Kim, S., and Lee, J-W., (2007), “Demographic changes, saving and current account in East Asia”, Asian Economic Papers, 6(2),
The growing elderly population is beginning to exert pressure on the East Asian economies’ national savings and investments. Three decades ago, major industrialized countries have begun to grapple with the similar problem. With increasing drop in fertility rates, more East Asian economies such as Japan, Hong Kong, South Korea, Singapore and Taiwan are expected to turn into “super-aged societies” by 2025.
The purpose of this paper is to investigate empirically the implications of demographic changes in East Asia on savings rate and current account balances. The aging population in East Asia will exacerbate the current global current account imbalances attributed by the accumulation of current account surpluses in East Asia and sustained current account deficits in the United States.
A panel Vector Auto Regressive (VAR) model is used in this paper to address the gaps in existing literature on the macroeconomic effects of demographic changes. The VAR model is data oriented and is able to capture the dynamic nature of the macroeconomic effects to analyse the transmission and consequence of demographic changes.
The paper provides detailed trend of demographic changes and the current accounts in the world, reviews the previous empirical evidence between demographic changes with savings and current account. A panel of annual data of 10 East Asian countries from 1981-2003 are used. The countries include Hong Kong, Taiwan, South Korea, Singapore, Malaysia, Indonesia, the Philippines, Japan, China and Thailand.
The results showed that an increase in dependency rate has strong association with saving decline and current account deterioration. However, the magnitude of the future impact depends on the ability of the individual economies in to resolve the demographic changes problem through increase in private savings, pension reforms, a migration on more productive countries and extension of retirement age. Like the advanced countries, East Asia will ultimately have to tackle issues related to pension reform and the provision of long term health care services.
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