Asia the saver – The global savings glut may persist as, despite ageing rapidly, Asia can continue to be a net saver

Source: The post is based on an article “Asia the saver – The global savings glut may persist as, despite ageing rapidly, Asia can continue to be a net saver” published in Business Standard on 10^th January 2023.

Syllabus: GS 1 – Population and Associated Issues

Relevance: impact of demographic changes on Current Account balance

News: The article discusses the impact of aging population and savings on the current account balance of Asian nations.

How an aging population may affect the saving of Asian nations?

The demographic shift in 10 major Asian economies (the A-10: China, India, Indonesia, Japan, the Philippines, Vietnam, Thailand, Korea, Malaysia, and Taiwan) is faster than the economic transition.

Further, there is disparity among the A-10 on the current account balance. For example, India and Indonesia run deficits, whereas north Asian economies run in surpluses.

However, they have collectively accumulated a surplus of nearly $5 trillion in the last decade. These surpluses are invested in global assets which have also led a boom in the consumption of the world.

But an aging population may lead to a drop in the savings of A-10 because production would fall due to a smaller number of workers and consumption may keep rising due to the increasing lifespan.

The number of consumers per worker is known as the dependency ratio. A higher ratio could turn current account balances from surpluses to deficits.

How higher dependency ratio affects the current account balances?

First, the aggregate demand that affects current account balances includes domestic consumption and investment. Investment (households, corporations and the government) fall as population growth slows and then turns negative.

This in turn leads to lesser requirement of investments in growth of the economy and invest is more driven by global demand-supply balances and rather than local demand. This affects the current account balance.

Second, household savings depend on sufficiency of pensions, especially for the retirees who depend on pensions for their future. If pension mechanisms are not adequate, it leads to a drop in consumption. Therefore, there should be a better saving mechanism in order to have a better current account balance.

How better pension plans can help in the current account surplus?

The Japanese fund GPIF has nearly 10 percent of all Japanese wealth, with half of it deployed in foreign financial assets.

The accumulated foreign assets of Japan are so large that the income from them exceeds 4 percent of gross domestic product. This helps Japan’s current account to stay in surplus despite a shrinking workforce.

However, the pension plans of most of the Asian economy are not good enough to build higher savings which ultimately affects the current account.

Therefore, there is a need for personal savings or government-mandated savings in Asia to grow. This increase in savings with the increase in financial assets will make the A-10 economies as providers of capital to the world.