Geoscience Reference
In-Depth Information
11.4.2 Simulation with the ICGE Model for Korea
In general, an aging population carries with it both positive and negative effects for
economic development. Negatively, it results in an intergenerational imbalance
between benefits, costs of pensions, and overall healthiness, thereby reducing the
total labor supply and lowering saving and investment rates (Canning
2007
;
Horioka
2007
; Bloom et al.
2009
). Positively, however, it induces higher rates of
labor market participation from older workers, thereby leading to longer working
lives. Moreover, the declining fertility rate associated with an aging population may
lead to a more general increase in female labor force participation, which may help
to offset the foregoing negative effects arising from lower male labor force partici-
pation and savings rates. The impacts an aging population has on changes in the
consumption expenditures, however, can be rather ambiguous in that the effect
depends on life expectancy rates and expected retirement age. For example, an
individual may consume less and work more in order to finance additional con-
sumption expenditures after retirement (Park and Hewings
2007c
). Yet, if one's
expected retirement age were to be deferred in accordance with prolonged life
expectancy rates, future welfare needs may be deemed too distant; hence, consump-
tion patterns might decline drastically as one nears or enters retirement age.
In this section, the ICGE model was applied to estimate the effects of an aging
population on the regional economies of residents for the Seoul Metropolitan Area
and the rest of Korea. The baseline assumed that population aging had not yet gone
into effect. The population share by cohort in this baseline is projected using the
trend from 2000-2005; likewise, all parameters are kept at their 2005 levels, so as to
simulate a scenario in which all population-related policies remain unchanged from
that same year. The base year and the snapshot year for this analysis are 2006 and
2020 respectively; that is, the baseline accounts for what would happen without any
significant changes for a 15-year period. In this paper, the aging population and the
composition of population by age cohort are key variables, and their changes based
on the scenario are considered 'shocks' to the ICGE model.
Regarding simulations, there are at least three shocks including (1) population
effects, such as changes in population growth rate, number of households, working
age population, and labor supply available, all effect levels of private consumption;
(2) technological innovations, which enhance productivity; and, (3) public policies,
such as reforms in pension benefits, education and training programs, and insurance
systems, which may have a variety of welfare related effects. However, only the
third shock is not considered here due to the model structure designed for the real-
side economy. The two other shocks can be taken into account in the model
simulation if the ICGE model is expanded to the financial side economies. The
shock from the population variables is modeled and injected into the ICGE, and
then a new set of equilibrium values can be generated for regional production and
prices for a 15-year span, thereby satisfying the price normalization rule subject to
the exogenous consumer price inflation rate without operation of the interregional
migration module. Long-term effects come into play during the second period in the
form of the stock-accumulation effects of changes in capital stock and population
