Population Aging in the Interdependent Global Economy: A Computational Approach with an Overlapping Generations Model of Global Trade

Since the latter half of 1990s, it has been discussed that many developing countries are going to face serious population aging problem while these economies are still underdeveloped and not adequately prepared against aging yet in terms of institutional reform such as social security. As the global interdependence of national economies has been deepened, a socio-economic problem in one country comes to have significant influences on many other economies and its effect might spillover around the world. The main objectives of our study are to analyze: (1) patterns of interregional spillovers of demographic change; (2) effects of pension reforms in one country on the other countries; and (3) role of foreign aid to the developing region where fund for investment is insufficient compared to their labor supply because of the immature capital market, with special emphasis on trade and capital flows among regions. This study presents a basic analysis on interregional cooperative framework which may offset negative effects of population aging and make it possible to take advantage of the so-called "population dividends" that are derived from the population structure with a large size of working population relative to the number of dependent population. A country under faster aging process would become a capital exporter to other countries at relatively moderate aging stage. As capital export would undermine assets over the long run, it would be possible for the faster aging country to eventually become a capital importer. Using a numerical Overlapping Generations (OLG) model that includes five regions with different demographic structure (high-income countries, Japan, mainland China, other Asia, and other low-income countries), we conduct simulation analysis to examine effects of (a) pension reforms, such as increase of contribution rate, decrease of replacement rate, and raising of pension age, respectively implemented in high-income countries and/or Japan; (b) foreign aid from high-income countries and/or Japan to other Asia and/or low-income countries; and (c) complementary trade-related measures such as Free Trade Agreement (FTA) in Asian region, on the patterns of interregional trade, capital flows, regional savings and economic growth. The simulation results revealed that, as previous works suggested, interregional capital movements between regions may play a significant role to moderate the impact of population aging and pension reforms. When contribution rate is increased in a pay-as-you-go pension system, its effect becomes just like the case of a tax increase. Savings may decrease so that the capital accumulation slows down, and consumption also may shrink. Relatively higher interest rate because of the scarce capital stock may induce foreign capital inflows and relax the decrease of consumption through growth effects. Finally, removing distortions induced by trade barriers would promote interregional adjustment in resource and capital allocations.