Demographic Changes and the Gains from Globalisation: An Overlapping Generations CGE Analysis

This paper develops a multi-country overlapping-generations general equilibrium model to gauge the economic impacts of demographic changes in the global economy and its transmission effects on different countries. Although severe demographic pressures contribute to significantly lower real GDP per capita across several regions in the world, globalisation through international trade generates an improvement in the terms of trade of older OECD countries, which sustains their real consumption per capita, while globalisation through capital flows stimulates capital deepening and therefore growth in younger countries such as India and various parts of the Rest of the World. The general equilibrium nature of the ageing process is crucial to understand the net foreign asset dynamics of countries during the demographic transition, and this is particularly relevant for a country like China that is caught, in the global economy, between relatively older and younger countries. On this regard China, unlike older countries, does not benefit from a terms of trade improvement which could otherwise sustain its consumption, nor does it benefit, unlike India, from capital deepening, which could otherwise sustain its GDP growth.