Demographic Interactions Between North and South and the Implications for North-South Capital Flows

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This paper focuses on the macroeconomic consequences of demographic differences between lower- income, less developed countries (the “South”) and higher-income developed countries (the “North”). The analysis emphasizes the likely implications in the two regions for aggregate saving- investment 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. This paper 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 suggests instead that asymmetric demography between the South and the North operates to reduce rather than increase the net flow of Northern savings to the South as a proportion of the Southern and Northern economies. This conclusion holds broadly for a range of alternative assumptions about the speed of the South’s demographic transition. It also appears to hold regardless of whether Southern productivity growth is vigorous or sluggish, and regardless of whether cross-border goods substitutability is moderate or strong. Substantial research remains to be done to refine the paper’s analytical framework and to test the robustness of this conclusion.