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N° 2007-01 |
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| January 2007 |
Asian Catch Up, World Growth and International Capital Flows in the XXIst Century:
a Prospective Analysis with the INGENUE 2 Model |
Michel Aglietta
Vladimir Borgy
Jean Chateau
Michel Juillard
Jacques le Cacheux
Gilles Le Garrec
Vincent Touzé |
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The world has been trapped in a paradox for a few years. The world saving investment balance defies the teaching of international economics. Whereas rich aging countries should provide financing to poorer and younger ones, the opposite has arisen, at least as far as the US is concerned. Controversy has raged on the sustainability of this pattern of world financing. Opinions diverge on the timing of adjustment to “a more normal pattern”. Macroeconomists talk about a sustainable US deficit of 3% of GDP. But why should the US carry a deficit forever?
The present paper takes a different view. It does not try to make prediction on the adjustment being smooth or bumpy. But it attempts to define what might be the “normal pattern” in XXIst century global capitalism. Such an approach cannot obviously be that of a single country, be it the US. Only the perspective of a world growth regime is valid. This regime should encapsulate the most salient long-run trends in the world economy for the next fifty years or so. These trends are the demographic transition and the catching up of very large emerging market countries.
The proper tool to investigate a world growth regime based upon such trends is a worldwide dynamic computable general equilibrium model, embodying a meaningful breakdown of the world and overlapping generations. The INGENUE2 model fits with these requirements. It divides the world into ten regions based on both demographic and geographic criteria. With twenty-one overlapping generations in each region, differences in aging amongst the different parts of the world can be captured in detail. Since long run saving depends essentially on the optimal behavior of households in their life cycle, the age structure of the population is a primary determinant of the saving patterns in the ten regions of the world. This is the underlying factor in the supply of capital. On the demand side, capital investment will depend essentially on the catching up process that modulates growth differential between the ten regions. Therefore the “normal pattern” of current account balances and net foreign asset positions is endogenous and can be traced from the basic assumptions that foster population forecasts and speed of technological catching up.
A baseline scenario is investigated using the UN central demographic projection until 2050 prolonged by a demographic model, which computes the change in the age structure for the ten regions under the hypothesis of a convergence to a stationary population some time after 2100. The process of technological diffusion, which is the engine of the catching-up, is based upon an assumption of convergence in total factor productivity. In the baseline scenario these assumptions are somewhat conservative, with only China, India and Eastern Europe on a fast track.
In the baseline scenario, the most salient feature is the return of the US current account balance to sustained surplus after 2010. This ensues from the dynamic equilibrium of the model. Real interest rates are neutral rates in so far as they are compatible with the intertemporal budget constraint of every region of the world. Being a high income and ageing country, the US is to improve households saving, so that they generate enough future surpluses for their foreign debt to be sustainable in the long run. This is what we call the “normal pattern”.
In this scenario, Europe is a slow-growth region and a pervasive world creditor with an appreciating real exchange rate. Such a rentier position in the world growth regime may be suitable for European households who will enjoy capital income and gains in purchasing power on imported goods. But the continuous slowing down of growth entails mounting financial constraints on the pay-as-you-go retirement system and risks of more adverse developments than anticipated in the baseline scenario.
The baseline scenario is somewhat conservative about the speed of catching up in the developing regions, as compared to the historical experience of Asian countries that took off in the 1960’s and 1970’s. The historical record vindicates our investigation of alternative scenarios, whereby the driving force in world growth are the catching-up in China and in India throughout the first half of the XXIst century. They are socio-economic scenarios that combine productivity enhancement and the redeployment of growth towards domestic demand. The latter can be stimulated by the containment of widening inequality. We have supposed that the best way is to vastly improve social welfare systems and, above all, to extend their coverage. Such a compounded scenario of supply-side and welfare reforms in the two most populated countries raises real consumption per capita substantially. |
Non-technical summary |
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Résumé
non-technique
en français  |
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| Full text |
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| Computable General Equilibrium Models; international capital flows; life cycle models and saving; economic growth of open economies |
Keywords |
| C68, F21, D91, F43 |
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