Demography, credit and institutions: A global perspective

This paper examines the role of age structure and its interaction with various capital market imperfections in driving international capital �ows in an empirical framework. Using panel data covering the period 1970 to 2000 for up to 115 countries, results indicate the existence of a di¤erentiated e¤ect in the relationship between age structure and international capital flows. Good institutions allow for a differentiated impact of age structure on saving and investment, opening the scope for an impact of age structure in driving international capital flows. In contrast, bad institutions result in no e¤ect of age structure on international capital flows. Despite increased credit availability contributing to reduced aggregate saving, this will nevertheless magnify the role of the population age structure in driving international capital flows. Over the past three decades, age structure changes are estimated to have contributed to improve the current account position by five percent of GDP in more advanced aging countries. However, around the year 2020, population age structure changes are projected to deteriorate the current account position in the latter countries which will experience a drop in saving. In other regions, the faster the current aging process, the sharper the projected improvement in the current account position. This improvement is projected to reverse itself, at a later stage in time in regions with a slower aging process. Also, our results suggest that in order to take advantage of their younger population in the form of increased foreign capital in�ows, countries that are less advanced in the demographic transition would need to improve the quality of their institutional arrangements before the "window of opportunity" closes.