle with thereality of an aging society dependenton a reduced working-age population.Booz & Company 19
  22. 22. CONCLUSION: Demographic trends are always at work within individual countries, grants and women are integrated into the workforce, and that socialTHE RELEVANCE shaping the society, the economy, and security and healthcare systems areOF NEW the environment, and these trends are better understood through the lens of transformed so large aging popula- tions do not overwhelm the work-DEMOGRAPHICS new demographics. In particular, new force and stifle the economy. demographics helps governments and companies to understand the demo- The most important thing for coun- graphic megatrend shaping all nations tries to bear in mind, no matter where today: increased aging and dependency. they fall on the arc of growth, is that they are the captains of their destiny. Companies must respond to aging The general consensus about many populations by seizing opportunities countries is that their future will be and confining risks. They must cope an extension of their present—that with changing preferences in current Japan’s hurdles are insurmountable, markets as consumers age, they must for instance, or that China’s trajec- look abroad to develop new target tory of growth is unending. This is not markets as countries move through the the case. Countries that are pleased arc of growth, and adjust to changing with their current circumstances will workforce patterns and shifting supply need to understand their demographic chains as countries develop. Companies profiles and put in place the policies must look beyond their sometimes that will preserve their good fortune. narrow, immediate goals and consider Countries that wish to improve their how demographics are affecting their lot will have to work even harder industry as a whole. to formulate the policies that will change it. Meanwhile, governments must select policies that improve their arc’s These challenges are daunting and trajectory by encouraging economic inspiring at the same time. Through activity and delaying the challenges the lens of new demographics both related to aging. They must ensure governments and companies can that public infrastructure keeps up glimpse the future, and influence its with demand, that education is high- outcome, by addressing key priorities quality and accessible, that immi- and seizing opportunities.20 Booz & Company
  23. 23. Endnotes1 The demographic dividend, a concept introduced by DavidBloom, occurs when societies are able to create sufficientopportunity for their populations to maximize productivity.(From selected writings of David E. Bloom; and Finance andDevelopment, a quarterly magazine from the IMF, vol. 43, no. 3,September 2006.)2 All forecasts are the result of consensus analysis. They donot represent the views of Booz & Company and are notdeterministic.About the AuthorsRichard Shediac is a senior Chadi N. Moujaes is a principalpartner with Booz & Company with Booz & Company in Abuin Abu Dhabi. He leads the Dhabi. He focuses on publicfirm’s public-sector activities in policy and socioeconomicthe Middle East region, with a development, with an emphasisfocus on public policy, socio- on education reform.economic development, andorganizational effectiveness. Dr. Mazen Ramsay Najjar is a principal with Booz & CompanyDr. Rainer Bernnat is a in Beirut, specializing in financialpartner in Booz & Company’s economics. He focuses onFrankfurt office. He leads the public policy, socioeconomicfirm’s public sector and IT development, and macro-work in Europe, and advises economic and financial stabilityinternational clients on management.innovation, modernization,and restructuring initiatives,primarily at the interfacebetween information andcommunication technology.Booz & Company 21
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