ASYMMETRIC DEMOGRAPHIC TRANSITIONS AND NORTH-SOUTH CAPITAL FLOWS

This paper studies demographic differences between lower-income, less developed countries (the “South”) and higher-income developed countries (the “North”). The specific objective is to analyze the implications of demographic asymmetries for aggregate savinginvestment imbalances, exchange rates, and the resulting net capital flows between North and South. An optimistic view of asymmetric demographic transitions among Southern and Northern economies suggests that the North can run a current-account surplus sizable in relation to the Northern economy, thereby transferring large net amounts of financial capital to the South. The analysis here argues that the optimistic view is a plausible summary of demographic influences on North-South capital flows in the historical period between 1950 and the mid-1970s. For historical decades after the 1970s and for the initial decades of the 21st century, however, the analysis argues instead that demographic forces considered by themselves are likely to diminish rather than augment the flow of Northern saving to the South as a fraction of the Southern economy. The fundamental causes of these effects are shifts in relative demographics between the South and the North. The qualitative conclusion about North-South capital flows holds regardless of whether the demographic transition in Southern economies is somewhat faster and sooner or somewhat slower and delayed, regardless of whether growth in Southern total factor productivity is vigorous or weak, and regardless of whether cross-border goods substitutability is modest or strong. Demographic changes alter macroeconomic outcomes. When demographic evolutions are asymmetric across countries, the cross-border transmissions resulting from demographic forces alter exchange rates and external imbalances. The cross-border effects alter countries’ welfare. Earlier research in this project addressed these global dimensions of demographic change by focusing on interactions among similarly structured developed economies. This paper changes the focus to demographic differences between developing and developed (“Southern” and “Northern”) economies. The specific objective is to analyze the implications of demographic asymmetries for aggregate saving-investment imbalances, exchange rates, and the resulting net capital flows between North and South. The paper starts with some background in section 1A, identifying issues about Southern economic growth and transfers of Northern savings to Southern economies. Section 1B summarizes alternative views about the influence of demographic transitions on North-South capital flows. Sections 2A and 2B provide an overview of the generalequilibrium model and the demographic data used in the paper. Section 2C identifies key analytical characteristics of Southern and Northern economies as incorporated into the model. Section 3 presents a benchmark analysis of demographic effects on saving, investment, and capital flows. Section 4 reports a variety of sensitivity experiments designed to test the robustness of the benchmark analysis. Section 5 summarizes conclusions and implications for government policies. 1. BACKGROUND AND ISSUES 1A. World Economic Growth and the Transfer of Northern Savings to Southern Economies In a self-contained (“closed”) economic system, all transactions occur between resident agents. When any one borrower has a liability on its balance sheet, a lender elsewhere in the system has a matching asset. The savings generated in such an economy 1 The earlier research in the project is summarized in Bryant (2004a, 2004b); Bryant, Faruqee, Velculescu, and Arbatli (2004); Bryant and McKibbin (2004); and Bryant and de Fleurieu (2005). Bryant (2004b) gives references to related work carried out by other researchers. 2 Bryant (2005) is a first effort in the Brookings components of the project to study interactions between developed and developing economies. McKibbin and Nguyen (2004), McKibbin (2005a, 2005b) and Batini, Callen, and McKibbin (2006) have addressed these issues in the ANU components of the project.