Indonesia’s Fertility Rate is Perfect for Growth
Foreign investors are usually either over-optimistic or wildly pessimistic about Indonesia. Before 1997, they were piling in without a qualm. Then in the wake of the Asian crisis they convinced themselves that it was close to being a failed state. Now they are enthusing again, if not quite like the 1990s then still buoyed by stable democratic government, well-managed finances and the assumption that Chinese growth will underwrite its commodity export prices for years to come.
More sober observers may think caution is now called for given the ongoing problems of effective governance, even by a popular, if vacillating, leader like President Susilo Bambang Yudhoyono, in the face of legislative corruption, a weak bureaucracy and the decentralization of much power. There is also the distinct possibility that current optimism about emerging markets generally will vanish when central banks turn off the money taps, commodity supply again overtakes demand and/or the China boom implodes.
However, there is one very positive aspect of Indonesia which has received almost no attention from overseas investors — its demographics. It has never had a sudden reversal like China, or before that, other Asian countries like Thailand, South Korea and Singapore, from high to low or even extremely low fertility. But gradual reduction over 30 years is leading to a particularly well-balanced age distribution which will help boost per capita income growth for the next 20 years. Among Muslim-majority countries, its fertility rate is far below the average and on a par with Turkey and only a little higher than Iran and Lebanon, the lowest in this group.
The basic facts are as follows. The fertility rate is now down to about 2.1 which is almost exactly replacement level and suggests that population will stabilize in the foreseeable distant future. Women are also having babies later, which also slows the rate of population growth. The UN’s medium population projection is that fertility will continue to fall to around 1.85, which would mean the total population, now 232 million, would stabilize at 290 million soon after 2050. However, if fertility falls faster than expected, population could peak by 2035 at just 257 million. As is it, the population is now only growing at barely 1 percent compared with over 2 percent in the 1970s and 1980s, and the rate of increase will continue to fall year by year. The country is also now in the very usual position that the total number of people in each five-year cohort between 0 and 30 is almost exactly the same size: 20 million. There is no baby bulge or bust to worry about.
There are several positive consequences of these overall trends. The first is that the percentage of the population in the 15-59 bracket has already reached 64 percent compared with 58 percent in 1990. This will edge slightly higher to 65 percent by 2020 but essentially is now on a plateau and will remain there for a long time. The median age, which in 1990 was only 21, is now 28 and will climb to 32 by 2020. In other words, it is entering the range which, other things being equal, individual enterprise and productivity are at their peak.
The second is that the pressure for new job creation is easing rapidly, making it more likely that the nation can focus more on quality and productivity. The working-age population grew by 26 million between 1990 and 2000, but the increase fell to 23 million in the decade just ended and will be only 20 million in the decade to 2020. Meanwhile, it will be another two decades at least before the percentage of old people becomes a significant issues. The 65-plus group will be only 7.5 percent by 2020 compared with 6.1 percent today.
Another benefit, at least compared with sexist neo-Confucian countries and parts of India, is that there is no male preference. The ratio of male to female births has been steady at a natural 1.05 for decades. This in turn makes it more likely that fertility will stabilize at or near replacement level while China’s shortage of women will undermine its efforts to sustain the birth rate. Raising the fertility rate (births per woman) to a replacement level of 2.1 will be of limited value if there is a 15 percent shortfall in the number of women (as is the case now in the 0-10 group).
Good demographics cannot substitute for good government or workforce skills. But they do matter, particularly if they can also help underwrite political stability and perhaps compensate for relatively low savings rates. Of course, the UN projections could be wrong. Demographics can change without warning and for reasons which are not clear. But as far as the next decade is concerned, most of the data is already built in. As for future assumptions, experience in East Asia suggests that fertility tends to fall faster than predicted.
Indonesia is also a shining example of what can be achieved in fertility reduction without resorting to Chinese-style draconian impositions. Its fertility rate is now only about 20 percent higher than China’s — and without China’s 20 percent gap between male and female births.
The impact of demographics on economies and investment opportunities is too slow to interest many investors. But anyone who wants to look ahead with a five to 20-year horizon should take note of Indonesia’s quiet but undisruptive demographic evolution, itself a sign of a social maturity which transcends politics.
Philip Bowring, a former editor of The Far Eastern Economic Review, is a founder and consulting editor of Asia Sentinel.