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The International Monetary Fund has warned that China, Japan and South Korea may lose up to a quarter of their workforce by 2050, as a result of accelerating population aging, in a development that threatens the prospects for economic growth, productivity and competitiveness of three of the most prominent industrial economies in Asia.

Krishna Srinivasan, Director of the International Monetary Fund's Asia and Pacific Department, said on Monday evening that demographic shifts in the three countries could lead to a contraction of the labor force by up to 25 percent over the coming decades.

These estimates highlight a long-term economic challenge, the impact of which extends beyond the labor market to include public finances, pension systems, and health care, as well as the ability of companies to maintain levels of production and investment.

The three economies face a combination of low birth rates and high life expectancy, which gradually leads to a decline in the number of working-age populations while the number of elderly people increases.

Although economic conditions and population policies differ between China, Japan, and South Korea, they share a fundamental challenge: how to maintain growth as the labor base on which production, consumption, and tax revenues depend is shrinking.

Pressures on growth and productivity

The shrinkage of the labor force represents one of the most prominent structural risks facing advanced and emerging economies in East Asia, especially since the growth of economic output depends on the size of labor, its level of productivity, and the investments available to it.

As the number of workers decreases, increasing productivity becomes a prerequisite for maintaining growth rates, which requires greater investments in technology, automation, and skills development.

In Japan, which has been facing the challenges of aging and population decline for years, labor scarcity has become a factor influencing companies' decisions regarding hiring, wages, and investment in labor-saving equipment.

As for China, it faces a more complex challenge due to the large size of its economy and industrial base, in addition to its need to boost domestic consumption and reduce dependence on investment and exports.

The shrinking working-age population may slow the growth of industrial production and services, unless companies can compensate for the shortage of workers by improving efficiency and adopting modern technologies.

In South Korea, low birth rates raise concerns about the economy's ability to provide the labor needed for the industrial, technological and service sectors in the coming decades.

Public finances face a difficult test

The repercussions of aging are not limited to a decline in the number of workers, but also extend to increased pressure on government budgets.

As the proportion of the elderly increases, spending needs on pensions, health care, and social services increase, at a time when the growth of tax revenues may slow due to a shrinking worker base.

This transformation imposes a double challenge on governments, which is to finance increasing social obligations without burdening younger generations with large tax burdens that may affect consumption and investment.

Rising spending associated with aging may also reduce resources available for infrastructure projects, education, and scientific research, making improving the efficiency of public spending even more important.

This issue is particularly sensitive in Japan, where public fiscal sustainability and government debt management are major challenges, while China and South Korea need to prepare early for the rising costs of aging.

Technology is a way to compensate for labor shortages

Advances in artificial intelligence, industrial robotics, and automation may provide an opportunity to mitigate the economic impacts of a declining workforce.

The three economies have industrial and technological capabilities that can be used to raise worker productivity and reduce dependence on human labor in some activities.

But the success of this path requires continuous investments in employee training and rehabilitation, to ensure their ability to use new technologies and move to more productive jobs.

Also, technology cannot address all the effects of aging, especially in sectors that depend on direct human interaction, such as health care and services for the elderly.

High demand for these services may lead to increased competition for labor, raising operating costs and increasing the need to develop more efficient business models.

Labor market reforms are increasingly necessary

Along with technology, labor market reforms can help limit the impact of demographic decline, by increasing the participation of women and older people in economic activity, and improving the flexibility of employment systems.

Gradually raising the retirement age, where health and social conditions permit, could also contribute to slowing the shrinkage of the workforce and alleviating some of the pressures on pension systems.

It also highlights the importance of policies that support families - such as providing child care services and improving work-life balance - in addressing some of the factors that contribute to low birth rates.

However, the impact of these measures on the size of the workforce takes many years, which makes short- and medium-term reforms necessary in parallel with population policies.

Some economies may resort to expanding the recruitment of foreign workers to fill the shortage in specific sectors, although the success of this option is linked to political and social considerations and the nature of local labor markets.

Economic transformation that transcends national borders

The effects of shrinking labor forces in China, Japan, and South Korea could spill over into the global economy, given the three countries' pivotal roles in international trade, supply chains, and advanced industries.

Any change in the costs of production or industrial capacity for these economies may be reflected in commodity prices, technology, and cross-border investment flows.

Labor scarcity may also prompt companies to reallocate some of their production activities, or increase investment in automated factories, reshaping trade and investment patterns in Asia.

In contrast, Asian economies with younger demographics may benefit from opportunities to attract investments and industrial activities in search of labour.

The International Monetary Fund's warning puts decision makers before the need to deal with aging as a central economic issue, and not just a gradual population shift.

The ability of China, Japan, and South Korea to maintain their economic standing by mid-century will depend largely on their success in raising productivity, reforming labor markets, and developing retirement and social welfare systems.

With up to a quarter of the workforce likely to be lost by 2050, early response to these transformations will be a critical factor in determining the course of growth and financial stability in East Asia over the coming decades.

Finance ministers and central bank governors are meeting in Bangkok this week to participate in the annual meetings of the International Monetary Fund and World Bank, at a time when the global economy faces simultaneous pressures resulting from the energy shock related to the US war on Iran, escalating debt burdens, and the investment boom in artificial intelligence.

The meetings continue in the Thai capital from Monday to Saturday, amid difficult economic choices before policymakers. While the International Monetary Fund calls on governments to control spending, the needs of the most vulnerable groups are increasing, due to rising inflation and climate risks.

The agenda includes closed high-level meetings, public events, and economic policy announcements by the world's top financial officials. The Fund is scheduled to reveal its forecasts for the global economy on Tuesday, and will publish detailed forecasts for different regions during the week, at a time when policy makers seek to deal with challenges that cast a shadow on growth prospects.

In Bangkok, Director General of the International Monetary Fund, Kristalina Georgieva, said that the global economy is exposed to two opposite forces: a negative shock in energy supply resulting from the US war on Iran, and a positive shock in demand driven by the boom in artificial intelligence technology.

She added, during an event on the first day of the meetings, that the acceleration of investment in artificial intelligence is what helps the global economy to continue growing by about 3 percent, despite the pressures imposed by the energy supply shock.

For his part, World Bank President Ajay Banga called on developing countries to focus on developing small, specialized applications for artificial intelligence, instead of trying to compete with major economies in building advanced, capital-intensive models.

Banga said, during a press conference, that developing countries should not try to compete with the United States and China in developing leading models or establishing huge data centers. Pointing out that many of them lack the computer capacity, electricity, and personnel necessary for this.

He explained that applications supported by artificial intelligence can run on less powerful smartphones and be used in areas such as health, education, agriculture, and other development priority sectors for low-income countries.

Energy shock puts pressure on developing economies

The economic impact of the US war on Iran tops the agenda of concerns in Bangkok, after military developments led to a sharp rise in energy prices and a reduction in global supplies of oil and gas.

The International Monetary Fund warned that the repercussions of this shock are not evenly distributed. Developing countries that depend on energy imports bear the greatest burden.

Despite the crisis, the Fund called on governments to reduce spending on support and strengthen financial reserves to confront shocks, after years of turmoil that followed the Corona pandemic.

However, critics believe that reducing support is not a realistic option for low-income countries, and that international financial institutions are required to provide a broader response to protect the most affected economies.

Kevin B said: Gallagher, director of the Center for Global Development Policy at Boston University, said that the poorer member states of the International Monetary Fund and World Bank are facing increasing pressure as a result of the repercussions of the war on Iran, rising interest rates in Western economies, and the climate crisis that has been exacerbated by the “El Niño” phenomenon.

He added that the Fund and the World Bank are not providing a response commensurate with the scale of the challenges, calling for the provision of emergency liquidity in the short term, in addition to long-term financing that makes economic growth paths less vulnerable to shocks.

Financing and social needs are expanding in developing countries, according to the United Nations Development Programme, which warned in a report issued Sunday that simultaneous shocks may push additional millions into poverty, at a time when governments are facing difficulty in continuing to provide support to families.

Program Director Alexander De Croo said that the world is witnessing a “perfect storm” that could return tens of millions, and perhaps hundreds of millions, to poverty. He added that the governments of developing countries now face an extremely difficult choice between reducing support provided to their poorest citizens and risking undermining their entire development plans.

Inflation and interest rates in advanced economies

The advanced economies in Europe and the United States were able to better absorb the shock of rising energy prices, but they were not spared the rising wave of inflation due to the increase in prices, the effects of which began to spread to other commodities.

Inflationary pressures have prompted central banks around the world to raise interest rates to curb rising prices, limiting economic activity. In contrast, the investment boom in artificial intelligence technologies has contributed to pushing stock markets to new record levels and enhancing growth in advanced economies.

The meetings are also scheduled to witness important meetings on the sidelines, including the G20 finance ministers’ meeting, which is expected to feature a rise in bond yields prominently on its agenda.

Among the most prominent absentees from the meeting is US Treasury Secretary Scott Besent, who will not participate due to “internal connections,” according to a US Treasury Department official on Friday.