15
The relation between net foreign assets and demographic structure also accords with the
thrust of the theoretical literature: a decline in the net foreign asset occurs if there is an increase in the
population shares of younger age cohorts, whereas the net foreign asset position responds positively
to an increase in the share of workers nearing retirement, with a maximum effect for the 50-54 age
group. It is also interesting to note that the over-65 age group exerts a negative effect, consistent with
the running down of net foreign assets.
However, as is evident from columns (2) and (4) in Table 2, the significance of the public
debt and demographic results is lost if wejust look at the more recent 1980-98 period. With regard to
public debt, the weakening of the conditional correlation is due to just one country, Australia, where
public debt exhibits a strong positive co-movement with net foreign assets. If Australia is excluded
from the sample, the coefficient on public debt rises to -0.12 and is strongly statistically significant.
Results for the balanced sample are similar to those forthe 1970-98 period for the full sample.20
We next turn to the results for the developing country sample. First, across columns (1)-(6),
we observe a negative relation between output per capita and the net foreign asset position: as a
developing country becomes relatively richer, it typically sees an increase in its net external
liabilities. The contrast with the result for the industrial country sample is quite striking, although the
negative coefficient is typically small and is insignificant in column (2). As was noted in section 3.1,
a negative association between output per capita and net foreign assets is consistent with the
relaxation ofbinding credit constraints on developing countries.21
Second, Table 3 shows a very strong inverse relation between public debt and the net foreign
asset position. A point estimate in the range [-0.67, -0.86] implies that a 20 percentage point increase
20 Belgium-Luxembourg, Denmark, Finland, Greece, Norway and Portugal were dropped to obtain a balanced
sample.
21 Results clearly suggest that the relation between output per capita and net foreign assets over the entire
sample of industrial and developing countries, is non-monotonic. To some extent, we capture a nonlinear
relation by splitting the sample between industrial and developing countries. We also tried to capture
nonlinearities within the developing country sample by positing the existence of a threshold level of income
(varying the choice of threshold), as well as by splitting the developing country sample into richer and poorer
countries based on initial or average income. However, no strong evidence of nonlinearity emerges from the
analysis—the relation with income per capita remains weak statistically and economically.