Gone with the wind: Demographic transitions and domestic saving

• Published date: 01 November 2018
• Author: Gabriel Sánchez,Patricio Valenzuela,Eduardo Cavallo
• DOI: http://doi.org/10.1111/rode.12518
• Date: 01 November 2018

REGULAR ARTICLE

Gone with the wind: Demographic transitions and

domestic saving

Eduardo Cavallo

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Gabriel S

anchez

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Patricio Valenzuela

2

1

Inter-American Development Bank,

Washington, D.C.

2

University of Chile, Santiago, Chile

Correspondence

Eduardo Cavallo, Inter-American

Development Bank, 1300 New York Ave.

NW, Washington D.C. 20577.

Email: cavalloe@iadb.org

Abstract

This study explores the relationship between demographic

factors and saving rates using a panel dataset covering

110 countries between 1963 and 2012. In line with pre-

dictions from theory, this paper finds that, on average,

lower dependency rates and greater longevity are associ-

ated with higher domestic saving rates. However, these

correlations are statistically robust only in Asia. In partic-

ular, Latin America, which is a region that has undergone

a remarkably similar “saving friendly”demographic tran-

sition since the 1970s, did not experience the same boost

in saving rates as Asia. The paper highlights that the

potential dividends arising from a favorable demographic

transition are not automatically accrued. This is a sober-

ing message at a time when the demographic tide is shift-

ing in the world.

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INTRODUCTION

Demographic factors can influence a country’s saving behavior (Ando & Modigliani, 1963; Modi-

gliani, 1966; Modigliani & Ando, 1957). In Asia, a favorable demographic transition has supported

high saving and investment rates over the last half century (Bloom & Williamson, 1998; Wil-

liamson, 2013). In this paper we explore if demographic factors are also related to saving perfor-

mance in other regions.

One key demographic factor is a country’s“dependency rate;”i.e., the share of the nonworking

population (both young and old) relative to the working age population. A country’s trans ition

from a high to a low age dependency rate is expected to lead to higher aggregate saving rates

because of the increasing share of savers in the economy vis-

a-vis the nonworking.

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This is known

as the “demographic dividend”(Lee & Mason, 2006).

Life expectancy is another demographic factor with implications for saving. The expected

impact of increasing longevity on aggregate saving rates is however, ambiguous. On the one hand,

DOI: 10.1111/rode.12518

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©2018 John Wiley & Sons Ltd wileyonlinelibrary.com/journal/rode Rev Dev Econ. 2018;22:1744–1764.

people living longer may save more during their working years to finance a longer retirement. On

the other hand, increasing longevity may indirectly contribute to lower saving rates, via increasing

old dependency rates. The structure of incentives that is embedded in a country’s pension systems

(i.e., mandatory saving schemes) can determine which of these forces prevails (see, e.g., Bloom,

Canning, Mansfield, & Moore, 2007).

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Since the 1960s, the world has experienced a decline in the age dependency rates and increases

in life expectancy. However, countries have witnessed a marked divergence in domestic saving

rates: whereas domestic saving rates have risen in Asia, they have stagnated in Latin America,

declined in North America and Europe, and remained particularly low in Africa.

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This paper

explores whether divergent saving behaviors across regions can be explained by asynchronous

demographic transitions.

We show that it is not the case. This is most evident when comparing Asia to Latin America.

These two regions have experienced similar demographic transitions, but remarkably different sav-

ing responses. While in Asia saving rates increased to approximately 30 percent of GDP in 2010

from 12 percent in the 1960s, in the case of Latin America, saving performance has gone largely

unchanged.

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The evolution of saving rates in Latin America during the period of declining

dependency rates contrasts not only with Asia, but also with the expectations that economists had

when the region’s population was still relatively young and thus the demographic dividend was

incipient.

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Decades later, the average saving rate in Latin America has remained practically

unchanged.

In view of the variations in demographic trends and in saving performance across regions and

over time, this paper addresses two questions. First, what is the impact of demographic factors on

domestic saving rates? Second, how much have demographic changes contributed to the evolution

of saving rates in different regions?

These questions have long been an issue of concern. Leff (1969) explored the relationship

between dependency rates and saving rates using a cross-country dataset for 74 countries in 1964

and showed that lower dependency rates had a positive effect on aggregate saving rates. More

recent papers have attempted to explore the effects of variations on dependency rates primarily in

samples of Asian countries.

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For example, Higgins and Williamson (1996, 1997) have attributed

the increase in saving rates in Asia since the 1960s to an impressive decline in youth-dependent

burdens. Bloom and Williamson (1998) and Bloom, Canning, and Malaney (2000) have argued

that the demographic dividend accounted for as much as one-third of East Asia’s economic mira-

cle. There is still a debate as to how much of the estimated effects is related to demographic fac-

tors, and how much is educational attainment. This is so because empirically, a declining young

age dependency ratio tends to come along with the increasing educational attainment of the adult

population (Crespo-Cuaresma, Lutz, & Sanderson, 2014).

Other papers have explored the relationship between longevity and saving rates. Li, Zhang, and

Zhang (2007) provide theoretical justification for the related yet independent roles of longevity and

old-age dependency rates in determining saving rates. Using panel data for the period from 1960

to 2004, they find that longevity has a positive effect on saving rates, and that the old dependency

rate has negative effects on saving and investment.

Bloom et al. (2007) study how the impact of life expectancy on saving rates depends on the

prevailing pension system. Analyzing a cross-country panel, they find that increased longevity

raises aggregate saving rates in countries with defined contribution pension systems, and that pro-

vide people incentives to stop working when reaching the retirement age. Instead, in countries with

pay-as-you-go systems with high income replacement rates, the saving effect disappears. Their

panel data are restricted to those countries for which there are data characterizing their pension

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