09/26/2012 01:29 pm ET Updated Nov 26, 2012

Aging Asia and That Competitiveness Thing

If you listen to conventional wisdom, the respective fates of China and Japan in the 21st century are all but prefigured: China is Asia's emerging tiger economy, and it is going to overtake the U.S. as the world's next economic superpower. Poor Japan, on the other hand, has seen its sun set, and its once-dominant economy will fail to keep pace with the emerging markets of the world.

A lot of smart people have used a lot of compelling data to build these arguments, but there's something missing from their predictive modeling: China and Japan won't succeed and fail in the 21st century based on 20th century metrics for economic growth and success. National and global competitiveness in the coming century is going to be based on a new x factor: the extent to which aging populations can be integrated into the heart of social and economic life.

When population aging is factored into the equation, a new universe of questions arise with China and Japan, and suddenly these two countries no longer have foretold futures. Instead, they become the world's first "test cases" with population aging; they become experiments, in a way, that will teach the world how to re-define aging in order to keep older adults integrated in economic life.

The reason why Japan and China are "test cases" for global population aging is quite straightforward: Both countries have populations that are aging at unprecedented rates, and each country faces the distinct challenges of the developed and developing world, respectively.

First, Japan. Like the U.S., Europe, Australia and a few other nations, Japan's aging population has been emerging since the end of the "baby boom," and now it -- like its economic peers -- must figure out how to modify its social welfare model to align with 21st century demographics. Yet Japan's demographic balance is tilted further than the rest of the developed world, and so its need is even more pressing.

Already, nearly one-third of its population is over 60, and this number will rise to 42% by mid-century. With these numbers, it is absurd for Japan to ask, "How can we afford pensions and social security?" A far better question would be, "How can older adults remain vital contributors to economic growth and wealth creation so limited entitlement funds can be saved for those who are really in need?" Asking this different question takes you down a path of innovative tax policy that enables entrepreneurship for "seniors," creates incentives for new and different financial instruments, and encourages investments for the health issues that are crippling public and household budgets.

China, on the other hand, faces a different set of challenges, and they serve as a "test case" for a different tier of nations. First, like much of the developing world, individual longevity in China has increased with extreme speed. Over the last fifty years, life expectancy has shot up from 40 to 70 on average. Recent improvements in health, medicine and sanitation are enabling lives to extend far longer than they did just a generation before.

Second, birth rates are way down. While China's low birth rate has been the product of its one-child policy, the steady drop in fertility can be seen from Vietnam to Peru. Indeed, all over the world, there is a steady inverse relation between material wealth and birth rates. And it is happening far more rapidly than occurred among today's developed economies. By 2030, China will have 340 million people over 60, a number that exceeds the overall population of the United States.

If ever there was a time and a need to pioneer a new vision of aging, that time is now for Japan and China. These two nations have become the world's prototypes for population aging. Leaders in China and Japan seem to understand this as they have begun taking measures to write a future where aging populations are not an anchor but a driver of economic growth. It is worth looking at how each nation is working to tap into the potential of older adults.

In China, population aging has become a policy priority with direct business implications. Their 12th Five Year Plan emphasizes "strengthening the role of families and developing an ageing industry to respond to the health care needs of the elderly." Recently, Xiao Caiwei, Vice President of the China National Committee on Ageing, stated that China aims to keep "97% of older people either living at home or depending on community-based services." To make this possible, they intend to create "virtual institutions" -- information platforms that connect seniors to service providers. In other words, they see a new industry arising when aging adults are kept out of institutional settings, and they imagine ways that aging adults can continue to contribute to familial economies when they are enabled to "age in place."

In Japan, population aging is driving technological innovation. Japan recently played host to an OECD/APEC conference in which academics, policy leaders, business executives and other thought leaders gathered to lay out the roadmap for where and how technology can enable a more integrated, engaged path of aging. Of the numerous exciting possibilities, Toyota's "independent walk assist" robots are one example. On the whole, though, what is emerging in Japan is a new vision of aging that is enabled by cutting-edge technologies.

The global competitive balance of the 21st century is going to look very different than it does today, and China and Japan are going to play integral roles in shaping it. How and to what extent they are able to tap into the potential of aging populations will tell much of the story. And how and to what extent the rest of the world pays attention will tell the rest.

Michael Hodin writes the Age and Reason blog for The Fiscal Times.