Growth, Demographic Structure, and National Saving in Taiwan

THIS CHAPTER IS concerned with the effects that changes in demographic structure have had on Taiwan's national saving rate, and how coming changes in its age structure-notably population aging-will affect the future saving rate. We examine this topic within the framework of the life cycle hypothesis. Life cycle theory is a natural starting place, because it implies that changes in demographic structure can exert potentially large effects on national saving. According to the theory, increases in the number of people who save (presumably those in middle age) relative to those who save little or dissave (the very young and the elderly) will increase the aggregate saving rate. A related implication of the life cycle hypothesis is that changes in the rate of growth of per capita income affect saving. Higher rates of economic growth increase the lifetime wealth of the young relative to the old, and the effects of higher growth on saving are much the same as the effects of increasing the numbers of young relative to the old. The life cycle hypothesis also delivers a rich set of predictions about interactions between economic growth and the age structure. As is emphasized in the variable-rate-of-growth models of Fry and Mason (1982) and Mason (1987 and 1988), the effects of changes in age structure on the saving rate will depend on the lifetime wealth of individuals in different age groups, something that is determined by economic growth. These interactions are important for understanding how the Taiwanese saving rate has evolved over time and how it may change in the future. A large empirical literature examines the relationships between demographic structure, economic growth, and saving. Early international comparisons of saving rates by Leff (1969) and Modigliani (1970) provided empirical support both for a positive association between growth and saving rates and for a negative effect of dependency rates-the ratio of young and old to the working ages-on aggregate saving. Subsequent empirical analysis