Population Aging in the Interdependent Global Economy

Since the latter half of 1990s, a possibility has been suggested that many developing countries are going to face serious population aging problem while these economies are still underdeveloped and their preparations are insufficient. As the global interdependence of national economies has been deepened, a socio-economic problem in one country comes to have significant influence on the other economies and its effect might easily spillover around the world. Thus, we need the analyses which examines fiscal consolidation or social security reforms as national measures, as well as the analyses from the international point of view which fully considers interrelationships between open economies. This study presents a basic analysis on international cooperative framework which may offset negative effects of population aging and make it possible to enjoy benefits from the so-called "population bonus" that would exist in the developing economies with plenty of working population relative to the volume of dependents. Using a prototype Overlapping Generations (OLG) model with an artificial data set, which includes three regions that are different in demographic structure (at the initial period, one has plenty of youths as dependents, another has plenty of working population relative to youths and seniors, and the last has plenty of seniors as dependents), we perform simulations to examine effects of the following three types of policy measure on the patterns of international trade, capital flows, savings and economic growth: (1) domestic pension reform in every region; (2) foreign aid from the region with already aged population to the other regions, one is at the initial stage of yielding population bonus and the other has just plenty of young dependents; and (3) economic partnership program between regions at different phase of the aging process. The simulation results revealed that, as previous works suggested, international capital movements between regions at different stage may play significant role to moderate the negative impact of population aging due to the imbalances among the growth rates of labor input, capital stock, and productivity. When a developing region may not attract enough capital inflow because of the absence of well-developed capital market institution, foreign aid as a flow of public capital would be the substitute. Since there might be the best balance among the growth rates of three production factors (labor, capital and productivity) from the view point of both economic growth and welfare, there also is the best proportion of the foreign aid between the one invested to the project to build social infrastructure, which may expand productivity through accumulations of human capital, and the one to build economic infrastructure, which may expand (public) capital stock. In addition, removing distortions in international trade, such as tariff and non-tariff barriers, would promote international adjustment in resource and fund allocations.