Immigration vs. Foreign Investment to Ease the Ageing Problems of an Ageing Open Economy

Abstract

This paper formulates an overlapping generations model of the world economy with two regions that vary in aging pattern: One region consists of Japan and other OECD countries with high life expectancy, low fertility rate, and high labor productivity, and the other region consists of the developing countries with low life expectancy, high fertility rate and low labor productivity. The paper shows that aging pattern such as in Japan can lead to dynamic inefficiency or capital over-accumulation, and insolvency of the publicly funded social security program. The paper studies the choice between investment of OECD countries' capital in developing countries and import of labor from developing countries to cope with the above aging problems. Under the assumption that international capital and labor markets are perfectly competitive, if imported labor from developing countries could be easily transformed into skilled workers, it is better for Japan and other OECD countries to import labor, otherwise it is better to invest capital in less developed countries. The paper also examines empirically why not much capital flows from OECD countries into less developed countries.