Wednesday, September 12, 2007

Saving from developing countries and the trade imbalance

Fed chairman Ben Bernanke expressed concern about the sustainability of the U.S. trade deficit and the imported foreign saving it represents. Why are developing countries supporting higher consumption in industrialized countries by exporting their saving?

One explanation is the Demographic Dividend: the resources freed up by the reduction in dependency owing to declining fertility and family size during the demographic transition. As development proceeds, mortality typically falls first. As babies and infants begin to survive in greater numbers, while labor market opportunities for women typically expand, fertility falls. Declining fertility and reduced family sizes allows households to save more resources, fueling investment either domestically or abroad.

For how long will investment opportunities in the U.S. continue to appeal to foreign savers? Presumably for as long as U.S. productivity remains the highest in the world (or among the highest, depending on how you measure it), and as long as political stability continues.