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

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An optimistic view of asymmetric demographic transitions among higher-income developed countries (the “North”) and lower-income, less developed countries (the “South”) 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. Such an outcome would permit asset owners in the North to earn higher returns on their savings than would otherwise be possible and simultaneously permit investment within the South to be higher, thereby advancing Southern development and welfare. 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. If reinforced by further refinements and sensitivity testing of the analytical framework, this conclusion will constrain analyses and choices made by Southern and Northern governments as policymakers struggle to devise policies that promote Southern development and ease the stresses of Northern population aging.