| Over the next several decades, it is projected that there will be an unprecedented aging of the population in all developed countries. During this demographic transition, the changing age structure of each of these countries will have macroeconomic consequences. According to the life cycle hypothesis, people will hold the largest stocks of life cycle saving just before and after retirement. If the ratio of the number of people near retirement to workers (the "rich ratio") increases then, all other things being equal, a society will tend to experience capital deepening. In a society with a pay-as-you-go social security system, the tax rates necessary to fund a given replacement rate will increase as the dependency ratio rises. These higher taxes may act as a disincentive to saving, thereby reducing a country's capital stock. Whether a country experiences capital deepening during the demographic transition will depend in part upon the magnitude of the change in each of these demographic ratios and the correlation between their movements.; If countries age at different rates, the returns to the factors of production in those countries may diverge. Where this occurs, international capital and labor flows might occur in order to take advantage of these differences. Such flows have the potential to ameliorate the fiscal burden of an aging society. While the welfare gains from international factor flows can be significant, they appear to be less effective at offsetting the welfare effects of an aging society than increasing the retirement age.; International capital flows in the form of frictionless, one period FDI may, in certain circumstances, make the capital receiving country worse off. I explore this possibility in a two-period OLG framework. When FDI inflows exacerbate dynamic inefficiency in a two-period OLG framework, each agent's aggregate lifetime consumption and utility may fall, notwithstanding the rise in output per worker. In such a situation, FDI will make agents in the capital importing country worse off if the fall in investment income as a result of the lower return to capital outweighs the wage gains for workers. |
