Reforms Needed to Ensure Higher Growth Rates as Vietnam’s Population Ages

9:30:22 AM | 10/14/2021

Unlike many other countries that went through the demographic transition to an older society, Vietnam is seeing the prospect of getting old before getting rich. The country’s economic growth could slow as its population ages, squeezing public finance and stressing the service delivery system, unless timely reforms are set in motion.

Vietnam is undergoing a dramatic aging phase

Vietnam is going through the demographic transition to an older society at an earlier stage of economic development and a lower level of per capita income than other countries who have experienced a similar shift, according to the report “Vietnam: Adapting to an Aging Society”, jointly produced by the World Bank (WB) and the Japan International Cooperation Agency (JICA). The prospect of “getting old before getting rich” means that Vietnam faces a set of important challenges whose solutions require making hard policy choices.

In 2015, Vietnam became an aging society. By 2035, it will be an aged society. With falling birth rates and a rising life expectancy, Vietnam’s elderly are expected to account for between 10% to just under 20% of its population by 2035. Vietnam’s old-age dependency ratio, the number of people over 65 divided by the number of those of working age, is estimated to double from 0.11 in 2019 to 0.22 in 2039.

The report finds that long-term growth over the period 2020–2050 will slow by 0.9 percentage points compared with the last 15 years as its population ages. At the same time, addressing the needs of an aging society is forecast to cost between 1.4% to 4.6% of GDP in additional expenditure. Expanding coverage and improving service quality will drive growth in fiscal costs.

According to the WB, with per capita income at 40% of the global average, Vietnam is still far from upper-middle income status. And the speed of its population aging means that it will have less time to adapt to an aged society than many advanced economies have had.

The “demographic window of opportunity” is starting to close as aging accelerates. The working-age population has been declining since 2014 and this trend is expected to continue until 2042, when the “demographic window of opportunity” will close.

“Getting old before getting rich” means that Vietnam faces a unique set of challenges that will require major reform efforts. The country must aim to take advantage of the “window of opportunity” while also mitigating the demographic headwinds to growth and the challenges of the high fiscal costs of aging. This will require making hard choices and implementing major policy reforms.

Building worker skills to boost innovations and productivity

“Vietnam has been good at tapping into an abundant workforce to drive economic growth over the past three decades,” said Carolyn Turk, World Bank Country Director for Vietnam. As Vietnam’s population ages, it will be important to build the skills of the workforce to boost innovation and productivity in the economy, while ensuring that pension reforms begin now to sustain livelihoods for the elderly in the decades to come.

Vietnam faces a “now or never” policy dilemma. Without major reforms, the country’s demographic shift will lead to major slowdowns in long-term growth, which, coupled with the substantial fiscal pressures of an aging society, could lead to high levels of deficit and debts, pushing up interest rates, crowding out much-needed domestic and foreign investment, and threatening macroeconomic stability.

Mr. Shimizu Akira, Chief Representative of JICA Vietnam Office, said, “Since becoming a super-aged nation in the 1960s, Japan has experienced various implications of aging, particularly those related to adjusting social protection programs and promoting community-based care. There have been a lot of successes, and also many bitter experiences.”

To manage the aging of its population effectively, based on lessons learned in other countries that have experienced a similar demographic transition including Japan, the WB said, with the right policies, Vietnam can still thrive economically and socially in the midst of this demographic transition. The report also recommends policy actions in four areas most affected by the aging trends: labor market, pension, health and aging care.

Major reforms include building a labor market that facilitates productivity and extending working lives, investing in human capital across the lifespan, increasing the efficiency of public expenditures, and strengthening the service delivery system, expanding its social welfare systems while ensuring their sustainability, and developing a vibrant long-term care system.

By Quynh Anh, Vietnam Business Forum