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Trade surpluses and life-cycle saving behaviour
Economics Letters 65 (1999) 227–237 www.elsevier.com / locate / econbase
Trade surpluses and life-cycle saving behaviour Tryggvi Thor Herbertsson a , Gylfi Zoega b a
b
Institute of Economic Studies, University of Iceland, Odda v /Sturlugotu, IS-101 Reykjavik, Iceland Department of Economics, Birkbeck College, University of London, 7 -15 Gresse Street, London W1 P 2 LL, UK Received 3 September 1998; accepted 12 May 1999
Abstract The national-income account identity and the life-cycle theory of consumption together imply that the current account should be a function of the age structure. A country with a high proportion of young and retired should have current account deficits. Using a panel of 84 countries, we find empirical support for this hypothesis. 1999 Elsevier Science S.A. All rights reserved. Keywords: Life-cycle saving; Age structure; Current accounts; Twin-deficit JEL classification: F41; F32
1. Introduction Persistent current-account imbalances are often a focus of attention. Persistent deficits — as witnessed in Latin America — often tend to be viewed as signs of economic mismanagement and surpluses — such as those of Japan — a sign of protectionist policies. For any macroeconomist, however, the starting point in this debate is the national-income-account identity which finds the sources of current-account deficits to be either private or public dissaving. This is the basis of the ‘twin-deficit’ theory which was popularised as an explanation of current-account deficits in the US in the 1980s (Cf. Clarida, 1989).1 The objective of this note is to look at net private saving as a determinant of current-account deficits and to show how demographic effects may be of paramount importance. In particular, we test
*Corresponding author. Tel.: 1354-525-4535: fax: 1354-552-6806. E-mail addresses: [email protected] (T.T. Herbertsson), [email protected] (G. Zoega) 1 There is some empirical support for this hypothesis: for example, the simple correlation between the current-account deficit and the budget deficit in the OECD for 1970–1989 is 0.38. 0165-1765 / 99 / $ – see front matter PII: S0165-1765( 99 )00148-2
1999 Elsevier Science S.A. All rights reserved.
T.T. Herbertsson, G. Zoega / Economics Letters 65 (1999) 227 – 237
228
the implications of Modigliani’s life-cycle hypothesis for the behaviour of the current account using data for 84 countries for the period 1960 to 1990. The idea is simple: taken together the life-cycle hypothesis and the national account identity imply, ceteris paribus, that a nation largely at work should have current-account surpluses while another with proportionately more young and old people should have deficits. The former is saving for retirement while the latter is running down past and future savings.2 Of course, other things may not be equal. Working-age consumers may demand more public services, vote for lower taxes or initiate massive private investment spending. But to the extent that their saving behaviour dominates other differences with the young and the old, the current-account implications are clear: the ‘South-east Asian Tigers’ may be saving for retirement instead of being super-competitive, as may be the Japanese.3 The US population may simply have been too young in the 1980s to save instead of being spendthrift and short-sighted.
2. Some regression results We have data on the proportion of the population between the age of 15 and 64, Lw , the current-account surplus as a fraction of GDP, CA, and the general government budget surplus. The demographic structure might also affect the budget surplus through its effect on public spending, G, and taxes, T — both measured as ratios to GDP. Our hypothesis is summarised in Eq. (1): CA 5 [S(Lw ) 2 I] 1 [T(Lw ) 2 G(Lw )]
(1)
where I is investment, S9 . 0, T 9 , 0, and G9 , 0. We hypothesize that per-capita income taxes and public spending on health care and education are decreasing in the fraction of the population at work. We use an unbalanced panel of 84 countries in our estimation compiled from the World Data Bank and the Penn World Tables. The data cover the period 1960 to 1990 and comprise up to six units of 5-year averages for the variables in question. We initially estimate, using least-squares, the following simple equation to see if there is any reason to expect demographics to play a big role in the determination of current-account surpluses.4 CA 5
2
2 0.27 (25.4)
1
0.39Lw (4.7)
(2)
Our focus on the national-income identity as a key to explaining current-account surpluses should not be taken as blind acceptance of the Mundell–McKinnon view on the irrelevance of real-exchange rate movements. For a survey of different explanations for current-account imbalances, see Knight and Scacciavillani (1998). 3 This point is partly supported by Young (1995) and Krugman (1996: chapter 11), both of whom claim that the extraordinary growth experience of the South-east Asian Tigers was due to a rapid accumulation of inputs but not ‘competitiveness’. For example, the saving rate was as high as 47% of GDP in Singapore in the 1985–92 period. 4 All ratios are written in decimals. Numbers in parentheses below coefficients are t-values.
T.T. Herbertsson, G. Zoega / Economics Letters 65 (1999) 227 – 237
229
The working-age population variable has a significant and a positive coefficient which lends support to our hypothesis.5 The equation explains 10% of the variation in the sample (as measured by the R 2 value).6 Our point estimates suggest that a 10% rise in the share of the population at working age will lead to a 4% improvement in the current account, ceteris paribus. A rise of that magnitude was experienced by the four ‘Asian Tigers’ from the early 1960s to the late 1980s. We now look at the direct effect through private saving as distinguished from that working through the government budget surplus: CA 5
2 0.19 (24.3)
1
0.29Lw (6.4)
1 0.56(T 2 G) (4.0)
(3)
Here Lw and the government budget surplus variable explain 31% of the variation in the currentaccount variable.7 The coefficient of Lw falls from 0.39 to 0.29 which implies that 1 / 4 of the effect of our demographic variable works through the public budget and 3 / 4 through private saving. We note that the budget surplus has a coefficient which is significantly below unity. This may imply that budget surpluses affect private saving and investment through interest rates. Alternatively, Ricardian Equivalence would suggest that changes in the budget surplus caused by tax changes affect private consumption and saving such that the effect on the current account is neutralised. However, Eq. (3) implies that this latter possibility can at most only be partially valid.
3. A more descriptive account We now look at the data from a different perspective. We calculate the simple correlation between the share of the population in each of 11 age groups and private saving as a proportion of GDP and plot these correlations in Fig. 1. An interesting pattern emerges. The correlation is strong and negative for the youngest cohort and then rises monotonically until the age group 35–39. It then declines monotonically. This is exactly what the life-cycle theory would suggest. The only surprising observation is the positive correlation for the oldest group. These results are consistent with studies of
5
It is possible that poor countries have a smaller proportion of working-age population because of the large size of the youngest group. This would apply if they had not gone through a demographic transition. To test this hypothesis we regressed the share of the population below working-age (Ly ), on the log of GDP, Y: Ly 5
0.95 (32.6)
2
0.076Y (221.4)
As can be seen from the regression, the poorer the country, the larger the fraction of population below working-age — income explains 54% of the variation in Ly . A vicious cycle of low income, young population and low savings may arise. 6 We also ran the regression using the random-effects estimator (not reported). The results were insignificantly different from those reported. 7 We also used the random-effects and the fixed-effects estimators here. The results were insignificantly different from those reported.
230
T.T. Herbertsson, G. Zoega / Economics Letters 65 (1999) 227 – 237
Fig. 1. Correlation between the age structure and private savings.
the consumption and saving of the elderly which find that they do not dissave as much as the life-cycle model predicts, cf. Ando and Kennickell (1986) and Hurd (1990).8 We next turn to public saving and calculate the analogous correlations shown in Fig. 2. Again, we
Fig. 2. Correlation between the age structure and the budget surplus.
8
Cross-country studies that have found correlations between saving rates and the demographic structure, hence the life-cycle hypothesis, include Leff (1969), Modigliani (1970), Modigliani and Sterling (1983), Graham (1987), Masson and Tryoin (1990), and Masson et al. (1996). For a micro-level study of household saving behaviour see Poterba (1994).
T.T. Herbertsson, G. Zoega / Economics Letters 65 (1999) 227 – 237
231
find a similar pattern: the correlations first rise monotonically and peak at 30–34 and then fall monotonically. But now the correlation becomes negative for the oldest groups which has workers over the age of 50. Fig. 3 shows us the analogous correlations for taxes and government spending, both as a proportion of GDP. We see that the correlations are initially declining in age up to around 50 years and then rising. So when the population has a large proportion of very young or old people, taxes and spending tend to be high. If prime-age workers are a large fraction of the population, both spending and taxes are lower. However, as Fig. 2 reveals, spending falls by more than taxes creating increased surpluses. Finally we calculate the correlation between the population age structure and the current-account surplus. This is shown in Fig. 4. On the basis of the first two figures, we expect a similar pattern for the current account. This turns out to be the case. The higher the proportion of the population in the youngest category — under 15 years of age — the larger is the current-account deficit. We conclude that there is substantial empirical evidence for a strong, robust effect of the age-structure on the pattern of trade imbalances. But could this be the explanation for some key stylised facts? • The United States had persistent current-account deficits in the 1980s and Germany and Japan persistent surpluses. These remained even after the Plaza accord of 1985.9 • The East-Asian Tigers have had current-account surpluses going back to the mid-1980s. This applies to Korea, Singapore, Hong Kong, and Thailand. Hong Kong also had surpluses in the 1970s.10
Fig. 3. Correlation between the age structure, taxes, and government consumption.
9
For an attempt to explain this phenomenon, see Krugman and Baldwin (1987). We do not have current-account data for Taiwan, but its surpluses have been widely documented.
10
232
T.T. Herbertsson, G. Zoega / Economics Letters 65 (1999) 227 – 237
Fig. 4. Correlation between the age structure and the current account surplus.
• Many African countries have had persistent current-account deficits. These deficits were especially serious in, amongst others, Guinea-Bissau: 46% of GDP on average in the period 1980–84. • Many countries in Latin America also had serious current-account deficits in the 1980s: these amounted to 4% of GDP on average in the period 1980–84 in Argentina and Brazil, 8.5% in Bolivia in 1985–90 and 9.5% in Chile in the same period. The most serious deficit was that of Guyana: 28% of GDP. We address each of the four observations in light of our hypothesis. Starting with the United States versus Germany and Japan, Fig. 5 has the relative size of the working-age population in the three
Fig. 5. Share of the working-age population in Japan, the US, and West-Germany.
T.T. Herbertsson, G. Zoega / Economics Letters 65 (1999) 227 – 237
233
countries. This is defined as the group between the ages of 15 and 64. We see that Germany had the smallest share in the 1980s and Japan the largest. Given our estimates in Eq. (2), the average differences in the size of the working-age population in the 1980s between the US and Germany would suggest a difference in the current-account surplus of 0.69% in favor of the US, and the corresponding number for Japan would suggest a difference of 1.18% in favour of Japan. While Japan’s surplus was 3.73% higher than that of the US, the German surplus was actually 2.61% higher. Thus Fig. 5 helps explain the US–Japan imbalance but not the US–German one. Fig. 5 masks differences in the age structure of the working-age population. If the German and the Japanese working-age populations were closer to retirement, we would expect this to be a contributing factor. The histogram in Fig. 6 confirms our suspicion: those of working-age are younger in the US. In Germany and Japan there is a spike in the population structure for middle-age workers. We conclude that differences in the demographic composition of the three populations could potentially account for the observed trade imbalances. However, it should be pointed out that the likely cause of the rise in the current-account deficit in the early 1980s in the US is the creation of large budget deficits — private saving did not fall and private investment did not increase at that time.11 We now turn to the three remaining stylized facts. Fig. 7 shows the average share of the working-age population in the 1980s in the OECD, Africa, and in Latin America and the Caribbean. The share of the working-age population is much larger in the OECD than in Latin America and Africa. This is again consistent with our hypothesis. Since relatively more people are working in the OECD, these countries should in the aggregate have larger trade surpluses than the two less developed areas. In Fig. 8 we compare the OECD to the South-east Asian countries: Hong Kong, Singapore, South-Korea, and Thailand. Interestingly, the share of the working-age population in the South-east
Fig. 6. The structure of the working-age population in Japan, the US and West-Germany.
11
However, this does not apply to the latter part of the 1980s when the trade deficit could be traced to lower private saving in the face of falling budget deficits.
234
T.T. Herbertsson, G. Zoega / Economics Letters 65 (1999) 227 – 237
Fig. 7. Share of the working-age population in the OECD, Africa, and Latin America.
Asian economies surpassed that in the OECD in the mid-1970s. This shift precedes the emergence of a trade surplus in the case of the former. It remains to be seen how the structure of the working-age populations differed between the four areas. Fig. 9 compares the OECD countries with the Asian ones. It shows that in the 1980s, the latter had a higher proportion of young workers and a smaller proportion of the older ones — especially
Fig. 8. Share of the working-age population in the OECD and in South-east Asia.
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235
Fig. 9. The structure of the working-age population in the OECD and South-east Asia.
workers over 55. Again, this suggests that the Asian countries should have had a trade surplus in the 1980s. Finally, Fig. 10 shows the structure of the working-age population in the OECD, Africa, and Latin America and the Caribbean in the 1980s. It shows that the two developing areas had relatively fewer working-age persons over the age of 25.
Fig. 10. Structure of the working-age population in the OECD, Africa, and Latin-America.
236
T.T. Herbertsson, G. Zoega / Economics Letters 65 (1999) 227 – 237
4. Conclusions Theory predicts that economies populated by largely working-age individuals should be saving compared to those with a higher ratio of young and retired individuals. The saving can be used to finance domestic investment or they can be invested abroad. To the extent that the saving takes the latter form, current-account surpluses arise. Hence, the existence of current-account imbalances should partly reflect demographic differences across countries. We have found some empirical evidence in this direction. To the extent that current-account imbalances, both surpluses and deficits, can be traced to demographic factors, it is clear that no corrective macroeconomic or trade-policy measures are called for. Their existence is a reflection of well-functioning capital markets and optimising behaviour on the part of consumers. We hope that this note has drawn attention to this important fact. References Ando, A., Kennickell, A., 1986. How much (or little) life cycle saving is there in micro data. In: Dornbusch, R., Fischer, S., Bossons, J. (Eds.), Macroeconomics and Finance: Essays in Honor of Franco Modigliani, MIT Press, Cambridge, MA. Clarida, R.H., 1989. On the US Trade Deficit, Protectionism, and Policy Coordination. Paper prepared for the Columbia University Conference on US Trade Policy, September. Graham, J.W., 1987. International differences in savings rates and the life cycle hypothesis. European Economic Review 31, 1509–1529. Hurd, M., 1990. Research on the elderly: economic status, retirement, and consumption and saving. Journal of Economic Literature 28, 565–589. Knight, M., Scacciavillani, F., 1998. Current Accounts: What is Their Relevance For Economic Policymaking, IMF, Working Paper No. 98 / 71, May. Krugman, P., Baldwin, R., 1987. The Persistence of the US Trade Deficit. In: Brooking Papers On Economic Activity, No. 1. Krugman, P., 1996. Pop Internationalism, MIT Press, Cambridge. Leff, N.H., 1969. Dependency rates and saving rates. American Economic Review 59 (5), 886–896. Masson, P., Bayoumi, T., Samiei, H., 1996. International Evidence On the Determinants of Private Saving, CEPR, Discussion Paper No. 1368. Masson, P.R., Tryoin, R.W., 1990. Macroeconomic effects of projected population aging in industrial countries. IMF Staff Papers 37, 453–485. McKinnon, R.I., Ohno, K., 1986. Getting the exchange rate right: insular versus open economies. In: Paper presented at the Meeting of the AEA, December 1986. Modigliani, F., 1970. The life cycle hypothesis of saving and intercountry differences in the saving ratio. In: Eltis, W.A., Scott, M.F., Wolfe, J.N. (Eds.), Induction, Growth, and Trade, Clarendon Press, Oxford, pp. 197–225. Modigliani, F., 1975. The life-cycle hypothesis of saving twenty years later. In: Parkin, M. (Ed.), Contemporary Issues in Economics, Manchester University Press. Modigliani, F., 1984. Measuring the Contribution of Intergenerational Transfers To Total Wealth, Conceptual Issues and Empirical Findings, Mimeo. Modigliani, F., 1988. The role of intergenerational transfers and life-cycle saving in the accumulation of wealth. Journal of Economic Perspectives 2, 15–40. Modigliani, F., Sterling, A., 1983. Determinants of private saving with special reference to the role of social security-crosscountry tests. In: Modigliani, F., Hemming, R. (Eds.), The Determinants of National Saving and Wealth, St. Martin’s Press, New York. Mundell, R.A., 1987. A new deal on exchange rates. In: Paper presented at Japan–United States Symposium On Exchange Rates and Macroeconomics (Tokyo, Japan, January 29–30, 1987). Poterba, J., 1994. International Comparisons of Household Saving, Chicago University Press, Chicago. Young, A., 1995. The tyranny of numbers: confronting the statistical realities of the East Asian growth experience. Quarterly Journal of Economics 3, 641–680.
T.T. Herbertsson, G. Zoega / Economics Letters 65 (1999) 227 – 237
Further reading McKinnon and Kenichi, 1986 Modigliani, 1975 Modigliani, 1984 Modigliani, 1988 Mundell, 1987
237
Trade surpluses and life-cycle saving behaviour Tryggvi Thor Herbertsson a , Gylfi Zoega b a
b
Institute of Economic Studies, University of Iceland, Odda v /Sturlugotu, IS-101 Reykjavik, Iceland Department of Economics, Birkbeck College, University of London, 7 -15 Gresse Street, London W1 P 2 LL, UK Received 3 September 1998; accepted 12 May 1999
Abstract The national-income account identity and the life-cycle theory of consumption together imply that the current account should be a function of the age structure. A country with a high proportion of young and retired should have current account deficits. Using a panel of 84 countries, we find empirical support for this hypothesis. 1999 Elsevier Science S.A. All rights reserved. Keywords: Life-cycle saving; Age structure; Current accounts; Twin-deficit JEL classification: F41; F32
1. Introduction Persistent current-account imbalances are often a focus of attention. Persistent deficits — as witnessed in Latin America — often tend to be viewed as signs of economic mismanagement and surpluses — such as those of Japan — a sign of protectionist policies. For any macroeconomist, however, the starting point in this debate is the national-income-account identity which finds the sources of current-account deficits to be either private or public dissaving. This is the basis of the ‘twin-deficit’ theory which was popularised as an explanation of current-account deficits in the US in the 1980s (Cf. Clarida, 1989).1 The objective of this note is to look at net private saving as a determinant of current-account deficits and to show how demographic effects may be of paramount importance. In particular, we test
*Corresponding author. Tel.: 1354-525-4535: fax: 1354-552-6806. E-mail addresses: [email protected] (T.T. Herbertsson), [email protected] (G. Zoega) 1 There is some empirical support for this hypothesis: for example, the simple correlation between the current-account deficit and the budget deficit in the OECD for 1970–1989 is 0.38. 0165-1765 / 99 / $ – see front matter PII: S0165-1765( 99 )00148-2
1999 Elsevier Science S.A. All rights reserved.
T.T. Herbertsson, G. Zoega / Economics Letters 65 (1999) 227 – 237
228
the implications of Modigliani’s life-cycle hypothesis for the behaviour of the current account using data for 84 countries for the period 1960 to 1990. The idea is simple: taken together the life-cycle hypothesis and the national account identity imply, ceteris paribus, that a nation largely at work should have current-account surpluses while another with proportionately more young and old people should have deficits. The former is saving for retirement while the latter is running down past and future savings.2 Of course, other things may not be equal. Working-age consumers may demand more public services, vote for lower taxes or initiate massive private investment spending. But to the extent that their saving behaviour dominates other differences with the young and the old, the current-account implications are clear: the ‘South-east Asian Tigers’ may be saving for retirement instead of being super-competitive, as may be the Japanese.3 The US population may simply have been too young in the 1980s to save instead of being spendthrift and short-sighted.
2. Some regression results We have data on the proportion of the population between the age of 15 and 64, Lw , the current-account surplus as a fraction of GDP, CA, and the general government budget surplus. The demographic structure might also affect the budget surplus through its effect on public spending, G, and taxes, T — both measured as ratios to GDP. Our hypothesis is summarised in Eq. (1): CA 5 [S(Lw ) 2 I] 1 [T(Lw ) 2 G(Lw )]
(1)
where I is investment, S9 . 0, T 9 , 0, and G9 , 0. We hypothesize that per-capita income taxes and public spending on health care and education are decreasing in the fraction of the population at work. We use an unbalanced panel of 84 countries in our estimation compiled from the World Data Bank and the Penn World Tables. The data cover the period 1960 to 1990 and comprise up to six units of 5-year averages for the variables in question. We initially estimate, using least-squares, the following simple equation to see if there is any reason to expect demographics to play a big role in the determination of current-account surpluses.4 CA 5
2
2 0.27 (25.4)
1
0.39Lw (4.7)
(2)
Our focus on the national-income identity as a key to explaining current-account surpluses should not be taken as blind acceptance of the Mundell–McKinnon view on the irrelevance of real-exchange rate movements. For a survey of different explanations for current-account imbalances, see Knight and Scacciavillani (1998). 3 This point is partly supported by Young (1995) and Krugman (1996: chapter 11), both of whom claim that the extraordinary growth experience of the South-east Asian Tigers was due to a rapid accumulation of inputs but not ‘competitiveness’. For example, the saving rate was as high as 47% of GDP in Singapore in the 1985–92 period. 4 All ratios are written in decimals. Numbers in parentheses below coefficients are t-values.
T.T. Herbertsson, G. Zoega / Economics Letters 65 (1999) 227 – 237
229
The working-age population variable has a significant and a positive coefficient which lends support to our hypothesis.5 The equation explains 10% of the variation in the sample (as measured by the R 2 value).6 Our point estimates suggest that a 10% rise in the share of the population at working age will lead to a 4% improvement in the current account, ceteris paribus. A rise of that magnitude was experienced by the four ‘Asian Tigers’ from the early 1960s to the late 1980s. We now look at the direct effect through private saving as distinguished from that working through the government budget surplus: CA 5
2 0.19 (24.3)
1
0.29Lw (6.4)
1 0.56(T 2 G) (4.0)
(3)
Here Lw and the government budget surplus variable explain 31% of the variation in the currentaccount variable.7 The coefficient of Lw falls from 0.39 to 0.29 which implies that 1 / 4 of the effect of our demographic variable works through the public budget and 3 / 4 through private saving. We note that the budget surplus has a coefficient which is significantly below unity. This may imply that budget surpluses affect private saving and investment through interest rates. Alternatively, Ricardian Equivalence would suggest that changes in the budget surplus caused by tax changes affect private consumption and saving such that the effect on the current account is neutralised. However, Eq. (3) implies that this latter possibility can at most only be partially valid.
3. A more descriptive account We now look at the data from a different perspective. We calculate the simple correlation between the share of the population in each of 11 age groups and private saving as a proportion of GDP and plot these correlations in Fig. 1. An interesting pattern emerges. The correlation is strong and negative for the youngest cohort and then rises monotonically until the age group 35–39. It then declines monotonically. This is exactly what the life-cycle theory would suggest. The only surprising observation is the positive correlation for the oldest group. These results are consistent with studies of
5
It is possible that poor countries have a smaller proportion of working-age population because of the large size of the youngest group. This would apply if they had not gone through a demographic transition. To test this hypothesis we regressed the share of the population below working-age (Ly ), on the log of GDP, Y: Ly 5
0.95 (32.6)
2
0.076Y (221.4)
As can be seen from the regression, the poorer the country, the larger the fraction of population below working-age — income explains 54% of the variation in Ly . A vicious cycle of low income, young population and low savings may arise. 6 We also ran the regression using the random-effects estimator (not reported). The results were insignificantly different from those reported. 7 We also used the random-effects and the fixed-effects estimators here. The results were insignificantly different from those reported.
230
T.T. Herbertsson, G. Zoega / Economics Letters 65 (1999) 227 – 237
Fig. 1. Correlation between the age structure and private savings.
the consumption and saving of the elderly which find that they do not dissave as much as the life-cycle model predicts, cf. Ando and Kennickell (1986) and Hurd (1990).8 We next turn to public saving and calculate the analogous correlations shown in Fig. 2. Again, we
Fig. 2. Correlation between the age structure and the budget surplus.
8
Cross-country studies that have found correlations between saving rates and the demographic structure, hence the life-cycle hypothesis, include Leff (1969), Modigliani (1970), Modigliani and Sterling (1983), Graham (1987), Masson and Tryoin (1990), and Masson et al. (1996). For a micro-level study of household saving behaviour see Poterba (1994).
T.T. Herbertsson, G. Zoega / Economics Letters 65 (1999) 227 – 237
231
find a similar pattern: the correlations first rise monotonically and peak at 30–34 and then fall monotonically. But now the correlation becomes negative for the oldest groups which has workers over the age of 50. Fig. 3 shows us the analogous correlations for taxes and government spending, both as a proportion of GDP. We see that the correlations are initially declining in age up to around 50 years and then rising. So when the population has a large proportion of very young or old people, taxes and spending tend to be high. If prime-age workers are a large fraction of the population, both spending and taxes are lower. However, as Fig. 2 reveals, spending falls by more than taxes creating increased surpluses. Finally we calculate the correlation between the population age structure and the current-account surplus. This is shown in Fig. 4. On the basis of the first two figures, we expect a similar pattern for the current account. This turns out to be the case. The higher the proportion of the population in the youngest category — under 15 years of age — the larger is the current-account deficit. We conclude that there is substantial empirical evidence for a strong, robust effect of the age-structure on the pattern of trade imbalances. But could this be the explanation for some key stylised facts? • The United States had persistent current-account deficits in the 1980s and Germany and Japan persistent surpluses. These remained even after the Plaza accord of 1985.9 • The East-Asian Tigers have had current-account surpluses going back to the mid-1980s. This applies to Korea, Singapore, Hong Kong, and Thailand. Hong Kong also had surpluses in the 1970s.10
Fig. 3. Correlation between the age structure, taxes, and government consumption.
9
For an attempt to explain this phenomenon, see Krugman and Baldwin (1987). We do not have current-account data for Taiwan, but its surpluses have been widely documented.
10
232
T.T. Herbertsson, G. Zoega / Economics Letters 65 (1999) 227 – 237
Fig. 4. Correlation between the age structure and the current account surplus.
• Many African countries have had persistent current-account deficits. These deficits were especially serious in, amongst others, Guinea-Bissau: 46% of GDP on average in the period 1980–84. • Many countries in Latin America also had serious current-account deficits in the 1980s: these amounted to 4% of GDP on average in the period 1980–84 in Argentina and Brazil, 8.5% in Bolivia in 1985–90 and 9.5% in Chile in the same period. The most serious deficit was that of Guyana: 28% of GDP. We address each of the four observations in light of our hypothesis. Starting with the United States versus Germany and Japan, Fig. 5 has the relative size of the working-age population in the three
Fig. 5. Share of the working-age population in Japan, the US, and West-Germany.
T.T. Herbertsson, G. Zoega / Economics Letters 65 (1999) 227 – 237
233
countries. This is defined as the group between the ages of 15 and 64. We see that Germany had the smallest share in the 1980s and Japan the largest. Given our estimates in Eq. (2), the average differences in the size of the working-age population in the 1980s between the US and Germany would suggest a difference in the current-account surplus of 0.69% in favor of the US, and the corresponding number for Japan would suggest a difference of 1.18% in favour of Japan. While Japan’s surplus was 3.73% higher than that of the US, the German surplus was actually 2.61% higher. Thus Fig. 5 helps explain the US–Japan imbalance but not the US–German one. Fig. 5 masks differences in the age structure of the working-age population. If the German and the Japanese working-age populations were closer to retirement, we would expect this to be a contributing factor. The histogram in Fig. 6 confirms our suspicion: those of working-age are younger in the US. In Germany and Japan there is a spike in the population structure for middle-age workers. We conclude that differences in the demographic composition of the three populations could potentially account for the observed trade imbalances. However, it should be pointed out that the likely cause of the rise in the current-account deficit in the early 1980s in the US is the creation of large budget deficits — private saving did not fall and private investment did not increase at that time.11 We now turn to the three remaining stylized facts. Fig. 7 shows the average share of the working-age population in the 1980s in the OECD, Africa, and in Latin America and the Caribbean. The share of the working-age population is much larger in the OECD than in Latin America and Africa. This is again consistent with our hypothesis. Since relatively more people are working in the OECD, these countries should in the aggregate have larger trade surpluses than the two less developed areas. In Fig. 8 we compare the OECD to the South-east Asian countries: Hong Kong, Singapore, South-Korea, and Thailand. Interestingly, the share of the working-age population in the South-east
Fig. 6. The structure of the working-age population in Japan, the US and West-Germany.
11
However, this does not apply to the latter part of the 1980s when the trade deficit could be traced to lower private saving in the face of falling budget deficits.
234
T.T. Herbertsson, G. Zoega / Economics Letters 65 (1999) 227 – 237
Fig. 7. Share of the working-age population in the OECD, Africa, and Latin America.
Asian economies surpassed that in the OECD in the mid-1970s. This shift precedes the emergence of a trade surplus in the case of the former. It remains to be seen how the structure of the working-age populations differed between the four areas. Fig. 9 compares the OECD countries with the Asian ones. It shows that in the 1980s, the latter had a higher proportion of young workers and a smaller proportion of the older ones — especially
Fig. 8. Share of the working-age population in the OECD and in South-east Asia.
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Fig. 9. The structure of the working-age population in the OECD and South-east Asia.
workers over 55. Again, this suggests that the Asian countries should have had a trade surplus in the 1980s. Finally, Fig. 10 shows the structure of the working-age population in the OECD, Africa, and Latin America and the Caribbean in the 1980s. It shows that the two developing areas had relatively fewer working-age persons over the age of 25.
Fig. 10. Structure of the working-age population in the OECD, Africa, and Latin-America.
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4. Conclusions Theory predicts that economies populated by largely working-age individuals should be saving compared to those with a higher ratio of young and retired individuals. The saving can be used to finance domestic investment or they can be invested abroad. To the extent that the saving takes the latter form, current-account surpluses arise. Hence, the existence of current-account imbalances should partly reflect demographic differences across countries. We have found some empirical evidence in this direction. To the extent that current-account imbalances, both surpluses and deficits, can be traced to demographic factors, it is clear that no corrective macroeconomic or trade-policy measures are called for. Their existence is a reflection of well-functioning capital markets and optimising behaviour on the part of consumers. We hope that this note has drawn attention to this important fact. References Ando, A., Kennickell, A., 1986. How much (or little) life cycle saving is there in micro data. In: Dornbusch, R., Fischer, S., Bossons, J. (Eds.), Macroeconomics and Finance: Essays in Honor of Franco Modigliani, MIT Press, Cambridge, MA. Clarida, R.H., 1989. On the US Trade Deficit, Protectionism, and Policy Coordination. Paper prepared for the Columbia University Conference on US Trade Policy, September. Graham, J.W., 1987. International differences in savings rates and the life cycle hypothesis. European Economic Review 31, 1509–1529. Hurd, M., 1990. Research on the elderly: economic status, retirement, and consumption and saving. Journal of Economic Literature 28, 565–589. Knight, M., Scacciavillani, F., 1998. Current Accounts: What is Their Relevance For Economic Policymaking, IMF, Working Paper No. 98 / 71, May. Krugman, P., Baldwin, R., 1987. The Persistence of the US Trade Deficit. In: Brooking Papers On Economic Activity, No. 1. Krugman, P., 1996. Pop Internationalism, MIT Press, Cambridge. Leff, N.H., 1969. Dependency rates and saving rates. American Economic Review 59 (5), 886–896. Masson, P., Bayoumi, T., Samiei, H., 1996. International Evidence On the Determinants of Private Saving, CEPR, Discussion Paper No. 1368. Masson, P.R., Tryoin, R.W., 1990. Macroeconomic effects of projected population aging in industrial countries. IMF Staff Papers 37, 453–485. McKinnon, R.I., Ohno, K., 1986. Getting the exchange rate right: insular versus open economies. In: Paper presented at the Meeting of the AEA, December 1986. Modigliani, F., 1970. The life cycle hypothesis of saving and intercountry differences in the saving ratio. In: Eltis, W.A., Scott, M.F., Wolfe, J.N. (Eds.), Induction, Growth, and Trade, Clarendon Press, Oxford, pp. 197–225. Modigliani, F., 1975. The life-cycle hypothesis of saving twenty years later. In: Parkin, M. (Ed.), Contemporary Issues in Economics, Manchester University Press. Modigliani, F., 1984. Measuring the Contribution of Intergenerational Transfers To Total Wealth, Conceptual Issues and Empirical Findings, Mimeo. Modigliani, F., 1988. The role of intergenerational transfers and life-cycle saving in the accumulation of wealth. Journal of Economic Perspectives 2, 15–40. Modigliani, F., Sterling, A., 1983. Determinants of private saving with special reference to the role of social security-crosscountry tests. In: Modigliani, F., Hemming, R. (Eds.), The Determinants of National Saving and Wealth, St. Martin’s Press, New York. Mundell, R.A., 1987. A new deal on exchange rates. In: Paper presented at Japan–United States Symposium On Exchange Rates and Macroeconomics (Tokyo, Japan, January 29–30, 1987). Poterba, J., 1994. International Comparisons of Household Saving, Chicago University Press, Chicago. Young, A., 1995. The tyranny of numbers: confronting the statistical realities of the East Asian growth experience. Quarterly Journal of Economics 3, 641–680.
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Further reading McKinnon and Kenichi, 1986 Modigliani, 1975 Modigliani, 1984 Modigliani, 1988 Mundell, 1987
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