Background

The pronounced demographic change, usually associated with population aging, will be one of the most important changes of this century. This is not a new insight. Nevertheless, most of the public debate and scientific research in Europe is centered around the direct socio-political consequences only, especially the sustainability or reform of pay-as-you-go systems. Demographic change, however, has a much more fundamental impact on the economy. It will trigger large structural changes and influence all central markets - labor markets, goods and services markets, as well as capital markets.

• The demographic change will have a substantial effect on production. By the year 2030, there will be about 20% less employees in Germany while consumption demand will remain roughly stable at today's levels. Unless dependency on foreign production via imports is increased, meeting this demand will be possible with increased productivity only, which in turn will have to be generated by higher physical and human capital intensity. Wages will increase further while capital returns may fall. These tendencies are undisputed, however, the quantitative effects are yet to be determined.
  
• Demographic change will furthermore result in substantial changes of consumption structure: there will be a higher demand for goods and services adressing and serving the needs of elderly people.
  Such shifts in the composition of demand may imply structural changes in production with the accompanying frictions, e.g.temporary unemployment. The unemployment problem will be especially severe if today's low sectoral mobility persists. Again, the quantitative effects are unclear: while there is some hope that the aging process will solve the unemployment problem by the increase in labor demand (and a decrease in labor supply?), high frictional unemployment might undo this effect. Due to the skill bias, this might lead to a parallel existence of scarcity among the high-skilled and unemployment among the low-skilled: thus to an aggravation of a phenomenon already present in the structure of today's labor markets. The picture becomes even more complicated by the possibility of interdependence of the age and the skill structure of the labor force.
  
• Demographic change will also alter international trade relations. Capital will flow from countries with relatively old populations to countries with relatively young populations, since capital returns might be higher in the latter due to high investment demand and a low savings capacity. Even when the whole world ages gradually, it is the large relative differences in aging that drive these capital movements. This insight is of crucial importance to Germany, since the population share of older citizens is already today one of the world's largest. Cross-border capital flows must be financed via the balance of payments. It is therefore likely that Germany will turn from an export champion to a net capital importer. It should be noted that these increased imports go hand in hand with the scarcity of labor. Little is known about the size of these capital flows. It depends on the speed of international capital market integration and the extent of globalisation in goods markets as well as the reduction of investment barriers in developing countries.
  
• Additionally, there are timing issues concerning the international capital flows. The anticipation of a large population share of the elderly in the future will lead to large capital outflows in the present and reversal flows in the future if the elderly repatriate their internationally invested capital for consumption in old age.
  

All these future developments need to be anticipated- not at least in order to reduce or entirely prevent transition problems. Though these topics begin to appear on the political agenda of governments and international organizations, data and appropriate models are still missing. They are crucial for measuring the quantitative dimension of these developments. It will be the main task of MEA to develop the necessary tools for a quantitative analysis and subsequently provide help and advice in this area.