By Carmelo Ferlito, CEO of the Center for Market Education and Benedict Weerasena, Research Director of Bait Al Amanah
The World Bank’s latest regional report found that the populations of countries in the East Asia and Pacific (EAP) region (including Malaysia, Indonesia, Vietnam and the Philippines) are ageing much faster than in rich countries. According to the report, while most Western countries took 50 to 60 years to transition from “ageing” to “aged”, the EAP region is likely to take only 20 years.
Gone are the days when the developing countries in the EAP region reaped the miracles of the demographic dividend — one where a decline in fertility and mortality rates resulted in a rise in the share of the working-age population. This demographic dividend generated manifold benefits, such as an increase in labour supply with more women joining the workforce; better health and educational opportunities with more resources invested per child due to smaller family sizes; and decreasing dependency ratios resulting in increasing gross domestic product per capita leading to a growth in personal savings. All of these contributed to accelerated economic growth.
However, this demographic dividend has come to an end, as structural shifts in population impinge on long-term economic growth. The World Bank has also said that the declining size of the working-age population will shrink the contribution base from which pension, unemployment and health insurance systems are financed in several major economies in the region. As a result, countries in the region will find pension systems posing a higher burden over time.
The crucial question in the currently underlying debate is thus: how to improve the social security system to deal with an ageing — and, later on, aged — society? A very legitimate question, which implies a fundamental assumption: like for individual human beings, for society as a whole ageing is ineluctable. Statistical observations seem to support such an assumption; for example, in his pioneering studies about Colombia, Grant Miller found that family planning programmes explain only 10% of the declining birth rate in the Latin American country, while a strong correlation is found between economic growth and lower natality: in a nutshell, “development simply reduces the demand for children and the true effect of contraceptive supply on fertility is quantitatively unimportant”.
The relationship, supported by the trend observed in the West, is, to a certain extent, a puzzling one: is it not strange that families tend to have more children when they have fewer financial resources to support them? We believe that there may be a missing interpretive ring in the chain between economic development and (lower) natality; it is secularisation — or the decline in religious beliefs and participation associated with economic growth. As explained by Harvard professors Rachel McCleary and Robert J Barro, according to the secularisation hypothesis, economic development reduces individual participation to formal religious functions and individual religious commitment in general (The Wealth of Religions, Princeton University Press, 2019). The secularisation hypothesis became popular thanks to several of Laurence Iannaccone’s works during the 1980s and 1990s, but it was recently challenged by sociologists Rodney Stark and Roger Finke.
Secularisation may help to understand why a higher degree of economic development brings about lower natality: individuals lose attachment to their traditional beliefs. How is this related to demographic decline? Most traditional religions have a strong link with the concept of after-death life, and with the related sets of punishments and rewards. Such a set of beliefs supports the development of a stronger bond with the concept of the future, broadly intended, and of mission (bettering the world, leaving something for the children and so on). The loosening of religious commitment, instead, nudges towards a present-oriented society, where the core value becomes present enjoyment.
The point we want to make here, however, is not of a moral nature. The two alternative perspectives have profound economic implications: while a present-oriented society will support the role of consumption, a future-oriented one will observe growth in savings. Sustainable economic development is based on the following relationship: growth in savings, followed by a natural rather than policy-induced decline in the interest rate and therefore the emergence of higher demand for investment funds. When savings are lacking and consumption at the centre, instead, demand for investment funds is generated through policy-induced lower interest rates (followed by a boom-and-bust cycle).
According to our explanation, we conclude that saving is an essential element for sustainable economic development. But, looking at it more deeply, saving is also a sign of an intergenerational alliance: saving makes sense only looking at the future of the next generations. In turn, future generations are the core of a non-ageing society.
While economic development seems to bring about a more present-oriented society, an action plan for the government in order to make the process non-ineluctable is to develop a policy framework which promotes and protects savings via education, financial literacy and an adequate banking strategy, which aims at building rather than deploying future resources.
From a macro perspective, countries should not pursue an unhealthy dependency on private consumption to drive the economy. Consumption-led growth tends to be less sustainable in the long term, leads to higher household debt and contributes to inflationary pressures, which was especially evident during the post-pandemic recovery period.
Take Malaysia as an example. Employees Provident Fund (EPF) withdrawals contributed to higher private consumption, which gave a boost to economic recovery. However, repeated withdrawals have depleted the savings of many households. Replacing the amount withdrawn is certainly an uphill task due to losses in compounding gains in dividends. Moreover, the multiple withdrawal schemes have led to shrinking total capital, jeopardising the ability of EPF to generate income and better dividends for a better future. Despite yet another round of irresponsible push for EPF withdrawals, we must say NO for the sake of future financial security, for a brighter hope of a dignified retirement.
All in all, we certainly need to inculcate the importance of saving across every segment of Malaysian society. That it’s about prioritising future well-being over immediate financial needs or present enjoyment. Saving means more than promoting investments; it is the signal of a society that believes in the future. A future that is bright as gold as many more enter their golden years.
*This article first appeared in Forum, The Edge Malaysia Weekly, on April 24, 2023 - April 30, 2023.