The Global Transition – The Impact of Demographics and AI on Economic Power

This study deploys a multi-region, dynamic life-cycle, general equilibrium model to assess demography’s impact, through the course of this century, on global development. Our model’s 17 regions encompass more than 150 countries comprising 99% of the world’s population. Output is produced with three labor skill groups and internationally-mobile capital, with each country deciding annually whether to adopt its frontier automation technology. Our model features region-specific fiscal policy, TFP growth, and idiosyncratic mortality. Agents live for 100 years, first as children, then as workers, and then as retirees. Work and saving decisions are governed by CES preferences. Lifespan is uncertain, but there are no annuities apart from state pensions. Hence, bequests, while significant, are unintended. Our fertility, mortality, and net immigration rates are region- and age-specific and align fully with the UN’s projections. To illustrate demographics’ power to impact the global transition, we simulate our model under the UN’s markedly different demographic projections for 2017 and 2024. The 2024 forecast is particularly pessimistic about China’s fertility prospects. Both projections produce very substantial global aging, a major global capital glut producing very low long-run real capital returns. The latest forecast entails 10% lower global GDP in 2100 and far higher payroll tax rates to fund old-age benefits. Most important, it entails a major change in the course of economic hegemony with China’s 2100 global GDP share falling from 25.6% to 14.9% and the US share rising from 11.2% to 14.4%. Our results are sensitive. Should the US eliminate all future immigration, its 14.4% global 2100 GDP share would drop to 9.2%. And were global fertility to follow the UN’s low variant, 2100 world output would be one third, not one tenth lower. The level and division of global output is also highly sensitive to the speed at which AI expands frontier technologies. Accelerated AU/AI – 4x faster-than-recent growth in capital’s share through 2050 – or Transformative AU/AI – 10x faster capital-share growth – reinforce demographic forces, ensuring long-run US economic hegemony. Indeed, Transformative AI combined with 2024 demographics implies US and Chinese 2100 global GDP shares of 25.3% and 16.9%, respectively. And not withstanding its considerable technological catch up, the US retains, based on our calibration, a technological edge over China throughout the century.