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Demographics and the Anatomy of International Capital Flows

Vistesen, Claus (2010) - Demographics and the Anatomy of International Capital Flows, Master's thesis Copenhagen Business School (MSc Applied Economics and Finance)

This thesis is built upon two core arguments. The first is the notion that the demographic transition should be narrated through the perspective of ageing rather than population growth and the second is that ageing on a macroeconomic level represents a strong driver of international capital flows. These two arguments are used to discuss the standard prediction in a life cycle framework that ageing leads to dissaving in the aggregate and thus how old economies should tend towards running current account deficits. Using Japan and Germany as the subjects of analysis, this thesis develops the idea that rapidly ageing societies are not, in the main, characterized by dissaving but rather by the fight against it. Finally, a small empirical exercise acts as a perspectivation on the results to suggest why ageing might lead to a reliance on exports and foreign asset income to achieve growth and what this means in a global context.

Reader Comments (1)

Here are a few thoughts I had while chewing over your paper:

As saving is intended to pay for future consumption, as a country ages the total quantity of savings required to cover future consumption shrinks due to a shrinking remaining lifespan. The younger cohort does not have an incentive to increase savings to offset the dissaving by the older cohort, as the younger cohort's expected aggregate future consumption is lower. Shifting to an export-dependent economy allows a country to put off dis-saving, as retiree consumption can be paid for by profits on exports.

To the extent that an aging country's savings are invested in government debt, that debt is nothing more than a claim on the production capacity of the younger cohort. Therefore, a country with an inverted population pyramid must radically increase productivity and exports in order to cover the government's debt obligations without a significant increase in the tax burden on workers. Failure to achieve productivity and export increases will result in either significant tax increases on the workforce or reduction of benefits to retirees.

A country with an inverted population pyramid will experience negative population growth as the largest cohorts move to the inevitable 100% mortality rate. The proportion of GDP generated by domestic consumption will shrink correspondingly. Increased exports would be required to offset the reduction in domestic consumption, in order for GDP to be stable or increase.

This implies that countries with aging populations and economies that are already export-oriented will experience extremely strong internal social pressure to maintain and increase the proportion of their GDP derived from exports. China, Japan, and Germany are prime examples. In the case of China, there is much evidence that little rebalancing from export based growth to domestic consumption based growth has occurred. It is unlikely that such a rebalancing will occur anytime soon given the preceding analysis.
August 16, 2010 | Unregistered CommenterScott Peterson

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