We have heard so much about population explosion, especially in the developing world. In contrast, an opposite phenomenon is taking place in Japan, Italy, Russia, and some other European countries. It’s the problem of low birth rate. How big is the problem?
A low birth rate means the average young couple produces less than 2 children. As the population ages, not enough young people are born to replace those passing away, resulting in a population decline. Furthermore, better health care has prolonged the lives of many senior citizens, making them a larger percentage of the entire population.
A shrinking population means reduced demands for goods and services. In economic terms, it’s called deflation. In Japan, the deflation already started in the early 1990s after the heydays of the 1980s when Japan’s economic success was widely praised, and its management model was considered worthy of adoption. It is estimated by 2050, four out of ten Japanese will be over 65. This represents the fastest aging rate for any country. What are the implications?
As a person approaches 65, productivity declines naturally. That’s why we have something called retirement. After retirement, the pensions earned by a retiree may not be sufficient to maintain a living. The burden then falls upon the children of that person. If not, the government shoulders the burden in the form of social security and health care being financed through taxes. Who are paying the taxes? The younger people of course who are not retiring yet. Since the young support the old through paying taxes, the society will run into financial trouble if the proportion of old people is rising faster than the young.
We understand such terms as fresh blood, dynamism, rejuvenation, regeneration, and reinvention, which are the vital forces for a society to progress and prosper. They are also characteristics associated with the young rather than the old. As the young population stagnates or contracts, the society will gradually lose those vital forces. In short, the country is losing its sparks. What can be done? It may require a cultural revolution to compensate for it. Let’s see the challenges that Japan is facing:
Japan used to be an isolated island country until the 18th Century. Even now, Japan is less open to the world compared with most developed countries. Examples:
Immigration and imported labor are very restricted. There is no fresh blood derived from the influx of human capital from other cultures. This is a far cry from countries in the European Union where there is free movement of labor; not to mention the US, Canada, and Australia, which are basically countries of immigrants.
Japan’s economy remains uniquely Japanese, especially its cascading distribution system, tariff structure, supplier organization, finance and banking practices, and the general way of doing business. Many international companies have expressed frustration trying to establish a foothold in the Japanese market. In the modern world, the strength of a national economy depends increasingly on how much integration it has achieved with the rest of the world to exploit all complementarities available.
Japanese companies are real experts in manufacturing as evidenced by its tremendous success in automobiles, electronics and many other products. However, this strength is mainly based on product exports. In the modern world where the products become more and more knowledge based such as computer chips, mobile phones, and software applications, success depends more and more on the ability to adapt to foreign cultures and fast changes. Being insulated by your own culture does not help.
Japanese culture reveres age and experience much more than other societies. This is generally seen in business, industry, and government where older people, especially males, occupy an overwhelming number of top positions. This presents a barrier to the development of the vital forces I mentioned earlier that are crucial for revival. Furthermore, older people tend to be more conservative and risk averse, which is also a barrier for taking advantage of new opportunities.
Besides being less open, Japan also feels under siege because its relations with its Asian neighbors remain contentious rather than friendly and cooperative. Why? This is a result of the hostilities of World War II, for which Japan has never managed to come forward with a direct apology for its aggression like Germany has done. So the ghost of WWII still lingers after more than 60 years. In addition, the government continues to whitewash its role in WWII in Japanese textbooks, which provokes strong protests and condemnation from its neighbors each time.
It would be interesting to see how modern Japan tries to address all the challenges, economic and otherwise, that come with an aging and contracting population.
For further information, read The Economist, November 20-26, 2010, “Into the Unknown, a Special Report on Japan”.