This article first appeared in The Edge Financial Daily, on May 30, 2016.

KUALA LUMPUR: Asian countries facing a declining fertility rate, including Malaysia, may fall into a middle-income cliff whereby its society starts ageing before it becomes a high-income economy, according to a Japanese economist.

Keiichiro Oizumi, senior economist at Japan Research Institute, said the middle-income cliff would happen when a country’s ageing population accelerates while birth rate declines, resulting in the country lacking a young labour force to contribute to economic growth towards becoming a high-income economy.

Oizumi said most Asian countries are facing a declining fertility rate as parents choose to limit the number of children so that they have more savings to provide a better education for them.

And these countries have been able to enjoy a period of economic growth driven by a young labour force, he said, using the phrase “demographic dividend” to describe such accelerated economic growth that arises from a fall in birth and death rates, and the resultant change in the population’s age structure.

In the case of Malaysia, he said the country is still receiving the demographic dividend, but may not be able to do so after 2019. Upon reaching 2019, the country will go through a 25-year doubling period when the population will grow old rapidly.

Oizumi said China and Singapore stopped receiving the demographic dividend in 2011, Thailand in 2012 and Vietnam in 2013. But Indonesia and the Philippines will still receive the demographic dividend until 2021 and 2064 respectively.

“If you start to have discussion now and clearly analyse what will happen in the future and to what degree the ageing population will have to be sustained by the public sector, Malaysia should be fine,” Oizumi told The Edge Financial Daily in an interview during his recent visit to Malaysia .

However, the economist, who has studied demographic changes for 25 years, said that although some countries have ceased receiving the demographic dividend, their economy can still be driven by the higher growth in mega cities or mega regions within the country.

Oizumi said that in the urban area, the income per capita could go as high as 10 times or double the income per capita in the rural area, and urbanites are enjoying a lifestyle similar to those in advanced economies.

However, another problem could arise, which is the widening income gap between the urban and rural population, as the money that is circulating in the city is not moving into the rural area, but instead moving to other mega cities within or outside the country.

Hence, he said there is a need for governments to decide on the kind of pension system the country should adopt to cater to their growing ageing population. And he opined that Malaysia’s pension model is still sustainable.

In order to continue to spur the economy despite the problem with the middle-income cliff, Oizumi said people in the rural area can leverage information and communications technology (ICT) or develop the digital economy.

The award-winning author thinks ICT could be the next trigger for economic growth in Malaysia.

“Smartphones may change the world,” he said. “Thanks to the Internet, there has been an information revolution — the same information is available to everyone no matter where you are.”

Oizumi believes that a digital economy, in which everyone is connected through the Internet, is the key to stimulating economic development, perhaps even reaching levels not seen since the late 1960s.

“While mega cities (population of more than five million) are thriving, rural areas are falling behind. More and more young people are coming to mega cities as there are better opportunities. Money is not circulating now.”

According to him, the Internet can help address this issue. He said the benefits of a digital economy will be able to solve the disadvantages of geographical remoteness, and more young people will choose to remain in rural areas.

He added wryly, “In some rural areas, they do not have water coming out of a pipe, but they have the Internet.”

Oizumi noted that Malaysia is among countries that are more advanced in digital economy, while English language proficiency is another advantage of the country in tapping into digital economy.

“My personal view is that it might not necessarily be good for Malaysia to promote manufacturing, considering Malaysia’s own character. Trading, finance and ICT may be more suitable,” Oizumi said.