Demographic changes and economic growth

The world is getting older. The number of people over 65 years is set to triple in 2050. Thanks to science, healthcare and pharmaceuticals, people have longer life spans. Competition, technology and modern lifestyle have resulted in the fertility rates declining. 

Sri Lanka is also undergoing a profound demographic transition. A rapidly growing elderly population could be the biggest socio-economic issue the country would be facing in the near future. But how ready are we as a country to face this challenge? How bad a fast-growing ageing population could hurt Sri Lanka’s economy?

The World Bank’s Sri Lanka Development Update released last week highlights the challenges Sri Lanka may face in dealing with its fast-growing ageing population. As the report pointed out, a rapidly ageing population has wider implications for labour supply, service delivery in sectors such as health, education, employment, pensions and of course public finances overall.
Sri Lanka’s working-age population peaked in 2005 and since then, it has been on a gradual decline. A young population is critical for the economic growth of a nation. But since Sri Lanka doesn’t have that luxury, it should set policies in motion to get the maximum out of its demographic transition. 

Increase of retirement age and reforming some of the archaic labour laws could be one way to deal with the situation. Increasing female labour participation, as the World Bank report has pointed out, is another option Sri Lanka can utilize to prop up its working population.

Out of Sri Lanka’s total labour force of 6.67 million, only 36 percent is women. The level of women’s participation in the labour force had not shown any improvement during the last two decades. 

Despite the fertility rates falling from 2.3 to two births per woman during the last two decades, it did not translate into a higher number of women entering the country’s 
labour market.

The World Bank report pointed out that this differs strikingly with the evolution of female labour force participation in many other countries, where a significant drop in the fertility rate resulted in increased female labour participation. 

The lack of a support system—which includes workplace childcare facilities—flexible work arrangements and safe transport, are identified as main factors blocking increased female labour force participation. 

According to the World Bank, closing the gender gap in labour force participation would buffer the impact coming from the reduction in the number of workers and could mitigate the impact of demographics on economic growth. Hence, the policies that enable the entry of more women into the labour market should be facilitated. 

It is interesting to see how Sri Lanka’s demographics have reached the upper-middle-income status before the country’s economy graduates to that level from the current lower-middle-income status. As the World Bank report showed, by 2016, Sri Lanka’s fertility rate has fallen to two births per woman, bringing it closer to the fertility rate of 1.8 births per woman in upper-middle-income countries. 

In comparison, the fertility rate of lower-middle-income countries stood at 2.8 births per woman. Also, Sri Lanka’s life expectancy, at over 75 years in 2016, is on par with the upper-middle-income countries.

Meanwhile, Sri Lanka’s public sector pension scheme, which remains the biggest attraction for a lot of people seeking public sector employment, is likely to struggle going forward to deliver its promises in the long term. The cost of the pension scheme is projected to increase in the coming years from the current cost of about 1.4 percent of GDP.

The Employees’ Provident Fund (EPF), the state-run private sector pension fund, will also play a limited role in financing the retirement for most workers. 

As the World Bank report pointed out, the EPF benefits are too little and too early. Besides, the payment is given as a lump sum and many retirees exhaust the full balance within a few years.

At the same time, Sri Lanka’s healthcare system needs massive adjustments to deal with the demographic realities. Although Sri Lanka has a fairly robust healthcare system, it is yet to be adapted to the needs of the growing elderly population, the World Bank has pointed out. 

The development lender has further said that Sri Lanka’s provision of elder care, including home-based care and institutional care, remains insufficient to address the growing demand for such care stemming from the demographic changes. 

The government needs to do more in terms of elder care going forward while encouraging investments into the sector, thereby creating jobs.Having a large dependent population can cause serious slowdown in economic growth. Sri Lanka’s dependency ratio is projected to grow significantly from 51.2 percent in 2015 to 67.4 percent in 2050. Unless proper policies to tackle these demographic changes are drawn, Sri Lanka’s economic growth will be challenged in the medium to long term, as demographic factors are starting to have a larger impact on GDP growth.