Applying Generational Accounting to Developing Countries

Generational accounting is neoclassical economics' prescription for doing long-term fiscal planning and analysis. Unlike the short-term, cash-flow budgeting that characterizes fiscal policy-making throughout the developed and developing world, generational accounting considers the entire future time-paths of fiscal variables. In particular, it calculates how much current and future generations will have to pay, in present value, to cover the government's current and future spending, also valued in the present. In so doing, generational accounting allows policy makers to determine whether future generations will have to shoulder a larger fiscal burden than current generations, i.e., whether current policies are sustainable. Generational accounting also provides policy makers with a means of identifying those fiscal policy changes whose implementation would promote generational equity. Generational accounting is being applied to a number of developed economies. This paper describes the results from applying generational accounting to a developing economy, namely Thailand. The paper begins by describing the method of generational accounting, contrasting fiscal assessments flowing from generational accounting with those based on official budget deficits. Next, it places generational accounting in a general equilibrium context, indicating a) the relationship between changes in generational accounts and changes in generations' levels of utility and b) how changes in the fiscal treatment of different generations affect an economy's saving, investment, and growth, when the economy is closed, and its balance of payments, when the economy is open. The paper then considers, in general terms, why the generational accounts of developing countries may differ from those of developed countries. This discussion focuses on the special demographic and economic circumstances facing particular LDCs, including extraordinarily high rates of population or productivity growth, very young population age-structures, and highly elastic foreign capital flows. It also shows how particular policies being considered by LDCs, such as expanding pay-as-you-go social security or privatizing social security, can be evaluated using generational accounting and how these evaluations are likely to be affected by the special demographic and growth circumstances of LDCs. Many of the points made in this discussion are next illustrated by showing how U.S. generational accounts would differ were the U.S. facing the kinds of demographic and productivity changes now underway in many developing countries. The paper's final section turns to the case of Thailand. It begins by laying out some basic demographic, economic, and fiscal facts about Thailand as well as discussing Thailand's proposed reform of social insurance. Next it describes the data used to produce Thai generational accounts. It then presents these accounts, compares them with those of the U.S. and uses them to evaluate the sustainability of current Thai policy as well as Thailand's proposed social security reform.