Syndicate content

Argentina’s challenge: getting rich before getting old

Ignacio Apella's picture
Also available in: Español

Probably, Mafalda - an Argentinean comic book character - was right when she said that "the urgent things do not leave time for the important things". However, it is necessary that, in this context, we must stop and think what should be done and what is important.

Argentina is going through a demographic transition process, which implies opportunities and challenges in economics and social fields. That is the actual case of Argentina, as well as the rest of Latin America.

It is still a young country where the working-age people represent the largest proportion of its total population, but the dynamic of fertility and mortality rates implies a gradual process of aging of its population, with implications in several dimensions of the economy, the welfare system, the public policy, and the society in general.

Therefore, high proportion of working age population generates a growing rate of savings and investments. The challenge is to create the conditions, both in the labor market and in the financial and institutional system, to encourage this potential higher savings over the next 30 years, and connect it with a higher investment rate. Following this path, it is possible to reach the stage of an aging population with a higher ratio of capital per worker, promoting a higher productivity and therefore the GDP of the country.

The challenge is how Argentina can become rich before getting old.  That is accumulating human and physical capital to stay on a path of sustained growth. For this to happen, many tasks must be overcome first. The performance of the education system, the pension system, the labor market, the public finance and the expenditure prioritization decisions, as well as, the functioning of the financial system, need to be addressed in a long term horizon to encourage savings and connect it with investment.

The book As Time Goes By. Economic Opportunities and Challenges of Demographic Transition Process in Argentina” (sp), emphasizes that the country is starting a period of 30 years called "demographic window of opportunity". At the present, the elderly population represents 10.4% of the total population, but this percentage will rise to 19.3% by 2050 and 24.7% by 2100, in a clear process of convergence with the European countries.

In this context, the expenditure of the pension system will grow from 9% of the GDP in 2010 to 15.5% in 2050, implicating a clear challenge for future generations. A similar trend, but in a smaller magnitude, will occur with the health sector expenditure, which will increase from 6.3% of the GDP in 2010 to about 7% in 2050. In relation to the education system, Argentina faces a good opportunity to increase investment per student using the same level of resources that it is currently being allocated (in terms of GDP), given that the proportion of children and youth in society will be reduced.

This implies a clear challenge from a fiscal perspective, as in the absence of long-term reforms, demographic transition would push for the reallocation of fiscal resources among social sectors. Finally, population aging raises concerns about the capability for the economy to maintain its growth with a smaller working age population in the future context.  To make the most of the current window of opportunity, increasing the savings to finance capital accumulation and thus promote higher productivity of the labor force is the main objective for the Argentina economy.

As a consequence, to get rich before the aging stage, is important to achieve a higher rate of capital per worker to enlarge the productivity of the labor force. In general, it is easy to waste the extra resources that the demographic window of opportunity gives, and when that happens, investment opportunities and policy challenges will be different than today in the process of aging.

The threat that Argentina becomes old before getting rich is not minor.

It is not convenient to assume that the country will replicate the experience of developed countries, such as Japan, or successful emerging countries, like South Korea. Public policy should take into account that the higher proportion of working age population has a relatively low impact on current economic growth, and this will end completely when the window of opportunity finishes. Thus, the economic growth policy should focus on the generation of savings and investment, which has a great potential to increase the productivity of the labor force by increasing the capital-worker ratio.

This requires the fulfilment of two conditions. The first one is not only to achieve full employment of the labor force, but also the formal and quality of the employment, allowing the generation of savings among workers. The second is the promotion of savings and investment. By accomplishing these two conditions, there are greater chances of higher productivity gains in the remaining period of the window of opportunity, and better chances of facing the ageing stage.

Yet again, all of this requires us to stop and make time to think about the important, and not only about the urgent.

Add new comment