Population aging and structural over/underinvestment

Demographic characteristics are mostly considered one of the most important structural factors influencing the equilibrium rate of investments and capital-to-output ratio. Current research does not identify structurally over/underinvested countries reflecting future population aging the countries face up in near decades. Using the implied equilibrium approach, the article analyzes structurally over/underinvested economies in the panel of 154 countries from 2005 to 2017. It verifies whether structural over/underinvestment is related to the expected aging of the population represented by the United Nations’ prediction of the old dependency ratio. The results show that the predicted future old-age dependency ratio determines the rate of capital accumulation. It also indicates that identified extent of overinvestment is distinctly larger than the extent of underinvestment and that the frequency of over/underinvested countries declines with a longer horizon of demographic prediction. A set of long-term and medium-term structurally over/underinvested countries is identified that might help the economic policymakers adopt adequate measures to make the capital optimally used. The robustness checks confirm that the estimations are not significantly influenced by potential endogeneity, choice of alternative demographic variables representing population aging, and alternative country’s institutional quality characteristics.