Ageing and Global Capital Flows - Is it Optimal to Dissave?

A preliminary apology is in order. What follows is uber wonkish and should be consumed preferably in small quantities. In fact, I am not sure that I have gotten everything right yet. Of course, we never are but in this case it is an important point to make up front. The argument is loosely built on my upcoming master's thesis which seeks to explore the connection between ageing and capital flows and specifically how and whether the former may lead to a state of export dependency; where export dependency is defined as a high and increasing sensitivity of the rate of change of national income to the rate of change of the current account. This is something I have discussed extensively on AS, but in this case I am trying to give it a thorough theoretical spin which means that any non econ-wonks are likely to be lost in translation.

I should stress immediately that this is not a virtue but rather a vice, but I do think that exploring  conventional economic theory (and moving beyond?) is an important part of the process. In the end, the argument should be amendable to plain English and, as it were, plain common sense and intuition as well as, of course, empirical falsification. One thing which I can promise though is that there will be no mathematical models; at least there, I should have provided some comfort. If you want the math, you will have to wait for the thesis.

The best way to frame the following argument is perhaps to insert it in the chronology of the thesis where it appears, in the end, as a perspectivation on aggregate global capital flows. What precedes this is thus an, hopefully convincing, account of the fact that Germany and Japan are effectively dependent on exports to grow as a result of their demographic profiles.

Some Thoughts on Export Dependency

First it would be worthwhile taking a look at the following sketch (click to enlarge) which captures a lot of the issues that will be discussed below. Essentially, it attempts to show, as nastily and brutishly short as possible, what export dependency means in the context of what we could call conventional economic theory.

For non-econ wonks it is likely to be quite difficult to read, but in fact; it is fairly simple. The X-axis  represents the age of an economy here exemplified in the phases of the age transition derived from a study by Malmberg and Sommestad that discusses the demographic transition as a transition in age structure (and not population growth). But really, it could just as well be median age where a median age of 40-50 would the limit to the right and, let us say, about 20-25 to the left. The Y-axis is adopted directly from Higgins (1998,  e.g. table 1, p. 350) who uses empirical estimations to model the effect from age on, in this case, the current account. As I, Higgins also use age on the x-axis (age distributions) and on the y-axis he has age coefficients. This basically means that a negative value signifies that the age structure in the economy influences the current account negatively (i.e. pushing the CA towards a deficit) while the reverse is true for a positive value. Essentially, we need not, initially, bother with the numerical value of such age coefficients here, but merely note whether it is positive or negative and then secondarily we may look at the level effect (i.e. whether the effect is numerically large).

I should immediately point out that there are no direct empirical basis for the curves. The line which is labeled trajectory of export dependency is basically a cubed function designed to show a more less linear association between export dependency and ageing with the added and important feature (hence the cubed functional form) that export dependency tends to increase exponentially when you move into very old age. The blue line naturally do contain some empirical foundation in that it originates from an empirical study Higgins (1998) where it is constructed based on empirical estimations. I shall not go into Higgin's empirical framework here since it would take us into the dark world of time series econometrics but merely point out that Higgins manages to come up with what we could call the textbook representation of the effect of ageing on the current account and it is worth pointing out that he is not the only one. Also Supan et al. (2007), Bryant (2006), Henriksen (2002) and Summers et al. (1990) (among a myriad of other studies) postulate either through theoretical elaborations or empirical estimations a relationship which may be approximated by the chart above.

In theoretical terms, the basis for this "hump-shaped" relationship between ageing and the current account is derived in the context of the simple, yet crucial, intuition derived from Modigliani's life cycle hypothesis which states that consumers spend their working age years saving for retirement where they will dissave those accumulated assets. Then, at some point during working age there is a "peak" which is characterised by the time when the saving rate is highest and thus also, indirectly, where the effect on the current account should be largest. Following convention, this is modeled in economics through the idea of overlapping generations and often in the form of a neo-classical growth theory framework or simply a general equlibrium representative agent framework. I shall not open pandora's box and discuss the merit of these methods here but merely point out that I think it is very difficult to argue against the the basic intution which lies behind these models and thus, as it were, the intuition from the life cycle hypothesis.

In essence of course, the real issue is one of calibration and thus one of empirical analysis to see just how this postulated hump may materialise as well as of course realizing that ageing is not the only variable which influences the current account. It is also here that the fun begins and where things very quickly become very complicated. 

In this respect, it is worthwhile focusing the attention on the so-called dissaving phase which should be a natural result of the move towards an ever higher share of the elderly in the population. The basic mechanism here is simply that in standard economic models "old" economic agents will dissave their entire asset and thus as the old cohorts increasingly will outnumber the young cohorts the dissaving of the former will trumph the saving of the latter and lead to dissaving on an aggregate level. All sorts of ill prophecies have been proposed in the context of this dissaving hypothesis, not least that we are facing an asset meltdown scenario in 2050 because there will be far too many elderly wanting to offload their assets to a much smaller base of younger cohorts who cannot support a satisfactory price (yield) level.

Now, the problem here is that empirical studies have shown that the idea of dissaving, while intuitively strong, is difficult to verify to the extent that theoretical models suggest. This is not difficult to imagine I think. By very nature of the uncertainty of the mortality schedule people do not (cannot) dissave to 0 and beyond this there are may be bequest motives. In an open economy context this further creates the rather dubious situation in which economies well into their old age will have to run persistent external deficits because, presumably, savings will have decline far faster than domestic investment demands. I say dubious here because this is exactly where I have chosen to take my stab at trying to amend the theoretical framework.

Consequently, I am not so sure that this is a plausible end point in the context of continuing population ageing. Specifically, I would like to ask the simple question of whether it is actually optimal for any society to dissave as the theory postulates. I don't think it is and while it is certainly not unlikely that economies may actually dissave (defacto) they will still be dependent on exports to grow and thus the difference between the two curves into the latter age transitions represents an externality. This is also why I think that economies, in stead of responding with dissaving, will fight the point at which they reach this stage since when they do it is effectively game over. Imagine for example how the likes of Germany and Japan would ever be able to finance an external deficit brought about solely on the basis of the fact that savings has declined so fast as to not even be able to meet domestic investment demand which in itself will be declining. In this situation, wouldn't it be much smarter to maintain savings persistently higher than domestic investment demand which can of course only be materialized in an external surplus. I think it will and it is this point which you need to keep in mind as we move forward.

Implications for Global Capital Flows

With these considerations in mind, the key question then becomes; what happens when more and more economies grow to become increasingly like Germany and Japan? (As we know they will, at least in the context of the OECD). Naturally, not everyone can maintain excess exports over imports at the same time so something, as they say, has got to give and it is this something, as it were, which is the topic of this entry.

The focus on the implication of ageing on aggregate global capital flows is not new and is, in fact, an integral part of the analysis in Supan et al. (2007), Higgins (1998) and Bryant (2006) which were also mentioned above. However, in the following we are going to relax the condition of dissaving normally assumed in e.g. OLG models and accept that the propensity to run an external surplus will increase as an economy ages.

If we do this, it should not require too much imagination to see the issues that may rise. For starters, I want to reiterate yet again the trivial fact that not all economies can run an external surplus at one and the same time. This means, quite naturally, that what might be optimal from the point of view of a single economy (i.e. maintaining a surplus as it ages) may not be viable or optimal from the point of view of the global economy.

In order to frame the discussion it is natural to take our point of departure in the discourse on global macroeconomic imbalances.

As so many other things, the financial crisis has completely dislocated this system but it still worthwhile to ponder the nature of the global financial system in a post Asian crisis perspective and up until now. Consequently, the global macroeconomic landscape has long been characterized by what many has termed Bretton Woods II in which a large batch of especially Asian and oil exporting economies have been pegging their currencies to the US dollar who in turn have been running a large current account deficit to match the savings surplus in emerging markets such as China, South Korea, the Petroexporters, Brazil and Russia. In fact, if we cut a lateral line through this argument we could say that the world has hitherto been characterized by the Anglo-Saxon economies running external deficits to match surpluses in big emerging markets as well as Japan and Germany.[1] That however changed abruptly with the advent of the financial crisis and it is interesting to note the initial response by market participants and many scholars in their interpretation. Consequently, as it became clear that the US economy had been mortally wounded on the back of the subprime mortgage debacle the US Fed slashed nominal interest rates significantly. As a result the USD plummeted which led many commentators to hail the US economy’s fall from grace and specifically coined the notion of decoupling in which the Eurozone economy and Japan were pinned as the ones taking up the slack in steering forward global demand. Initial versions of the decoupling thesis thus centered on the shift in emerging market exports from the US to Japan and, especially, the Eurozone and thus in the process also a shift from the US dollar to the Euro as a global reserve currency. As it turned out this was nothing but a mirage masked by the fact that US policy makers essentially acted preemptively to a crisis which turned global during the summer 2007 and now most major central banks in the OECD have slowly bitten the bullet and followed Bernanke into quantitative easing to combat the risk of deflation which would be devastating in the context of the debt overhangs some economies face. Moreover, and as a general point, the global economy already decoupled from the US, and indeed OECD, economy a long time ago. Consequently, it is an irrefutable fact that the global economy is undergoing a fundamental change in which emerging economies such as India, Turkey, Brazil, China; Chile etc will ascend to account for an ever larger share of global GDP and growth. The crucial question is then; how will this process and the process of global ageing be transmitted to the global economy through capital flows?

As a starting point to answer this question I would like to draw the attention to comments made by two of the most prominent members of the global financial punditry in the form of US economist Paul Krugman (PK) and the Financial Times’ chief economics commentator Martin Wolf (MW).

Starting with the former[2] he recently pointed to the fact, in the context of Japan, that external demand was instrumental in ending the slump and providing a relative bounce between 2003 and 2007. As PK further goes to argue, this may present a rather ominous outlook since the extent to which we are all, in the OECD, currently stuck in a “Japan-style” liquidity trap the way out may constitute a rather crowded route. As PK poignantly points out at the end of his small piece;

(...) needless to say, we can’t all export ourselves out of a global slump. So, how does this end?

Krugman 2009

This is indeed a good question and MW makes a similar argument in a recent column[3] where he points towards the fact that the global imbalances themselves may prove to be an impediment to a swift global recovery.

 In short, if the world economy is to get through this crisis in reasonable shape, creditworthy surplus countries must expand domestic demand relative to potential output. How they achieve this outcome is up to them. But only in this way can the deficit countries realistically hope to avoid spending themselves into bankruptcy.

Martin Wolf (2008)

This is of course a very appealing proposition and also goes to heart of idea that, at least, one part of the solution of the current global crisis lies in the resolution of global macroeconomic imbalances. But prey tell, how are these surplus countries going to revert towards a growth path characterized by a more balanced external account and perhaps even an external deficit?

It is in this context that the argument presented in this thesis becomes important. Consequently, there is a big risk that these surplus economies (e.g. Japan and Germany) simply will not be able to heed the call of MW. The main reason for this inability is then, in part, exactly to be found in the economic profile of a rapidly ageing economy with a median age pushing 40 year mark and beyond. Japan and Germany as well as the economies next in line to reach their age bracket cannot achieve growth based on domestic demand in a way which would allow them to suck up excess global capacity through an external deficit.

This is a very important point to stress in the context of the global economy and must be stressed with great emphasis.

Some Charts to Go With This

In order to try to make sense of all this consider the supply/demand chart below which plots the supply and demand for savings in the global economy. Following convention, the X-axis represents quantity and the Y-axis represents price. In this specific case, the X-axis can be seen as the total demand (from deficit nations) for excess investment beyond the level which can be achieved through domestic savings. The Y-axis then becomes the price[4] (interest rate) which equates this demand with the level (supply) of excess savings provided by the surplus nations beyond the level which can be absorbed by domestic investment demand

(click to enlarge)

As a natural consequence of the intuition underlying this small model, equilibrium is a forced (and always binding) condition since, by definition, the sum of external deficits must equal the sum of external surpluses in the global economy. 

If we accept the idea behind the theoretical framework presented in this thesis it is very easy to see the implications of a sustained global process of ageing. As is shown in the diagram the supply of excess savings (external surpluses) will increase with ageing [S(1) to S(2)]. But this is not the only effect. Following the simple intuition of a closed system an increase in supply must be meet by a decrease in demand too since we assume that economies are moving from a position as external deficit nations to a position of external surplus nations. In this sense, the constant level of output (quantity) is largely a simplifying trick in the sense that we let the entire adjustment process occur on the return of the excess savings of surplus nations rather than the quantity of excess widgets they can produce to sell abroad.[5] This produces an effect whereby ageing reduces the price of excess savings in equilibrium.

In order to move forward from here we need to mentally relax, as it were, the idea that deficits need to equal surpluses in equilibrium. In concrete terms, we need to understand the idea of equilibrium does not capture the notion of dependency on exports/foreign asset income to grow.

This is amended in the following graph; (click to enlarge).

The key here is the notion of the critical price level [6]. This should be seen as the level needed to sustain an acceptable level of growth in ageing economies and is thus a direct proxy for export dependency. As the global economy ages and assuming that equilibrium must hold at all times, the supply of excess savings and the demand for these savings decrease both lowering the equilibrium price and quantity. However, the critical price level remains. One key implications of this is a systematic oversupply of savings, or glut if you will, produced by the process of ageing and it is very important to understand that this oversupply is very tangible. It represents the value of external surpluses which would be enough for the likes of Germany, Japan etc to maintain a growth rate consistent with expectations and essentially the maintenance of their market economies. In the jargon of the theory, it represents the point at which ageing economies are optimally smoothing consumption and saving as a function of their intertemporal preference for the latter over the former. Of course, it cannot exist as a real entity but it may still have real implications.

The first obvious effect is to make the variation of ageing economies’ output very sensitive to the variation in out of deficit nations and thus global output. In its strictest form, this is how export dependency emerges. Another notable effect would be that it drives down the return in ageing economies to such an extent that it may fuel so called carry trade flows in which traders borrow in low interest rates currencies and invest in high interest rate currencies. Another example would be how these savings may be used to fund temporary and unsustainable build up of credit expansion in economies running external deficits. This is to say that if the equilibrium depicted above essentially is binding in the long run the implied existence of this excess pool of savings may lead to sudden outward jumps of the demand curve and thus the creation of credit bubbles. The main key to take away from this small economic model is thus the idea of an externality of ageing on a global level. This externality arises as a direct function of the implied existence of an excess of savings over demand as the global economy ages. In the context of the theoretical framework above the externality should be seen as function of the crowding of economies in one end of the spectrum on intertemporal preferences for consumption and saving. Crucially, it also means that what we might find to be optimal in the context of a single economy is not optimal on a global level a point which is certain to make standard economic modeling of aggregation from the representative economy level to the global economy very difficult. In empirical terms it means that what one might find to be the optimal path in a time series perspective of one economy may turn out to have radically different implications in the cross section when more or all global economies are involved.  

Further studies should attempt to develop this idea further since it provides a useful venue of analysis as an alternative to the traditional idea drafted from life cycle theory that global ageing will entail dis-saving on an aggregate level.

List of References

David M. Cutler & James M. Poterba & Louise M. Sheiner & Lawrence H. Summers (1990)
"An Aging Society: Opportunity or Challenge?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(1990-1), pages 1-74.

Henriksen, Esben (2002) – A Demographic Explanation of U.S. and Japanese Current Account Behavior, Graduate School of Industrial Administration, Carnegie Mellon University

Higgins, Matthew (1998) – Demography, National Savings, and International Capital Flows, International Economic Review, Volume 39 (1998) Issue (Month): 2 (May) pp 343-69

Bryant, Ralph C (2006) – Asymmetric Demography and Macroeconomic Interactions Across National Borders, Brookings Institute, the paper was presented at a conference hosted by the Reserve Bank of Australia in 2006 (http://www.rba.gov.au/PublicationsAndResearch/Conferences/2006/)

  Borsch-Supan, Axel H; Alexander, Ludwig; and Krüger Dirk (2007) – Demographic Change, Relative Factor Prices, International Capital Flows and their Differential Effects on the Welfare of Generations, NBER Working Paper No W13185

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[1] With the German surplus mainly materializing itself in an intra-European imbalance.

[2] Paul Krugman (2009) – The Eschatology of Lost Decades, NYT blog post

[3] Martin Wolf (2008) – Global Imbalances Threatens the Survival of Free Trade

[4] Which is assumed to be exogenously determined for all involved economies through the equilibrium in this system.

[5] Remember that I am assuming that quantity is fixed and that the entire adjustment takes place on the price. In a more realistic representation the adjustment would of course take place on both the price and quantity.

Global Population Ageing - What Do We Know?

Update: Warren Sanderson who is one of the authors of the paper discussed in this entry has dropped a comment with some additional information about the data they use and where to go if you want more of this kind of population wonkery.

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As many of the readers of this space undoubtedly will have come to realize; yours truly is a bit of a demographics wonk which probably goes a long way to characterize him except for the obvious fact that he is also, above all, an econ wonk.

As part of my upcoming master's thesis I am naturally trying to combine these traits and it should come as no surprise that the focus is on demographics and international capital flows. That will not be the topic of this entry however. Rather, I thought that I would plug a recent paper on global ageing [1] by Wolfgang Lutz Warren C. Sanderson, and Sergei Scherbov published in the brand new journal, Journal of Population Ageing, edited by the team of demographers, Sarah Harper and George Leeson, at the Oxford institute of Ageing (Oxford University). Also, this would naturally be a nice occasion to ever so slowly reveal what I am arguing in the context of my own research; research which is naturally heavily affected by the likes of Lutz, Malmberg, Lee, McDonald and other of our time's great (econ)-demographers. [Graphs are made by the author and not taken from Lutz et al.]

With respect to Lutz et al they set out to grapple with one of the most difficult issues in the context of demographics and ageing in the form of our ability to forecast the future trends of ageing in the context of the global economy and different regions. The main conclusions indicate a rapid and, in some cases, accelerating process of population ageing in a global context in the next decades as well as a the very likely outcome that global population growth will cease to exist as a lingering phenomenon in the century which follows. Here is their abstract;

Population ageing is, in the first instance, a demographic phenomenon; although its consequences go far beyond demography. But the future trends of ageing are not yet known and many of the consequences of ageing will depend on the future speed and extent of ageing. Here we summarize what is already known and what is not yet known about future ageing trends in different parts of the world. We do this through the means of new probabilistic population forecasts. The section ‘New Regional and Global Probabilistic Population Forecasts’ presents the results of those forecasts. They confirm the earlier finding (Lutz et al., Nature, 412(6846), 543–545, 2001a) that it is highly likely that the world’s population growth will come to the end during this century. The following four sections present results for proportions of populations 60+, old age dependency ratios, proportions 80+ and average ages. In the section ‘New Measures of Ageing’, we analyse a new measure of ageing that takes life expectancy changes into account.

The first question which immediately springs to mind (or at least it did to me) is first and foremost what kind of techniques the authors are using in their endeavors to actually make forecasts on a variable as complex as ageing and so far into the future. Well, this is also where water gets muddied since it is important to realize, a priori, the amount of uncertainty which are attached to the kind of exercise Lutz et al. embark on. As most of you will know ageing is driven by the joint process of declining fertility and increasing life expectancy (and to some extent migration) and once we use this break down to operationalize ageing it gets dreadfully difficult to forecast although there are tentative conclusions which can be drawn based on existing evidence. In this way, it is important to dwell at the main conclusion, namely that the world as a whole is set to age rapidly before heading off into more specific forecasts.

The formal technique used by Lutz et al. is probabilistic forecasting which is basically a technique of collecting random draws from existing data on fertility, mortality and migration in order to produce a series of potential distributions and paths which can ageing can take as we move forward. Lutz et al. center on five simulations. The first in the context of total population size, the second on the proportion of people aged 60+, the third focuses on dependency ratios, the fourth turns the attention to the proportion of people aged 80+ and the final simulation centers on average age.

In relation to the first simulation which focuses on population growth it appears certain that the global population will continue to grow up until 2030-2050 depending on the path you look at. Beyond that point the simulations become extremely insecure ranging from a continuation of population growth to a decline in population growth which will restore the global population level at its 2000 level in the year 2100. Needless to say that such exercises are largely pointless from the point of view of inference about e.g. economic effects. However, what seems to survive as a main conclusion is that it is very likely that the tendency of population growth will come to an end some time during the next century, something which is significant in its own right in a world where the discourse on global warming, in my opinion, risks to engender policy advice to emerging economies which are essentially ill informed.

With respect to the paper in general I take away the following points in random order.

• The potential importance of migration. In this regard, it is worthwhile to have a look at the simulated path for population growth (and thus in some sense the change in age structure) for Eastern Europe and Sub-Saharan Africa. As many of you will have guessed the former shows a steady decline (rapid ageing) from 2010 and onwards whereas the latter is set to increase (in all probability) towards the year 2050 (and beyond). Although uncertainty remains it is undoubtedly true that in a world of complete equalization of factor returns and with no barriers (of any kind!) to labor flows a lot of the detrimental impacts from ageing could be mitigated. Having said this though, I still want to emphasise the importance of managing the transition in an emerging market context since all evidence points towards a much more rapid move towards below replacement levels once economic development sets in. In short, population managment policies need to look at both sides of the coin.

• A rapid increase in the proportion of 60+. Perhaps this is the most striking aspect of the coming process of ageing and whether we concur with the actual forecasts, there is no doubt that the change in age structure measured as an increasingly large share of, in this case, people aged 60+ is going to be extraordinary. According to Lutz et al. by 2040 the probability of the entire of Europe (CEE+Russia), Japan/Oceania as well as China having more than a third of its population aged 60+ is over 80%. This raises some extremely important important questions which researchers are only now starting to focus on. What happens to the labour supply of people in the 60s-70s? How does the life cycle of the young adjust to the skewed age distribution and what about that of the "old"? How should life expectancy be calibrated into the issue of raising retirement age for this growing age group? What happens to the productivity profile of society? And of course, my favorite; how will these changes be transmitted through capital flows both in a time series perspective (i.e. for the individual economy) as well as of course in a cross sectional perspective where the fact that all surpluses and deficits must add up act as a decisive binding constraint on the ability of some economies to smooth consumption and investment optimally.

• The analysis on old age dependency (60+/20-59) ratio mirrors the points above to a large extent, but leafing through some of the tentative conclusions e.g. in the context of Japan and China I am pretty amazed, if not scared, by the projections. Especially, in the context of the former some of the projected paths would quite literally mean that the market economy (with associated welfare structures) will cease to exist. The interesting thing about the latter (China) is of course that for all the hopes about China ascending to take over the baton of the US as the sole global leader, most people are missing the fact that the country, in all likelihood, is going to catch up (and surpass) large parts of the OECD in terms of ageing as soon as the 2020-2025 mark.   

• Turning the attention to the forecasted share of people aged 80+ my own opinion is that this is pretty useless. I mean, I salute the effort but as the authors themselves point out; once we incorporate the long time horizons (up to 2100!) and most importantly the extreme uncertainty surrounding future mortality evolutions for this age group (both in terms of life expectancy at birth as well as on a cumulative basis for the people alive today) the uncertainty takes on huge proportions. What we know naturally is that the number will increase substantially, but also that it is likely to do so following a concave function of time as one would assume the extra gain in life expectancy gets smaller. [2].

Now, as Lutz et al never tire of pointing out throughout their excursion into the world of forecasting population ageing, this is all very uncertain and for two reasons primarily. Firstly, there is the inherent uncertainty associated with forecasting and essentially mapping changes in fertility, mortality, and migration. Secondly, there is the effect from moving the goal posts, or in this case; the reference points in relation to ageing. The simple point here is that it is not certain that old will mean the same thing tomorrow as it does today. This is especially the case of course if mortality continues to decline.

If this concludes the look on the paper by Lutz et al. I think it is worthwhile to produce something of an apology. Consequently, I have on several occasions pointed towards the futility (and in some cases stupidity) of narrating demographic changes in the context of what might and might not happen once the calendar shows 2050. Yet, here I even venture something about the state of affairs in the year 2100. An explanation is in order I think.

First of all, I maintain my view that the most important issue with respect to population ageing is the period one or two decades forward in time. Even if we might be able to plausibly say something interesting about ageing beyond this point the economic effects from ageing are correspondingly almost impossible to map. One good example here is the supposed asset meltdown scenario which is supposed to hit us in 2040-2050 as the weight of older age cohort's dissaving pushes up real interest interests and floods the market with assets (i.e. disinvestment) for which there is not a significant amount of takers. Not only do researchers only scantly understand what is actually meant by dissaving, there is also reason to believe that although optimal from an individual's life cycle perspective dissaving is not optimal from the point of view of an ageing society writ large [3].

With this general point in mind it is also worth recognizing a fundamental pre-requisite for focusing on ageing, namely the fact that the demographic transition is not over. It is ongoing and given the fact that the coming age of ageing which was initiated somewhere in the late 1960s (in the context of the OECD) it means that fertility will not stabilize at replacement levels. Despite the obvious reality of this point and the subsequent need to adjust models, views and analyses accordingly many still assume for example that global fertility, by some form of magic, is imbued with a drift parameter that will take it to replacement levels in the year 2100. Let me state as clearly that I can that such assumptions are completely useless. Interestingly and as a short digression, demographers have been focusing on this for quite some time and although the people at the UN, arguably, are getting better I would still recommend anyone interested in this to go back to the seminal volume edited by Jones et al and look up the chapter by Demeny where he ties the UN Population projections, of the time, up in knots. He essentially rams home the point that replacement fertility constitutes, in his own words, an implausible endpoint of the demographic transition; a point John C. Caldwell made already in the beginning of the 1980s. Whoever made the point first, this is extraordinarily important to take aboard.

In fact, I would take all this a step further.

In most modern accounts of the demographic transitions the traditional process is amended by an additional phase, or transition if you will, called the second demographic transition Van de Kaa (2002)[4] (or phase of ageing Lee (2003)). Now, I tend to take a more drastic approach. Quite simply I think that the transition need to be revamped all together and that a focus on ageing and age structure should be adopted at the offset. In this sense I think that Malmberg and Sommestad (2000) is a very important starting point since this the most comprehensive contribution which maps the whole transition in the context of ageing (specifically using Sweden). Working from this I believe that we can narrate the demographic transition in a way which makes it much more likely for us to use it to make inferences on economic processes which is ultimately my goal even if the study of demographics is a fascinating area in itself.

With respect to the question implicitly posed by Lutz et al. and thus how much we actually know about the global and regional process of ageing the initial answer has to be that we know quite a bit. Most importantly, you have to remember that ageing is not a new phenomenon and as I would argue a lingering aspect of the entire transition. The key is what happens next to mortality, fertility and migration and here uncertainty is vast although I should stress yet again that idea of convergence towards homoestasis in which these parameters are constant is not a desirable way to look at demographic processes. If we want to model this and if we want to make solid economic inference we need to take into account a myriad of feedback loops as well as the path dependency of the transition. With this end point it is perhaps apt to recall Socrates who reminded us of the fact that knowing that one knows nothing or very little is actually knowing quite a bit. 

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For more on population ageing, the Economist had an interesting briefing on the issue a couple of weeks ago which touches on some of the same points as above and provides some nice examples and cases. Finally, I also think that I should plus Georg Magnus' book the Age of Ageing which is really also a nice introduction for the intermediate laymen. In terms of academic papers that offers a general introduction to the issue of modern population dynamics and ageing Lee (2003) is a must, but also this paper by David S. Reher is very good (I discuss the paper here). Hopefully, I will have my own contribution to offer soon which sets the demographic transition in the context of economics and how it should understood in order to best make the connection to the study of economic phenomena.

List of References

Harper, Sarah and Howse, Kenneth (2009) - An Upper Limit to Human Longevity?, Journal of Population Ageing, Vol 1, issue 2.

Jones, Gavin W; Douglas, Robert M; Caldwell, John C; and D'Souza, Rennie M (1997) - The Continuing Demographic Transition, Clarendon Press Oxford; chapter 5, Replacement Level Fertility: The Implausible End Point of the Demographic Transition, Paul Demeny.

Magnus, George (2008) - The Age of Ageing, Wiley

Malmberg, Bo and Lena, Sommestad (2000) – Four Phases of the Demographic Transition, ”Implications for Economic and Social Development in Sweden 1820-2000” Arbetsrapport/Institut för Framtidsstudier; 2000:6. The paper was presented at the SSHA meeting in Pittsburg. October 2000.

Lee, Ronald (2003) – The Demographic Transition – Three Centuries of Fundamental Change, Journal of Economic Perspectives vol.17 issue 4, pp. 167-190 fall 2003

Lutz, Wolfgang; Sanderson, Warren C; and Scherbov Sergei (2008) - Global and Regional Population Ageing - How Certain Are we of its Dimensions, Journal of Population Ageing vol 1, issue 1. '

Reher, David S (2007) - Towards long-term population decline: a discussion of relevant issues, European Journal of Population

Van de Kaa, Dirk J. (2002) – The Idea of a Second Demographic Transition in Industrialised Countries, National Institute of Population and Social Security, Tokyo, Japan 29 January 2002

Notes

[1] - The paper is walled for non-subscribers, and I can't of course upload a version here, but mail me and we can discuss the paper "further" if you like ...

[2] - Although it should be noted here that in a recent literature survey on human longevity by Sarah Harper and Kenneth Howse evidence is provided, from Japan, that mortality shows no sign of "compression" at older ages which indicate a linear rather than a concave function.

[3] - I will have much more about this in my next posts where I respond to this.

[4] - The idea of the SDT dates back to the 1980s and earlier works by Van de Kaa as well as Boongaarts.