Demographic Influences on Saving-Investment Balances in Developing and Developed Countries
This paper studies demographic differences between lower-income, less developed countries (the “South”) and higher-income developed countries (the “North”). It analyzes the implications of heterogeneous demographic evolutions for aggregate saving-investment imbalances, exchange rates, and the resulting net capital flows between North and South. An optimistic perspective 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 an optimistic perspective is a plausible characterization 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, a less optimistic perspective is appropriate. 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 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 crossborder goods substitutability is modest or strong. Public policy concerned with demographic trends in higher-income Northern nations should recognize that demographic asymmetries with lower-income Southern economies are unlikely, by themselves, to ease resolution of Northern macroeconomic difficulties caused by population aging.