Demographic Change and Policy Responses: Implications for the Global Economy

1
Demographic Change and Policy ResponsesImplicati
ons for the Global Economy

• Rod Tyers and Qun Shi
• Australian National University

2
Demographic change

• The concluding phase of the global demographic
  transition is bringing lower fertility and slower
  population growth even in developing countries,
  and especially in Asia.
• This deceleration has come more quickly than had
  been anticipated in recent decades.
• Most striking are recent sharp declines in
  fertility, initially in developed and then in
  (mainly Asian) developing countries.
• Effects are complicated by
• a resurgence of migration flows
• continued growth in life expectancies.
• The one consistent consequence is ageing.

3
This paper

• Builds full demographic behaviour into a dynamic
  numerical model of the world economy
• Constructs a base line projection to 2030 that
  embodies slower population growth and ageing
• Examines the effects of this slower population
  growth and ageing on general economic performance
• Compares the base line with a constant-population
  growth projection
• Examines the effects of policy responses in the
  North to address aged dependency
• Raising retirement ages to keep constant
  aged dependency
• Replacement migration increases sufficient to
  keep constant aged dependency

4
The model

• Global demographic module with migration flows to
• Quantify the demographic effects of changes to
  fertility, life expectancies and migration rates
• Distinguish full and part-time labour force
  participation and skill levels by group to link
  labour forces with demographic change.
• GTAP Dynamic model of the global economy,
  incorporating 8 age-gender groups and integrating
  the demographic module, to
• Construct a base line projection for the global
  economy that incorporates anticipated demographic
  changes
• Compare projections with alternative assumptions
  about demographic behaviour to the base line

5
The demographic module (14 regions, 4 age
groups, 2 genders)
6
GTAP-Dynamic the standard model

• Dynamic global general equilibrium model
• based on comparative static GTAP, by Rob
  McDougall and Elena Ianchovichina (Purdue
  University, World Bank)
• Recursive multi-region dynamics
• adaptive expectations about capital returns drive
  the regional distribution of investment
• financial capital has perfect international
  mobility only in the long run
• Single regional households with fixed saving
  rates
• Open capital accounts with offshore asset
  ownership pooled via a global trust
• Solow-Swan-like dynamic structure growth by
  physical capital accumulation with exogenous
  technical change and diminishing factor returns
• so slower population growth slows GDP growth and
  raises per capita income.

7
GTAP-Dynamic our modifications

• Disaggregation of regional households into the 8
  age-gender groups
• Consumption-savings decisions differ by group,
  based on reduced form consumption equations
• so group and average regional saving rates now
  depend on real disposable incomes and domestic
  real interest rates
• Expenditure shares across commodities differ by
  group
• Full integration of the demographic module
• So the age distribution affects
• skilled and unskilled labour force size
• average saving rates in advanced countries the
  aged deplete their assets
• average consumption shares the aged consume
  more basic foods and more (health) services

8
Scenarios to 2030

• Comparator (hypothetical)
• Uniform population and labour growth at 1990s
  rates, fixed age distributions (no ageing)
• Base line
• policy regimes business as usual, full
  demographic dynamics
• Increased participation
• 60 participation rises, sufficient to achieve
  constant non-working aged dependency ratios in
  North America, Western Europe, Japan, Australia
• Replacement migration to the North
• Migration increases, sufficient to maintain
  constant non-working aged dependency ratios in
  North America, Western Europe, Australia

9
The base line projection

• Full demographic dynamics
• Policy regimes business as usual
• Exogenous factor productivity growth that is
  independent of demography
• Stable investment (risk) premia

10
Base line population projection
11
Base line age distribution China
12
Base line population and labour force Index
19971.0
13
Base line population and labour force Index
19971.0
14
Base line dependency ratios
15
Base line dependency ratios
16
Base line real per capita income, 2030Ranked by
increase over 1997
17
The Comparator Projection

• Constant growth, fixed age distributions
• Hypothetical because the demography is
  inconsistent
• Policy regimes, factor productivity growth and
  investment premia are exogenous, as for the base
  line

18
Comparator, base line global population
19
Population
Base line departures from comparator
Labour force
20
Base line departures from comparator
Investment
Savings
21
Global saving changes 1997 US bn
Base line departures from comparator
Real yield changes
22
Base line departures from comparator
Real GNP per capita
Real GDP
23
Summary of effects of ageing base line vs
comparator

• Slower population growth in all but Sub-Saharan
  Africa
• Faster labour force growth in the short run in
  young regions
• Ultimately, by 2030, smaller labour forces in all
  but Sub-Saharan Africa
• Savings volume declines in the older industrial
  regions
• Rise in savings volume in younger regions,
  particularly in India, Indonesia, Other East Asia
  and China
• Net effect on global financial markets is a
  gentle reduction in yields
• North America, Western Europe, Japan and
  Australia become larger net recipients of
  financial capital
• All regions enjoy gains per capita, except
  Western Europe.

24
Policy scenarios vs base line

• Increased aged labour force participation
• 60 participation rises, sufficient to achieve
  constant non-working aged dependency ratio in
  North America, Western Europe, Japan, Australia
• Replacement migration
• Migration increases, sufficient to maintain
  constant non-working aged dependency ratio in
  North America, Western Europe, Australia

25
Holding aged dependency constant viaaged
participation and migration
26
Changes in labour forces departures from the
base line
27
Increased 60 participation, investment
departure from base line
28
Increased 60 participationreal per capita
income departure from base line
29
Effects of increased 60 participation

• The four advanced regions enjoy labour force
  expansions
• This attracts investment to these regions
• Investment falls in other regions, particularly
  in China
• Real per capita income expands more quickly in
  the advanced regions (at the expense of aged
  leisure)
• Other regions enjoy terms of trade improvements,
  so their real per capita incomes are not retarded.

30
Replacement migration, investment departure
from base line
31
Replacement migration, real per capita income
departure from base line
32
Replacement migration, GDP price departure
from base line
33
Effects of replacement migrationto North
America, Western Europe and Australia

• The average global saving rate increases
• young high-savers move from poorer regions, where
  the old also save, to the advanced regions where
  the old do not
• North America enjoys the largest labour force
  expansion
• it attracts the most investment per worker, but
  suffers a terms of trade loss
• Western Europe draws workers from Eastern
  neighbours, almost to depletion
• Real per capita income falls in the destination
  regions
• by least in Western Europe, because its terms of
  trade improve
• The terms of trade of China and Japan improve
• Due to cheaper goods from destination regions.
  Also because competing Other East Asia is a
  key source region.

34
Overall conclusions

• Base line demographic change causes substantial
  divergence in the trajectories of populations and
  labour forces
• Populations of Europe, Japan and China are
  projected to decline
• Labour forces in these regions will decline
  earlier and faster than their populations
• India, other South Asia, Africa and South America
  continue to be major centers for population and
  labour force growth
• Dependency ratios rise in Western Europe, Japan
  and China but fall elsewhere

35
Conclusions (continued)

• Effects of slower population growth and ageing
• In young regions ageing initially raises labour
  forces as the very young survive to working age
• Investment is attracted to young regions, in
  greatest volume to North America, India and Other
  South Asia
• Saving declines in older regions but is partially
  compensated for by higher saving in younger ones,
  particularly in Asia, and global yields decline
• GDP growth is slower but per capita income grows
  more quickly everywhere except Western Europe,
  which attracts reduced investment

36
Conclusions (continued)

• Replacement migration to regions with rising aged
  dependency
• expands investment and growth in the destination
  regions but reduces per capita real incomes
• shifts the terms of trade favourably for Europe,
  Japan and China
• Europe suffers a comparatively small per capita
  income penalty
• Relative importance of transmission mechanisms
• labour force size and composition largest
• saving rate changes substantial
• consumption mix effects are small
• investment and terms of trade changes are
  significant.

37
Additional slides for detail
38
Base line projections of total populations
39
Base line GDP prices real exchange rate changes
40
Base Line GDP Trends
41
Investment risk premia,
42
Base line movement in trade balance, GDP
43
Increased aged participationEffects on GDP prices