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Published: October 31, 2011

 
 

Demographics Are Not Destiny

By 2030 several momentum countries, such as China and some Latin American countries, will start bridging the gap to partially developed or advanced developed status. To prepare for this transition, they must answer important questions: How can governments ensure that policies are in place to create an environment that spurs economic growth and exploits their demographic dividend? What role does the private sector play in the demographic dividend equation? How can Latin American countries emulate the success of their East Asian counterparts?

In momentum countries, social policies should focus on education, particularly higher education, and the development of skilled talent to fulfill labor market needs. Also, as these countries generate greater wealth, it is important for income distribution to be equitable to ensure social well-being and cohesion. As for environmental policies, these countries should work to reduce pollution (including CO2 emissions) and promote conservation of natural resources.

Economic policies should promote labor productivity by, for instance, encouraging mobility, spurring competitiveness, supporting emerging high-value sectors, and encouraging the private sector to satisfy local consumption. Although such measures are valuable for countries at any stage of development, they are critical for momentum countries. These countries are at a juncture where they may or may not make the leap to become true global players. Momentum countries should take a comprehensive look at their assets and capabilities, including natural resources (such as oil, natural gas, and water), strategic position (for example, the ability to become a transportation and logistics hub between trade regions), climate (which could create vibrant sectors in agriculture or tourism), and talent. This assessment will help momentum countries understand how their particular capabilities will allow them to make a unique contribution to the global economy.

China is the most prominent example of a momentum country. Its dependency curve has hit a historic low, and its development rate is at a historic high. In 2010, China’s economy became the second-largest in the world (passing Japan’s and becoming second only to the U.S. economy), and some estimate it will surpass the United States in the coming decades. This rapid development has been due in part to a large generation of young, economically active people. But troubles loom. In the medium term, China will begin to feel the constraints of an aging population and low fertility — thanks in part to the one-child policy that has been in place for the last 30 years, which cut sharply into its pool of prospective workers. In the long term, the workforce will age rapidly.

If not managed correctly, this combination of low fertility and rapid aging could keep the country from achieving high development levels. The best response is the one that China appears to be making: to implement policies that encourage technology and innovation in order to boost productivity and competitiveness. This means upgrading production quality to sustain high export levels and encouraging local consumption fueled by the aging consumer, creating a robust domestic market that will help to support Chinese industries. The government is also improving access to higher education so workers will have the tools to perform high-value work. Next, it will need to carefully develop its social services to prepare for its large and aging population. Other policy considerations include ensuring balanced regional development across China to avoid urban- versus-rural tensions and ethnic divides, and reducing the negative environmental impact of economic growth. The country is already the number one emitter of CO2 in the world, and its cities suffer high levels of smog.

All these issues are, naturally, on the Chinese government’s radar already — and from a purely economic point of view, the government is doing a lot right. For instance, when global demand for its exports shifted during the 2008 economic downturn, China shifted its economic policies to spur greater domestic demand. It will need to be cautious, however, and avoid the mistakes of the U.S. in creating a highly leveraged economy; that vulnerability would be even more damaging if played out in a country the size of China.

 
 
 
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Resources

  1. DeAnne Aguirre, Laird Post, and Sylvia Ann Hewlett, “The Talent Innovation Imperative,” s+b, Autumn 2009: In light of today’s changing workforce, rethink the way you manage people.
  2. David E. Bloom and David Canning, “Booms, Busts, and Echoes,” Finance and Development, vol. 43, no. 3 (September 2006): Analysis of current population trends, featuring the demographic dividend concept.
  3. Alonso Martinez and Ronald Haddock, “The Flatbread Factor, ” s+b, Spring 2007: To understand the life cycle of an emerging market, learn to decode its consumer products.
  4. C.K. Prahalad and Hrishi Bhattacharyya, “How to Be a Truly Global Company,” s+b, Autumn 2011: Three strategies — customization, competencies, and arbitrage — for a business model relevant to emerging economies.
  5. Edward Tse, The China Strategy: Harnessing the Power of the World’s Fastest-Growing Economy (Basic Books, 2010): A guide to the country’s changing markets, increased competition, shifting government priorities, and relationship with the outside world.
  6. Edward Tse, Bill Russo, and Ronald Haddock, “Competing for the Global Middle Class,” s+b, Autumn 2011: How three types of companies are jockeying to capture the loyalty of billions of new consumers.
  7. For more on this topic, see the s+b website at: www.strategy-business.com/global_perspective.
 
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