A Novel Solution to Southeast Asia’s Coming Demographic Crisis

In her first speech to parliament this week, Paetongtarn Shinawatra, Thailand’s new prime minister, vowed “to bring the hope of Thai people back as soon as possible” amid a cost of living crisis, soaring private debt, and general economic glumness.

The problems Thailand’s economy faces are legion. But they are underpinned by a demographic crisis. The country is fast running short of workers. By 2050, there could be 11 million fewer working-age people than today, so about a quarter less. This won’t be as bad as it sounds; Thailand can attract millions of migrants from its neighboring countries that will see growth in their working-age populations. Perhaps it can attract enough that, coupled with automation, the effects of the demographic crisis will be relatively painless.

However, this mostly deals with the production side: having enough people to produce the goods and services. It does very little about the consumption side. Migrant workers typically consume a lot less in their host country than the local population, preferring to send most of their wages home for family members or save it to pay for their own return. Lose 11 million workers between now and 2050, and Thailand loses 11 million consumers, too.

It’s this consumption problem that the Thai government is trying to deal with, getting more disposable income into the pockets of Thais. This is why the Pheu Thai party wants to press ahead with its crazy 10,000-baht digital cash handout program and debt-relief schemes, although the latest plans to legalize casinos and make them into “entertainment complexes” in which Thais would pay a $148 entrance fee makes some sense.

Yet, most are very, very short-term fixes and are coming way too early in Thailand’s demographic wave. (You would ideally want to be giving our free cash in the 2030s when the demographic crisis will really start to bite). Moreover, these policies aren’t discriminating enough – they’re giving out free money to pretty much everyone. Paetongtarn says the cash handout scheme will now prioritize vulnerable low-income groups. What Bangkok should do instead is, across the next two decades, make sure the diminishing numbers of 16-30-year-olds have more disposable income since they are the ones who typically do much of the consumption.

Thailand’s demographic problems aren’t unique in Southeast Asia, although they’re the most perilous. Across Southeast Asia, societies are aging fast. Even in countries where the working-age population will increase massively by 2050 (Indonesia and the Philippines), they’re running out of people in their twenties. The median age in the Philippines is now 25; it’ll be around 32 in 2050. In Indonesia, the median age is 29 and will rise to 36 by 2050. For the first time in history, no Southeast Asian country will have a median age below 30 by 2050.

The social and economic implications of this are more far-reaching than just consumption rates. Soon, you will only have 2-4 working-age people for every retiree when the average has been higher than 6 or 7 across the region for decades. The tradition of children looking after their parents simply won’t be viable in some Southeast Asian countries in the near future, fundamentally changing how societies function.

Indeed, the region’s demographic history going back centuries is many, many children, teenagers, and people in their twenties, much fewer people in middle age, and almost none above 65. This bulge of those in middle age means you will have a lot more older, more experienced workers, which is fantastic as these countries look to move up supply chains to higher-end things. But it’s bad news since all Southeast Asian countries, except Singapore and perhaps Brunei, will still need young, inexperienced and cheap labor to do low-cost, low-skilled manufacturing and agriculture that will remain key to their economies over the coming decades. If you’re thinking about the economic future, you need to start discriminating in favor of the young.

I don’t expect governments to actually do what I’m about to suggest, but since the likes of Bangkok are bandying around half-brain ideas to boost consumption rates, why not float around some novel ideas? What about reforming the entire tax code into a “lifetime income tax” system? The idea, developed by the Canadian business thinker Roger Martin, is that workers don’t begin to pay income tax until they hit a certain threshold over their lifetime instead of an arbitrary figure within a tax year. When a Canadian politician ran with this idea in the 2000s, they chose the figure of $250,000, the amount it would take the average Canadian worker to earn over a decade.

The average monthly wage in Thailand is around $450 per month, so let’s say the threshold is around $50,000 (the amount it would take an average earner just over ten years to accumulate). If you start working at 16 and earn $5,000 each year, you won’t start paying income tax until you’re 26. Earn less and maybe it’s not until you’re in your thirties. Earn more each year and taxes kick in earlier. You can get one step further and gradually raise the rate of taxation as someone crosses certain thresholds, so the lowest tax rate is applied between a lifetime earning of $50,000 and $75,000, a slightly higher rate between $75,000 and $100,000, and so on.

The basic premise is that the young get to keep their entire earnings, making it easier for them to save for a down payment on a home, start raising a family, invest in a business – or, indeed, consume. Only once they’ve settled down in the labor market does the state start putting its hand in their pockets.

Critics say the “lifetime income tax” system is very difficult to implement, which is true. One might also argue that it is unfair to older workers. Yet, there are similar principles around business tax. Many Southeast Asian governments give new investors tax holidays so they don’t need to pay any corporate tax for a set period after establishing their company, a window that (theoretically) allows them to inject as much capital as possible into the local economy. The same logic applies to a “lifetime income tax”: make it easier for the newcomers to consume.

In any case, Southeast Asia, for the first time in history, will soon run short of people in their teens and twenties, so something has to be done.