Ageing and Export Dependency on the Agenda

I know that I tend to harp quite a bit about this theme, but I also trust that my readers by now will be well be used to it. One of the main interesting things about the notion that ageing might be related to export dependency is that while it enjoys little, if any, support in the academic literature it seems to have gotten an increasingly amount of momentum in the context of the market discourse. But then again, perhaps this is not so odd after all in the sense that markets, analysts, and commentators would tend to pick up narratives and ideas quite a bit before they get assimilated into the sometimes arcane world of academia, especially in relation to economics and finance.

In any event, it is with an increasing regularity that we can now observe analysts and commentators alike invoke the idea that for example Germany and Japan are indeed dependent on exports to grow.

Personally and in the context of a more wonkish perspective of why we should expect ageing and export dependency to be related, I have tried to speed the process on the academic side of the fence through two attempts here at Alpha.Sources to explain how this might be seen. The first was a very wonkish piece taken, to some extent, from my upcoming master's thesis and the second was a bit less difficult, I hope, and dealt with the specific case of Germany. To cap it off, I have even written a paper on the topic and I am presenting it this Wednesday in Barcelona; here is the abstract.

The primary manifestation of the demographic transition in a modern economic context is through ageing and the primary transmission from ageing to the macro economy is through its effect on saving and investment behavior. These two effects taken together suggest a strong impact from the continuing process of ageing on international capital flows and global macroeconomic imbalances. This paper explores the potential relationship between ageing on a macroeconomic level and the reliance, or outright dependency, on exports and foreign asset income to achieve economic growth. The paper’s argument is both theoretical and empirical. Using a standard overlapping generation framework (OLG) in an open economy context this paper discusses whether the proposed relationship between a transition into old age and dissaving is feasible and desirable (or even optimal?). Finally, an empirical analysis is presented on Germany and Japan to show how these two economies, as the oldest in the world, may exactly be in a state of export dependency.

It is still rough around the edges, but readable I hope. Comments, critique, and suggestions are welcome.

More generally, I was also happy and honoured to read the recent monthly newsletter from the London based investment company Absolute Returns which included a thorough and fine review of my ideas and thoughts on the topic of how ageing affects capital flows. In fact, the author Niels C. Jensen elaborates in some detail on the obvious and relevant question surrounding the fact that while we may all become de-facto dependent on exports as a function of old age, we cannot all export at the same time. Niels rolls out a fine and thorough argument, but especially; I took note of the following in relation to Japan (my emphasis);

No other country is aging as quickly as Japan. Saddled with a large number of old age pensioners already (the dependency ratio is currently 35), the ratio will grow to an astonishing 76 over the next four decades. The Japanese economy has struggled to drag itself out of a slow growth environment for the past twenty years (give or take). The problems in Japan are well publicised and are often blamed on failed policy measures. I just wonder how big a role demographics have actually played in all of this and whether the Japanese mire is a sign of things to come for the rest of us?

I would never be so stupid to argue that policies, culture, as well as institutions don't matter. They obviously do and are a big part of the picture. However, I also believe that when we come to look at the case of e.g. Japan the demographics, defined by an ongoing and relentless process of ageing, tend to crowd out these other factors. This is especially the case when taken so far as it has been in Japan. But then you only need to realize that Niels is right here. Japan is essentially but one step ahead of the rest of the OECD (with a few exceptions), and it is worthwhile to think long and hard about what this means. I am not being a fatalist here, but simply trying to point in the direction of where the real issue is buried since I also believe, without I hope sounding to alarmist, that the stakes are quite high here, not least in the context of policy advice and guidance to the large batch of emerging economies who are destined to follow the same demographic transition as Japan, Germany et al. if we don't arrive at narrating the issue in a proper way.

Ok, I shall leave it here. Needless to say, that for those of you who are mainly concerned with a P/L (be it yours personally or your clients') I believe the discussion has relevance too since ultimately ageing is first and foremost transmitted through the flow of factors of which capital flows is, by far, the most important [1]. For that reason alone, Niels' piece is worth more than a brief look.


[1] - Migration holds huge potential here, but labour mobility across borders is a whole different ball game than capital.