Abstract WP08-05

Andrew Mason, Ronald Lee, and Sang-Hyop Lee, “Demographic Transition and Economic Growth in the Pacific Rim”, This paper was prepared for the East Asian Seminar on Economics (EASE), held in Seoul, Korea, June 19-21, 2008.

Declining mortality followed by declining fertility over the demographic transition initially produce decades of rising child dependency, then decades of improving support ratios as child dependency falls (the "first dividend" which raises per capita consumption, other things equal), and finally population aging. India and ASEAN are in the first dividend period; China and Korea are near its end; and Japan's population is aging. Between 2008 and 2050, Japan's support ratio will decline by 25%; Korea's by 22%; China's by 14%; and India's and ASEAN's will rise. Population aging and the forces leading to it can produce not only frightening declines in support ratios, but also very substantial increases in productivity and per capita income by raising physical and human capital intensity. Longer life, lower fertility, and population aging all raise the demand for wealth to provide for old age consumption. This raises capital per worker (the "second dividend") despite declining aggregate saving rates, unless the increased demand for wealth is met through increased familial or public pension transfers for old age support: institutions and policies matter. Lower fertility and mortality are associated with higher human capital investment per child, also raising labor productivity. Together, these positive changes will likely outweigh the problems of declining support ratios aspopulation ages.

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