Why the Rich Need the Poor
The existence of international capital markets raises the possibility that industrialized countries
with aging populations could, by investing in less developed countries, simultaneously increase their savings rates and decrease
their investment rates without large movements in the return to capital. Less developed countries have lower capital-labor
ratios, but faster growing labor forces, than the industrialized nations.
Thus, the less developed countries represent an attractive opportunity for investment. However,
these countries also often have underdeveloped capital markets and are perceived by foreign investors as being quite risky.
The industrialized countries of France, United Kingdom, Japan, and Germany will experience population aging due to a drop
in fertility and rising life expectancy, and they face an aged dependency problem more severe than that of the United States.
While there are now 4 5 workers working in the U.S.to pay for every pension, by 2030 there will
be only 1.7 workers in the U.S. available to be taxed to pay for every pension. In 2030, the ratio of people older than 64
to those between the ages of 15 and 64 will be about 30 percent in the U.S., 40 percent in France and the United Kingdom,
and nearly 50 percent in Germany and Japan. France, Germany, and Japan also face financing problems in their social security
programs that are much more severe than those of the U.S. system.
Population aging has two components: increased longevity, which extends the proportion of life
spent in retirement and should boost desired pre-retirement savings rates, and decreased fertility, which reduces the growth
rate of the labor force. The latter leads to reduced demand for new investment.
In a closed economy, saving must equal investment. and a combination of increased desired saving
and decreased demand for investment would lead to a decrease in the rate of return.
If the sole objective of the increased
saving were to restore Social Security to solvency, then investment abroad would be preferred, since by increasing wages,
domestic investment would also increase Social Security's future benefit obligations.
Domestic investment would also decrease the returns on the Social Security trust fund and private
pension funds. Developing countries also have aging populations and many are setting up partially pre-funded mandatory pension
plans. This may result in increased global saving and a decreased rate of return.
Offsetting this are continued large movements of workers out of agriculture; these shifts increase
the demand for capital investment and could increase the global rate of return.
To stimulate foreign investment, developing
countries need to exhibit financial stability. Financial stability in the developed countries relies on the health of the
banking system.
