Abstract
The paper first uses the production function to analyze the sources of past growth in Singapore and compares it with the experience of other Asian and industrialized economies. This study also provides some thoughts on how to boost medium-term growth prospects in Singapore, and assesses the growth slowdown of the past few years in Singapore reflecting cyclical versus structural factors. The assessment given in this paper suggests that there are returns to be had from investment in education and structural reforms.
V. Population Ageing and the Current Account Surplus1
A. Introduction
1. Singapore’s current account position has shifted from deficits up through the mid-1980s to surpluses thereafter. In recent years, these surpluses have grown substantially to around 30 percent of GDP in 2003 (Figure V.1). While much of the recent rise may reflect cyclical factors stemming from weak domestic demand— including a sharp fall-off in investment— longer run structural factors may also be at work. Indeed, even before Singapore was hit by the succession of shocks in recent years, there was a steady rise in the gross national savings rate and a decline in investment.
The Actual Savings-Investment Balance in Singapore
(In percent of GDP)
Citation: IMF Staff Country Reports 2004, 103; 10.5089/9781451834208.002.A005
Source: World Economic OutlookThe Actual Savings-Investment Balance in Singapore
(In percent of GDP)
Citation: IMF Staff Country Reports 2004, 103; 10.5089/9781451834208.002.A005
Source: World Economic OutlookThe Actual Savings-Investment Balance in Singapore
(In percent of GDP)
Citation: IMF Staff Country Reports 2004, 103; 10.5089/9781451834208.002.A005
Source: World Economic Outlook2. This chapter assesses the role of demographics in explaining the evolution of the current account balance in Singapore. It should be noted at the outset that demographics is only one of many factors that can explain the evolution of the current account surplus. The results presented in this chapter are thus not intended to fully explain the evolution of Singapore’s current account. Instead, the goal is to isolate the role of demographics in order to shed light on the population-related structural component of the surplus. The chapter uses an optimizing model, in which changes in Singapore’s age distribution drive the savings-investment balance, to ask two questions: (i) can changes in the population structure explain the evolution of the savings-investment balance in Singapore? and (ii) is the present level of the current account consistent with an optimizing framework?
3. The results suggest that population dynamics do help explain the historical shift in Singapore’s current account from deficits to surpluses. They also help to put Singapore’s large and rising current account surplus in perspective. They reveal that an important driver underlying these surpluses may in fact be structural, associated with population ageing leading to a decline in investment and a rise in savings.
4. From a purely optimizing perspective, the model suggests that Singapore’s average current account over the past 20 years should have been near balance. Instead, Singapore’s actual current account over this period has been in surplus to the tune of 12 percent of GDP. The fact that this “cyclically-adjusted” surplus is so much larger than that generated by the optimizing model may be due to a number of factors, including the stylized nature of the model, which may omit other factors that could account for a larger structural surplus.2
5. This chapter is organized as follows: Section B reports the simulation results and Section C concludes; the Annex provides technical details of the model.
B. Simulating Singapore’s Current Account
6. This section uses an overlapping generations model to simulate the effects of population ageing on Singapore’s current account.3 Underlying the model, which is described in the Annex, are two key assumptions. First, capital is perfectly mobile, so that capital flows equate Singapore’s interest rate to the world interest rate at any point in time. Second, as Singapore is a small open economy, the world interest rate is taken to be exogenous. In such a setting, the basic intuition behind the effects of population dynamics on the current account is the following. During periods when the population is ageing rapidly, for example, there will be a surge in the savings rate as workers prepare for retirement, while the investment rate falls, a reflection of the declining workforce. Under the assumption of perfect capital mobility, this mismatch generates capital outflows to the rest of the world, such that the return on capital in Singapore and the rest of the world are equalized. See the Annex for a brief overview of the model and its calibration.
7. Singapore’s population growth has been slowing, while ageing is accelerating. Figure V.2 shows youth dependency ratios for Singapore and several other Asian countries, calculated as the share of the population aged zero to 14 to the population aged 15 to 64, from 1950 to the present, and projected through 2150. Figure V.3 plots old-age dependency ratios for the same set of countries, calculated as the ratio of those aged 65 and older to the number of individuals aged 15 to 64, again from 1950 through 2150. The old age dependency burden in Singapore is expected to accelerate after 2010, when large numbers of the population will move into retirement. Old age dependency is expected to rise from 12 percent in 2010 to 33 percent in 2030. While this rise may seem dramatic, it is well within the range of other countries in the region. It is more modest than projected increases in Hong Kong SAR or Japan, but more severe than in Korea, Malaysia, and Thailand.
Youth Dependency Ratios in Asia: (0-14)/(15-64)
Citation: IMF Staff Country Reports 2004, 103; 10.5089/9781451834208.002.A005
Youth Dependency Ratios in Asia: (0-14)/(15-64)
Citation: IMF Staff Country Reports 2004, 103; 10.5089/9781451834208.002.A005
Youth Dependency Ratios in Asia: (0-14)/(15-64)
Citation: IMF Staff Country Reports 2004, 103; 10.5089/9781451834208.002.A005
Old-Age Dependency Ratios in Asia: (65+)/(15-64)
Citation: IMF Staff Country Reports 2004, 103; 10.5089/9781451834208.002.A005
Old-Age Dependency Ratios in Asia: (65+)/(15-64)
Citation: IMF Staff Country Reports 2004, 103; 10.5089/9781451834208.002.A005
Old-Age Dependency Ratios in Asia: (65+)/(15-64)
Citation: IMF Staff Country Reports 2004, 103; 10.5089/9781451834208.002.A005
8. Singapore’s population boomed in the 1950s and 1960s and contracted thereafter. This section now translates the actual population data into the stylized environment of the model. Figure V.4 shows what this looks like. It plots the ratio of the child to parent cohort that corresponds to the actual population data. The simulated population shift begins in the 1950 period when the child cohort is larger than its parent cohort. This baby boom continues in the 1970 period. The situation is reversed in the 1990 and 2010 periods, when negative cohort growth means that the child cohort is smaller than its parent cohort. The simulated population shift ends in 2030. Cohort growth before and after the simulation is assumed to be zero. The simulated shift thus does not capture the trend decline in fertility in Singapore, but focuses on the transitional dynamics of the population boom and bust.
The Simulated Ratio of the Child to Parent Cohort in Singapore
Citation: IMF Staff Country Reports 2004, 103; 10.5089/9781451834208.002.A005
The Simulated Ratio of the Child to Parent Cohort in Singapore
Citation: IMF Staff Country Reports 2004, 103; 10.5089/9781451834208.002.A005
The Simulated Ratio of the Child to Parent Cohort in Singapore
Citation: IMF Staff Country Reports 2004, 103; 10.5089/9781451834208.002.A005
9. The simulation shows that population changes help to explain the evolution of Singapore’s current account. Figure V.5 shows the simulated savings-investment balance in the model. As population growth initially accelerates, the investment rate rises in anticipation of a growing labor force. Thereafter, investment falls as population growth turns negative and the future labor force contracts. In contrast, the savings rate falls during the initial period of rapid population growth, because rising youth dependency makes it harder for households to save. But as the workforce increases and a rising number of households begins to save for retirement, the savings rate rises and peaks in 2010. It falls thereafter, as the last of the large generations—born in the 1970 period—dissaves in retirement in 2030. Thereafter, the savings rate returns to equilibrium.
The Simulated Savings-Investment Balance in Singapore
(In percent of GDP)
Citation: IMF Staff Country Reports 2004, 103; 10.5089/9781451834208.002.A005
The Simulated Savings-Investment Balance in Singapore
(In percent of GDP)
Citation: IMF Staff Country Reports 2004, 103; 10.5089/9781451834208.002.A005
The Simulated Savings-Investment Balance in Singapore
(In percent of GDP)
Citation: IMF Staff Country Reports 2004, 103; 10.5089/9781451834208.002.A005
10. The key driver behind the shift of the current account from deficits to surpluses in the simulation is a big fall in investment. This suggests that the recent decline in investment rates may have, at least in part, a structural component. The simulated profile for the current account is robust to different parameterizations. Figure V.6 explores the sensitivity of the simulation results with respect to the risk aversion parameter, a key parameter because it affects savings behavior. It depicts the current account in percent of GDP 12 times, increasing the risk aversion parameter from 0.5 to 6 in increments of 0.5. For the 2010 period, the model projects a current account surplus of 8.1 percent of GDP for a risk aversion parameter of 0.5, while it projects a balance of 8.5 percent when the risk aversion parameter is 6. The simulations results are thus not very sensitive to risk aversion.
Singapore: Current Account Balance Sensitivity Analysis
(In percent of GDP)
Citation: IMF Staff Country Reports 2004, 103; 10.5089/9781451834208.002.A005
Singapore: Current Account Balance Sensitivity Analysis
(In percent of GDP)
Citation: IMF Staff Country Reports 2004, 103; 10.5089/9781451834208.002.A005
Singapore: Current Account Balance Sensitivity Analysis
(In percent of GDP)
Citation: IMF Staff Country Reports 2004, 103; 10.5089/9781451834208.002.A005
14. The model suggests that Singapore’s average current account over the past 20 years should have been near balance. But over this period, Singapore’s actual current account has been in surplus to the tune of 12 percent of GDP. The fact that this “ cyclically-adjusted” surplus is so much larger than that generated by the optimizing model raises two possibilities. On the one hand, the stylized nature of the model means that it omits other factors, such as the CPF savings scheme and other policies to encourage savings in light of national security or political concerns that could account for a larger structural surplus. On the other hand, taken at face value, and abstracting entirely from other factors that could influence the current account, the model suggests that the surplus may be too large from a welfare maximizing perspective. However, caution needs to be taken in drawing such a conclusion, due to the extremely stylized nature of the model.
C. Conclusion
15. The results of the model simulations presented above suggest that population dynamics do indeed help to explain the shift in Singapore’s current account from deficit to surplus. An optimizing model successfully replicates the historical shift in Singapore’s current account from deficit to surplus in the early-1980s. In the context of the model, this shift is largely due to a decline in the investment rate, which falls as slower population growth reduces the need for capital formation. Going forward, the model suggests that demographic forces may tend to keep Singapore’s current account in surplus, as increasingly large parts of the population save for retirement.
References
Brooks, R. (2003), “Population Aging and Global Capital Flows in a Parallel Universe,” Staff Papers, Volume 50, Number 2 (International Monetary Fund, Washington, D.C.).
Cardarelli, R. (2000a), “Generational Accounts for Singapore: Is Singapore Ready for the Demographic Transition?” Staff Country Report No. 00/83 (International Monetary Fund, Washington, D.C.).
Cardarelli, R. (2000b), “Singapore’s Central Provident Fund: Options for a Comprehensive Reform,” Staff Country Report No. 00/83 (International Monetary Fund, Washington, D.C.).
ANNEX Model Description
This Annex gives a short description of the model used to simulate the effects of population dynamics on Singapore’s current account. The representative agent lives for four periods: childhood, young working-age, old working-age, and retirement. In childhood, agents are not active decision makers and rely on their parents, young workers, for consumption ct0. Young workers have an endowment of one unit of time, which they supply inelastically as labor. They make a standard consumption-saving decision, setting period t household consumption
In old working-age, agents again supply labor inelastically, though they now supply one full unit of labor, their children having become self-sufficient as young workers. Wage income is supplemented by interest on wealth accumulated from the previous period. The constraint of a period t+1 old worker is thus:
Here rt+1 denotes the return on capital held from period t into t+1. Retirees no longer supply labor and, there being no bequests, simply consume down their retirement saving. Since this amounts to a decision rule for consumption, retirees—like children—are not active decision makers in the model. The budget constraint for a period t+2 retiree is simply:
Preferences are described by an additively separable utility function. The discounted lifetime utility of an agent born in period t-1 is:
This expression shows that young workers, the parent generation, derive utility from feeding their children. As a result, changes in the age distribution generate youth dependency effects on aggregate saving, in addition to old-age dependency effects. This feature of the model has the advantage that it permits a more accurate depiction of saving behavior over the life cycle. It also allows for the possibility that lower youth dependency from declining fertility, a key side-effect of population ageing, may offset the adverse effects on aggregate saving from old people dissaving in retirement. The magnitude of the youth dependency effect is determined by α, which controls the extent to which parents care for their children. The former parameter determines if parents discount the utility of their children, which is true for α < 1. Turning to other parameters in the model, the subjective discount factor is given by β, where 0< β<1, while. is the coefficient of relative risk aversion.
Output is generated by a standard Cobb-Douglas production function. The world rate of return on capital is fixed exogenously at 4 percent per year. The assumption of perfect capital mobility means that capital inflows and outflows keep Singapore’s capital-labor ratio such that the return on capital in every period is also always fixed at 4 percent annualized. The share of capital in output is set to one-third, while depreciation occurs at a rate of 5 percent per year. The subjective discount factor is set at 0.44, which amounts to an annualized rate of 0.96, which is standard in the literature. In the baseline simulation, the coefficient of relative risk aversion is set to one, which is the special case of log utility.
Prepared by Robin Brooks (ext. 36236).
For related work on generational accounting in Singapore, see Cardarelli (2000a). For a detailed discussion of issues relating to the Central Provident Fund (CPF), see Cardarelli (2000b).
See Brooks (2003) for a detailed description of the model.
