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Wednesday, March 31, 2010

Facing Up to the Demographic Dilemma

At the World Economic Forum’s summer meeting in Dalian, China, four experts discussed the challenges and opportunities that aging populations present to business.

strategy+business magazine

with Yoshito Hori, Jean-Pierre Lehmann, Timothy Ma Kam Wah, and Vanessa Wang

The world is in the midst of an epochal demographic shift that will reshape societies, economies, and markets over the next century. The big news is that the world population, according to United Nations forecasts, will either stabilize or peak around 2050, after growing for centuries at an ever-accelerating rate. The main reason is the decline occurring in birthrates as nations advance economically, and it is already having a significant impact: As birthrates drop and better health care prolongs life spans, the world’s population is aging rapidly. For example, between 1950 and 2000, the percentage of the world population older than 60 rose almost imperceptibly to 10 percent from 8 percent. By 2050, however, that percentage will more than double, to 21 percent. And in many countries — notably Japan and those in western Europe — the share of population age 60-plus will be more than 40 percent by mid-century.

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The demographic dynamics in the developing world are radically different. Birthrates are still high, and populations are both growing and becoming younger. Over the next few decades, many of these countries will experience what David Bloom, chair of the department of global health and population at Harvard’s School of Public Health, has called a “demographic dividend”: a rising proportion of young people entering the workforce, driving productivity and economic growth. (See “India’s Demographic Moment,” by Nandan Nilekani, s+b, Autumn 2009.)

There are also anomalies among nations. In the developed world, the United States has many of the same demographic attributes as Japan and Europe, but high rates of immigration are offsetting the trend toward aging. In the developing world, the population of China is destined to begin aging rapidly as the result of the government’s past policies to limit population growth. …

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These demographic shifts will drive massive change in markets and economies, and will require entirely new approaches on the part of both policymakers and business leaders. But the shifts seem to get less attention than they deserve — largely because they take place over time spans much longer than the political and business cycles that drive most legislative and managerial agendas. To identify some of the most significant challenges that will need to be addressed as populations age, strategy+business teamed with the World Economic Forum to convene a roundtable of notable thought leaders with expertise in Asia….

The discussion was moderated by s+b Executive Editor Rob Norton and took place on September 12, 2009, at the World Economic Forum’s third Annual Meeting of the New Champions in Dalian, China.

S+B: What would you consider the most significant challenge that political and business leaders face related to aging populations?

HORI: We’re seeing a very big generation gap opening up, between the older people who are enjoying government benefits and the younger generations that are bearing the financial burden. … But people are not aware enough of what’s going to happen in 10 or 15 years’ time. … Is the priority of the country to care for the elderly or to look to younger generations for innovation? …

LEHMANN: One of the things unique to the period that we’re living in now is that we must think in terms of centuries rather than decades. … When I look at my grandchildren, I realize that they will be around in 2100.

One of the things that concerns me about aging populations is that older people — to make a big generalization — tend to be more self-centered. In Europe, for example, the politics are very short-term, and that’s because politicians know that old-age pensioners vote and have money, whereas young people don’t vote, and in any case don’t have much money. …

MA: I am concerned that governments, businesses, and people in general are not well prepared to think about the implications of aging societies. I attended the first United Nations Assembly on Ageing in Vienna, in 1982. … But 20 years later, at the U.N.’s Second Assembly on Ageing in Madrid, in 2002, the same topics were brought up again, and since then they keep being repeated. …[The] preparation has still not been done. I feel that we all are not well prepared, not only physically, but psychologically, morally, and spiritually.

WANG: …I feel the demographic issues today are where climate issues were five or 10 years ago. Everybody had heard about it, but nobody cared. …[If] it doesn’t feel like an opportunity, there’s no urgency. As Mr. Ma said, the topics keep repeating and repeating, but everybody still says we are not ready to address them.

So my thought is that we have to bring focus to this issue — the need for changes in social policy and for innovation in products and services. There is a huge gap in information. … Better information is the fundamental thing needed to address the demographic risks that we have been discussing over the last few years.

MA: … In most of society, we define … aging as regression, as poor, as noncontributive, as reliance and dependency. I think we need to appeal to the whole world to position aging as a blessing to society, not a problem or a difficulty. …

LEHMANN: …I don’t think that we can say that aging is only a blessing for society. I think it can also be a terrible drain … [In] some cases it can be a curse. …

MA: I think we also need to focus on those 90 percent [of elders] who are healthy and active, and can live independently and still contribute to their families and to society. It seems that we always misallocate our attention to those who are weak and senile and sick.

HORI: We all pay respect to the elderly, and we want them to live longer and have a happy life and a happy ending as well; … But as the number of elderly people rises in proportion to the number of young people, the question is, Who is going to bear the burden? … the implications for business and society….

WANG: Again, I think that there is a lack of focus and a lack of data that’s tailored toward solving problems. …When we get the kind of information that can show how we can create efficiencies in medicine that could help solve problems related to aging, then people will start to see business opportunities instead of problems. …

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S+B: As we turn to potential solutions to some of the problems posed by population aging, are there approaches from business that could be helpful?

LEHMANN: … One obvious solution that would be beneficial for both Japan and Europe as they try to deal with aging populations would be to open up the frontiers to migration and allow in younger workers from less-developed countries. Another idea is to encourage elderly people to live elsewhere …You say, “Look, the bad news is that we have to reduce your pension. The good news is we’re moving you to Libya, where the standard of living is much lower and your pension will go a much longer way.”

HORI: I don’t think those policies are politically practical, and they won’t solve the problem.

LEHMANN: They are certainly not a major part of the solution, but they are ideas that could help, and there may be ways to make them attractive to people. I think the globalization of aging is one of the options that should be explored, even if some of the solutions are difficult or unacceptable for political or other reasons.

MA: One of the problems with focusing on solutions is that as policymakers and businesspeople think about community resources and corporate commercial resources, they currently don’t see the potential market power of the aging population. But when a quarter of the total population in the world is aging, they cannot disregard that. Those people have to be accommodated. …

WANG: It’s interesting to think of what the “silver” GDP will be in the future. The more we can quantify the consumption of the elderly, the better we can gain an appreciation of the business they generate, and think of the steps that will stimulate this silver market.

HORI: The Japanese government is taking steps to address these challenges. The new government, … will introduce a US$260 allowance per child per month to encourage larger families. Additional child-care services will also be implemented. Although that does not provide a short-term solution or a midterm solution, it will help over time. … Other partial solutions may include encouraging more women to join the workforce, extending retirement ages, and, as we discussed, encouraging countries to welcome foreign workers.

But when you look at specific issues like our pension system, eventually elderly people are going to have to accept the fact that they will get their pensions later, and those pensions will be smaller. …

S+B: What about the skills gaps that we see opening in the developed countries where the aging population is currently rising? The demographic forecasts show that the same kinds of gaps will begin to appear in China a decade or two out. What are the challenges and the opportunities for corporations?

HORI: …One challenge for corporations is losing a market…There’s a shortage of children; … There has to be a big market shift in terms of the corporate sector.

The second challenge is the workforce, because it is going to shrink as well. …There are several dimensions: One is the need to increase productivity through approaches like robotics and IT. The second is migrant and immigrant workers, … The third is offshoring, shifting the business to either China or India. …

S+B: Your mention of offshoring raises the question of the degree to which companies are going to be able to do demographic arbitrage — locating their headquarters and production in relation to where they can find an employee base or markets for their goods and services.

WANG: …One of the main costs of running a business is represented by the cost of fixed salaries, because salaries don’t go backward — they keep going upward; the same is true of health-care premiums and pension costs. It costs companies a lot to hire older employees. … Solving this problem would require innovation in financing pensions and health care so the companies aren’t bearing all the costs, as well as retraining and other issues. It will take a shifting — a redistribution — of social resources.

S+B: Is the challenge in filling skills gaps different for service industries, where the services are provided in the home market and the jobs cannot be outsourced?

HORI: Yes, it is different. In Japan, it’s in these industries where we’ve seen foreign workers come in recent years as the workforce has been aging. Many have lost their jobs or have gone back to their home countries because of the economic downturn, and it’s going to be difficult to attract them again. So there will be some needs in the service sector. But the service sector is also where we’re seeing large productivity increases. Fewer and fewer workers are needed, largely because of the Internet. The volume of sales in e-commerce is going up, and the number of retail shops is going down.

MA: I think there’s another side to that, in that companies could change a lot of their mechanisms and procedures and IT systems to cater more to older employees. There are many ways for workers to deliver services and care from their homes, for example. … I think we could develop job redesign processes to equip elderly people with basic skill sets and some IT technology, to do this kind of work from their homes. …

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S+B: Is there a greater need for coordination among the public, private, and nonprofit sectors?

LEHMANN: I do think there needs to be collaboration, … I totally agree that businesses are looking for profits and by definition have to work on a relatively short-term basis. … So if you start with the premise that companies are about profits, you need to push them to think about where the profits are going to be generated, and whether they are going to have the resources to generate them.

When you look at the demographic data, the bottom line is that on the one hand, you have the problem of aging populations, mostly in the developed world. On the other hand, you have the problem of an enormous population explosion taking place among the poor countries of the world.

The biggest demographic increase is going to be in Africa. By 2050, roughly 20 percent of the world population is going to be in Africa, up from 9 percent in 1900. … Just in the next decade, the youth dividend will be adding 250 million people in Central and South Asia, 9 million in Iraq, 9 million in Iran, 10 million in Afghanistan, 38 million in Pakistan … The population of Yemen is going to increase from 17 million today to 39 million in 2025.

This is the kind of thing that we need to talk to companies about. If you ask them, “Where are your computer engineers tomorrow?” …Well, they won’t be in China, or in Singapore. Your future computer engineers — your future workforce — has to come from Yemen, from Nigeria, from Pakistan. We need to think about how we are going to get people who will have the necessary skills. …

S+B: Could we envision corporations in developed countries founding schools in the Yemens and the Pakistans of the world and then building plants there or relocating or importing the workers?

LEHMANN: I think those are the kinds of things that will be needed. …

What must be done is to integrate issues like demographic change into the mainstream of the corporate strategy. … I’ll give you just one case, … I am acquainted with an Indian entrepreneur named Rajendra Pawar, who is cofounder of a very successful software company called NIIT Ltd., … NIIT is a pioneer in education-oriented technology. It developed a concept, … called Hole-in-the-Wall, which places free computers in public locations for kids in slums and in poor villages. … These kids, … gain computer literacy by teaching themselves simply through the availability of the computers. It’s a fantastic social experiment.

It is free — so there are no profits in the conventional sense. If you ask Raji Pawar why he’s doing this, of course there is an element of altruism, …. But he will also say that, basically, it’s expanding his market. …[The] more people who have basic computer competency and literacy, the more his market is going to expand and the more he is going to be able to make profits.

…I am quite convinced that companies would invest in developing human capacities if they could do it in a strategic way, such that, in Pakistan for example, they would reap the benefits in due course.

WANG: I think we need a fundamental change in public perceptions. Even if the labor force issues were solved, we’re still going to face fundamental problems as we adjust to aging populations. …Resources are limited, and we need to set priorities. There needs to be some focus in terms of how resources are spent on different segments of people, and better information, shared more widely, about the innovations that are succeeding in places like Japan and Singapore.

Reprint No. 10105

Roundtable Contributors:

  • Yoshito Hori is dean of the Globis Management School, with campuses in Tokyo, Nagoya, and Osaka. He is also managing partner of Globis Capital Partners and author of several books, including Dear Visionary Leaders Who Create and Innovate the Society (PHP Institute, 2009), and Six Dimensions of Life (Kodansha, 2004). His blog, Views from an Entrepreneur, is at http://blog.globis.co.jp/hori_english.
  • Jean-Pierre Lehmann is professor of international political economy at IMD in Lausanne, Switzerland, and is founding director of the Evian Group at IMD. Prior to joining IMD, Lehmann had a 40-year career in journalism, academe, and consulting that encompassed activities in virtually all Asian and western European countries, as well as North America.
  • Timothy Ma Kam Wah is executive director of the Senior Citizen Home Safety Association in Hong Kong, a nongovernmental organization that runs a 24-hour lifeline and related services for the elderly and chronic invalids. He is president of the Hong Kong chapter of the Association of Fundraising Professionals and a cofounder of the Hong Kong Social Entrepreneurship Forum.
  • Vanessa Wang is the Asia business leader of Mercer LLC’s retirement, risk, and finance business. Based in Beijing, she works closely with Chinese regulators on issues concerning enterprise annuity and investment policies. Her clients include multinational companies, local private and public companies, state-owned enterprises, and public-sector plans in Asia and the United States.
  • Photographs of the roundtable contributors courtesy of the World Economic Forum