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households, two regional governments, a central government, and the rest of the
world. The policy simulations from the ICGE model identify how an ageing
population affects regional economic growth and disparity over 15 periods. In
addition, this paper examines how these economic losses can be compensated by
educational investments in the 20-29 age cohort.
As noted earlier, the proportion of the elderly population (65+) to those of
working age (15-64) in Korea is expected to rise from 11 % in 2008 to an estimated
23 % in 2030. Dealing with this reality presents a unique challenge for the
government, as the welfare programs typically used to alleviate socio-economic
problems—such as public pension payments, medical insurance benefits, and
public assistance for the low-income classes—are in need of rapid expansion, and
yet tax revenue is on the decline (Chun
2006
). The main objective here is to
estimate how much of an increase in labor productivity is required to offset the
effect of a shrinking labor force. The increase will be assumed to be derived from
educational investments on economic losses incurred from the population aging
using an Interregional CGE Model (ICGE) of Korea. The ICGE model identifies
three industrial sectors: primary (i.e., agriculture, forestry, fishing, and mining),
manufacturing, and service industries. As to the regions, the SMA accounted for
roughly 47 % of the national population and over 80 % of all major enterprise
headquarters, while only accounting for 12 % of Korea's territory. The ICGE model
accounts for the behaviors of the economic agents of six producers, two regional
households, two regional governments, a central government, and the rest of the
world. The policy simulations from the ICGE model identify how an aging popula-
tion affects regional economic growth and disparity for 15 periods.
Analysis of the structural changes in population composition, age-earning pro-
file, and income sources found that as the growing aging population becomes less
economically active, they are likely to become increasingly economically depen-
dent. This potential outcome is supported by the fact that the 60+ age cohort
depends significantly more on outside income (e.g., social security) than other
age groups, while simultaneously possessing considerably lower overall income
levels. Non-wage income sources, such as grown-up children, subsidies from state
or local governments, and social security benefits, account for over 50 % of the total
income of the 60+ population. Hence, it is important to understand how the elderly
population functions before the combined effects of their dependency and increased
longevity (due to higher life expectancy rates) acts as a damper on contemporary
economic growth.
In contrast to the earlier work reviewed here (Kim and Hewings
2013a
,
b
,
c
) that
integrated a perfect foresight assumption for households with an optimization
behavior for consumers and producers. More attention need to be directed to the
specification of interregional economic interactions and the roles of financial
sectors in the market. For example, the ICGE model follows an adaptive expecta-
tion for price inflation, whereas Kim and Hewings' (
2013a
,
b
) model employs
Auerbach and Kotlikoff's OLG model to accommodate uncertainty and idiosyn-
cratic risk. This means that household consumption in Kim and Hewings (
2013a
,
b
)
is accounted for in terms of a mathematical optimization process, whereas in the
ICGE model, household consumption is determined by the saving rate.
