One of the most discussed themes in economics is “global imbalances”. The West is accused of consuming too much, the East of saving too much. The result is current account surpluses in countries such as China, mirrored by deficits in the US. Bringing down this imbalance, say economists, is one of the main tasks today.
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The latest Goldman Sachs economics paper argues that demographics have a role to play in these current account imbalances. Wilson and Ahmed point to the life cycle hypothesis of consumer spending, which argues that savings patterns change at different points in a person’s life. Youngsters spend and invest in skills, those in the prime saving years (roughly 35-69 years) save more than they spend, while older people run down their savings. The authors argue that if the proportion of prime savers is higher, that will mean a higher level of savings, which will be lent to countries that have a lower proportion of prime savers. The authors write, “the share of DM (developed market) ‘prime savers’ rose faster than the share of EM (emerging market) ‘prime savers’ between 1950 and 1990, the period of DM surpluses. But over the last 20 years it has begun to reverse and the process has accelerated. Relative to the stability of the 1950-1990 period, the sharp shifts in the relative proportion of those of ‘prime saving’ age in EM is dramatic.” That shift in the last 20 years accounts for the “imbalances”.
Why does the proportion of prime savers impact the current account? Because the current account and the capital flows needed to finance it are nothing, but the difference between a country’s savings and investment. So a higher proportion of “prime savers”, or a tendency to save more, will mean a current account surplus and a flow of capital to other countries. Similarly, a falling proportion of prime savers will lead to current account deficits. Of course, demographics is not the only influence on the current account and the paper argues that the current imbalances are more than that warranted by their demographic model and need to be brought down further.
It is the rise in the prime-age savers globally that has led to what has been called a “savings glut” and has exerted downward pressure on interest rates in the last 20 years. What about the future? The authors say that “the share of ‘prime savers’ peaks much earlier in DM (around 2016) than in EM (around 2032)”. That would mean current account surpluses in emerging markets and deficits in the developed economies for a long time to come. India is supposed to move into surplus over time, a surplus that is predicted to remain until 2050. Also, with the continued rise in the proportion of “prime savers” globally, the worldwide savings glut is likely to become even larger, leading to lower real interest rates globally. This also means that the flows of emerging market surpluses to fund developed country deficits will continue.
Of course, since the countries in the developed world will see their current account positions deteriorate, there will be upward pressure on real interest rates relative to the emerging market countries that see an improvement in their current account positions. Therefore, “while demographic forces may work to keep real interest rates low across the world, our projections imply that, on average, this downward pressure may be larger in EM”. An offsetting factor would be a deepening of capital markets in emerging markets that may reduce some of the excessive pressure to “export” savings to the developed world.
In short, the global “imbalances” are, at bottom, the result of demographics and are here to stay.
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