Asymmetric Demographic Transitions and North-South Capital Flows

Abstract

This paper studies demographic differences between lower-income, less developed countries (the “South”) and higher-income developed countries (the “North”). The specific objective is to analyze the implications of demographic asymmetries for aggregate savinginvestment imbalances, exchange rates, and the resulting net capital flows between North and South. An optimistic view of asymmetric demographic transitions among Southern and Northern economies 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. The analysis here argues that the optimistic view is a plausible summary 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, the analysis argues instead that 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 about North-South capital flows 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 cross-border goods substitutability is modest or strong.