Over the last three decades, the major industrialized countries have experienced large increases in elderly population. As fertility rates drop and the baby boom generation becomes old, these countries face a significant population aging. The aging process is expected to accelerate over the next three decades. For advanced countries as a whole, the old dependency rate the share of elderly population aged 65 and above in total population is forecasted to increase from 15% in 2005 to 26% in 2000.
East Asian economies has also experienced rapid demographic changes a decline in young age population and population aging. Japan is a well known case. Since 1995, it has become an “aged society” with the old dependency rate of 14% or higher, and is forecasted to become a “super aged society” by 2025 with the old dependency rate of over 20%. The aging process is also fast in emerging Asian economies. The ‘four Asian tigers’ Hong Kong, South Korea, Singapore and Taiwan-are expected to turn into a “super-aged society” by 2025.
The purpose of this paper is to empirically investigate the implications of demographic changes in East Asia, in particular, focusing on saving rates and current account balances. In theory, the fast-aging population and the shrinking labor force will have a significant impact on national saving and investment. The current account is, by definition, identical to the imbalance between national saving and domestic investment. Therefore, a saving investment imbalance in an individual country determines its current account balance and net capital flow. It is an important question if the demographic change has a significant impact on current account balances or net capital flows in East Asia.
In recent years, enlarging global current account imbalances have been one of the major concerns in the international community. The global imbalances are characterized by continued accumulation of current account surpluses in East Asia mirrored by sustained current account deficits in the United States. The East Asian current account surplus reflects their saving-investment imbalances due to ‘savings glut’ or ‘investment drought.’ Eichengreen (2005) suggests that as a result of population aging, East Asia will have lower saving rates and thereby reduce the imbalances. Despite this conjecture, not many studies attempt to empirically assess the effects of demographic changes on saving rates and current account balances in East Asia.
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Demographic Changes, Saving, and Current Account in East Asia
