international capital flows in the xxi century · ingenue 2 : age-linked rate of employment...

WORLD GROWTH AND INTERNATIONAL CAPITAL FLOWS IN

THE XXIst CENTURY

A prospective analysis with the INGENUE 2 modelby the INGENUE TEAM

Michel AGLIETTA and Vladimir BORGY (Cepii), Jean CHATEAU (Ocde), Michel JUILLARD (Cepremap),

Jacques LE CACHEUX, Gilles LE GARREC, Vincent TOUZÉ (Ofce)

For the Tokyo Club ConferenceThe future structure of international capital flows

Kyoto, 21-22 November 2005

CEPREMAP

OUTLINE

• The paradox of world saving in the early years of the XXIth century

• The conjecture of a world growth regime: demographic trends and technological catching-up

• The baseline scenario: the pattern of net financial flows and assets

• A faster catching-up in China and India

• How to get from here to there?

THE PARADOX OF WORLD SAVING

Countries or regions

Advanced Economies:United StatesEuro ZoneJapan

Emerging Economies:

ChinaOther AsiaLatin AmericaCeecs

Average 1990-99

-0.5-2.4+0.4+2.3

-1.9

+1.8-1.2-2.6-2.7

Average 2000-03

-0.4-3.2+0.4+2.5

+1.7

+2.0+1.8-2.0-4.3

2004

-1.3-6.0+0.7+3.7

+2.3

+4.1+2.7+1.2-4.7

Emerging market economies and Japan finance the debt-induced consumer spree in the US

(Net financial saving in % of GDP)

THE PARADOX OF WORLD SAVING

A massive misallocation of world saving unsustainable in the long run

• The so-called saving glut reveals weak productive weak productive investmentinvestment as an aftermath of the Asian and subsequent crises: breakdown in domestic demand trends, huge real depreciation of exchange rates, chronic over capacities of supply.

• The prolonged balance sheet recession in Japan has come to a near end without reviving domestic demand yet.

• And unprecedented slump in US household saving is generating the debt counterpart of a $3.2 trillion reserve accumulation.

THE CONJECTURE OF A WORLD GROWTH REGIME

Ageing rich regions

Growing workingage pop regions

technology

capital

• A world growth regime transferring resources between regions:

• Households in rich regions have incentives to export their saving to faster growth regions with higher capital yields

DEMOGRAPHIC TRENDSWorking age population is split between growing and declining regions

Working age population annual growth rate 1960-2050

-2,0

-1,0

0,0

1,0

2,0

3,0

4,0

1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

N. America W. Europe Japan S. America MediterraneanAfrica Russia China India E. Europe

DEMOGRAPHIC TRENDS

High Savers Ratio (age group 45-69 yrs in percentage of total population) 1960-2050

5

10

15

20

25

30

35

40

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050


High savers ratios reach their top in sequential waves

Production sectors

Production of the world good :

Production of theregional intermediategood :

Production of the regional final good

Utilization of the regional final goodzt

zt

zt ICYF +=

),( zt

zt

zt

zt MBGAFYF =

),( 1zt

zt

zt

zt NKFAIYI −=

111** )()(

−−

= ∑

µµ

µµ

µγz

zztt tXtAY

POTENTIAL FOR CATCHING UPThe growth process in Ingenue 2

POTENTIAL FOR CATCHING UPA Schumpeterian Paradigm

• There is a global technology frontier which shifts outwards with the increments in knowledge due to leading-edge innovations in frontier countries (namely North America).

• The countries behind the frontier implement technologies already developed elsewhere. Part of the inputs of technological diffusion are brought via foreign trade.

• The further a country is behind the global technology frontier, the faster it can grow.

• As emphasized by Gerschenkron, backwardness can be an advantage for growth provided “appropriate” institutions are developed within the country

POTENTIAL FOR CATCHING UPCrucial Hypotheses of World growth

λ Is an acceleration coefficient of the growth rate of TFP in the leading region

µ is a brake factor capturing social impediments to the speedy diffusion which depends on the distance between the level of TFP relative to that of the leader

The catching-up in total factor productivity:mechanics of technological diffusion

[ ] ( )

−++=

−

−

−− 1,

1,1

1,1

,1

1,

, 11ti

ttt

t

tt

ti

ti

AA

AA

AA µµλ i i

POTENTIAL FOR CATCHING UPThe pattern of TFP Growth in the baseline Scenario

Total Factor Productivity : 1950-2100 (percentage of "North America" level)

0,0

0,2

0,4

0,6

0,8

1,0

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100


North America keeps leadingThree catching-up regions: China, India, Eastern Europe

BASELINE SCENARIOJapan, Europe and Russia have the lowest growth ratesAmerica slows down fast, then recoversIn China the speed of catching-up partly offsets the demographic decline

GDP Growth rate (2000-2050)

0

1

2

3

4

5

6

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050


BASELINE SCENARIOReal exchange rates appreciate in the fastest-ageing regions (Europe, Japan, Russia) against North America. They remain relatively stable in other regions

Evolution of Real Exchange Rate (2000-2050)

0,0

0,5

1,0

1,5

2,0

2,5

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050


BASELINE SCENARIO

The redeployment of capital flows to the world regions with the best growth potential

Evolution of Current Account Balance (percentage of World GDP) :

-0,4

-0,3

-0,2

-0,1

0,0

0,1

0,2

0,3

0,4

0,5

0,6

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050


Ownership Ratio

0,70

0,75

0,80

0,85

0,90

0,95

1,00

1,05

1,10

1,15

1,20

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050


BASELINE SCENARIO

Main features for Europe

• The demographic profile and the weak catching-up in TFP will make Europe a slow growth region.

• Europe will be a pervasive world creditor with an appreciating real exchange rate

• European households will benefit from globalisation via capital income drawn from their creditor position and gains in purchasing power on imported goods

FASTER CATCHING-UP IN CHINA AND INDIAMain Hypotheses

Supply-side factor: an enhanced technological diffusion more pronounced in China than in India in the first half century

Total Factor Productivity (annual growth) :

1,0

1,2

1,4

1,6

1,8

2,0

2,2

2,4

2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

North America Chinese World - Fast catching-up processIndian World - Fast catching-up process Chinese World - BaselineIndian World - Baseline

FASTER CATCHING-UP IN CHINA AND INDIAMain Hypotheses

Demand-side factor: extension in coverage of public pension systems.Convergence of the participation rates for age group (60-69) toward the level of North America

INGENUE 2 : Age-linked rate of employment coverging to North America :

0,00

0,10

0,20

0,30

0,40

0,50

0,60

0,70

0,80

0,90

1,00

10 15 20 25 30 35 40 45 50 55 60 65 70

North America China India

Source : ILO

Share of pensions in GDPIn % 2000 2050 (baseline) 2050 (expanded

public pension)China WorldIndia World

2.13.2

7.37.7

8.09.2

FASTER CATCHING-UP IN CHINA AND INDIABoost in Productivity and Real Income

The faster technological diffusion accelerates growth and lowers the propensity to save in a first stage. Then growth slows down gently and saving recovers with higher income

GDP Growth rate(difference from baseline scenario)

-0,05

0,05

0,15

0,25

0,35

0,45

0,55

1995

2000

2005

2010

2015

2020

2025

2030

2035

2040

2045

2050


Evolution of the Net Saving (in percentage of GNP)(difference from baseline scenario)

-2,00

-1,50

-1,00

-0,50

0,00

0,50

1995

2000

2005

2010

2015

2020

2025

2030

2035

2040

2045

2050


FASTER CATCHING-UP IN CHINA AND INDIATransition Cost to Better Social Welfare

The improved social welfare is costly while the reform is under way:

• The participation of older workers is reduced• The higher dependency ratio must be financed via

higher taxes and saving

Private consumption per capita (level)(Percentage point difference from baseline scenario)

-4,0%

-3,5%

-3,0%

-2,5%

-2,0%

-1,5%

-1,0%

-0,5%

0,0%

0,5%

1995

2000

2005

2010

2015

2020

2025

2030

2035

2040

2045

2050

2055

2060

2065

2070

2075

2080

2085

2090

2095

2100


GDP per capita level (2000-2050)(Percentage point difference from baseline scenario)

-4,0%

-3,5%

-3,0%

-2,5%

-2,0%

-1,5%

-1,0%

-0,5%

0,0%

0,5%

1995

2000

2005

2010

2015

2020

2025

2030

2035

2040

2045

2050

2055

2060

2065

2070

2075

2080

2085

2090

2095

2100


COMBINED SCENARIO OF HIGHER GROWTH IN TFP AND IMPROVED SOCIAL

WELFARE• The growth-enhancing factor dominates on GDP and

private consumption• The effects on saving are in opposite directions so that they

cancel out on net capital flows and international financial positions

GDP Growth in Asian regions :

1,4

1,9

2,4

2,9

3,4

3,9

4,4

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

China - Alternative scenarios India - Alternative scenarios China - Baseline scenario India - Baseline Scenario

Ownership ratio in Asian regions :

0,78

0,83

0,88

0,93

0,98

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

China - Alternative scenarios India - Alternative scenarios China - Baseline scenario India - Baseline Scenario

The international impact of a change to a more inward-looking growth regime in Asia is thus muted

HOW TO GET FROM HERE TO THERE?

1.1. The baseline scenario points out to the need of The baseline scenario points out to the need of restoring a sustainable saving/investment balance restoring a sustainable saving/investment balance in the USin the US

• A substantial real depreciation of the dollar:will boost net private saving in slowing down domestic demandwill change the structure of demand in favor of non-traded goods, thus mitigating the negative impact on employment

• A reduction in the budget deficit is the surest way to improve national saving (weak Ricardian equivalence in the US)


2.2. The baseline scenario depicts Europe as a low The baseline scenario depicts Europe as a low growth region on persisting in inefficient policiesgrowth region on persisting in inefficient policies

• Europe has a declining working-age population and is relatively close to the technology frontier. The only source of potential growth will stem from boosting innovation

• Overcoming Europe’s shortcomings requires:more public spending on higher education and R&Dbetter links between public and private research

• Long-run growth is enhanced by countercyclical economic policy (Aghion and Howitt). In a situation of high profits and low productive investments, domestic demand should be raised to induce firms to spend instead of buying back their equity capital


3.3. The baseline scenario shows that the world growth The baseline scenario shows that the world growth regime in the regime in the XXIXXIthth century will have its engine in century will have its engine in regions with a huge labor force and fast catchingregions with a huge labor force and fast catching--upupOverhauling the growth regime in Asia towards domestic demand is a top priority. It involves:

• Promoting financial reforms to set up smooth well-regulated credit systems for the private sector, including consumer credit.

• Investing in infrastructure and mass education to lower the barriers to technological diffusion

• Initiating long-standing social policies to vastly improve social welfare systems and above all extend their coverage

international capital flows in the xxi century · ingenue 2 : age-linked rate of employment...

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