Friday, March 10, 2006

So, you think you can fix the demographic crisis, right?

The spirit of procastination having taken possession of me, and with Google at my fingertips, I decided to abuse numbers in a most outrageous way. What follows is, at best, statistical fiction (one day I want to help write the U.S. budget, which is the Da Vinci Code of statistics: everybody knows it's fiction, from the writers to the critics, except the clueless millions who don't).

Using the data in the rather interesting Table 6 of the EC's paper The economic impact of ageing populations in the EU25 Member States we linked to, let's do a quick back of the envelope calculation about what we could do to help Italy get to 2050 in a good economic shape. After all, I'll be about seventy by then; I might want to retire to Firenze like Hannibal Lecter ("retire" of course, will be relative by then).

The concrete problem is this: The EC projection indicates a 1.5% average annual GDP per capita growth for Italy in the period 2004-2050. How hard would it be to raise it to 2%? Two percent isn't an unreasonable figure, is it? But the demographic shift makes it quite challenging.

Basically, you need to change the average annual change in labor input from -0.2 to 0.3 points. As the former figure takes account of changes in participation, postponed retirement, etc, this can only come from a combination of migration, unexpected extra delays to retirement (which can only come from unexpected extension of life, as all the slack is already accounted for in the table), or changing demographic dynamics.

For the latter, as children per woman in Italy are about 1.23, you'd need to raise that to (handwaving) about twice that. *Or* you can take immigrants, but the economically active population of Italy is about 25 million (right now), so we are talking in the order of more than a thousand qualified migrants a _year_. For ever and ever (of course, pretty soon they'll start changing the aggregate dynamics themselves, so perhaps you'll get off lightly - but there's still the fact that few
countries attract that number of migrants, and even fewer are integrating them well).

*Or* you can raise life expectancy enough so 0.3% of your population that would leave the productive age bracket would stay there. Now, assuming a bit of linearity here and there (retirement, after all, will be already as close to death as possible), as Italy's death rate is about 1.0% each year, this would mean, roughly, that you have to prevent one in three deaths that would happen each year. Just to put this in perspective: that's equivalent to curing cancer.

These are your choices, then (without being too serious about it):
* Convince every woman in Italy to have twice as many children as she had planned to have.
* Import a hundred thousand working-age migrants (with the average productivity of the average Italian) per year.
* Cure cancer.

Bottom line: There'll be no easy solutions, probably no reasonable ones, and certainly no "normal" ones. This problem will take some creativity to solve.


Edward said...

"more than a thousand qualified migrants a _year_."

This is a typo isn't it? The thousand I mean.

"The EC projection indicates a 1.5% average annual GDP per capita growth for Italy in the period 2004-2050"

This is a point I wanted to make on Claus's post about the developing countries, these figures need to really be treated with a lot of caution. Last year Italy managed zero growth. Over the past ten years it has managed an average of 1%, ditto Germany. In theory things were better then. I don't know where they suck the 1.5% from, but I hardly find it credible.

"*Or* you can raise life expectancy enough so 0.3% of your population that would leave the productive age bracket would stay there."

Well there is an interesting question here, is the increase in life expectancy subject to rescaling? This is, I think, unknown, although the growing number of eg Altzheimer cases here in Europe suggests that it may be.

What am I getting at here. Well the question is what does living longer imply, that all the stages in our life course grow by an equal proportion? This seems the most plausible explanation if you look at the later and later ages at which people say become independent from their parents.

Well this means that the economically dependent years are not fixed in number, but a fixed proportion of the life. In which case increasing life expectancy doesn't necessarily change things (at least not very much).

Anonymous said...

When looking at the economy of Italy you do have to take into account the enormous size of their informal economy. Estimates vary, but a World Bank study )1999-2002 data) puts Italy's informal economy in terms of GDP as 27%. (By comparison, the UK's informal economy is estimated to have 12% and the US about 8%.)
The sheer size of this aspect of the total economy makes analysis of productivity, worker participation rates, household savings, etc. very difficult.
Also, one should take into consideration the offsetting decline in certain national expenses that will occur as Italy's population declines: Lower expenditures for infrastructure, schooling etc. Lower unemployment rates; the 2004 estimate for Italy is about 8.6% official unemployment (which probably in reality is lower, but still fairly high by North American standards), and so on.


Edward said...

"When looking at the economy of Italy you do have to take into account the enormous size of their informal economy".

This is surely true, but the important question would be how this changes over the years. Is there reason to think that ageing could increase the informal share. Possibly, as retired people take part-time jobs. But how does the informal economy affect the productivity profile of the whole economy? This would be the question.

My feeling is that apart from some spectacular exceptions - like drug trafficing eg - most of the work in the informal economy is in the low-value end, which if correct would mean that an increasing reliance on the informal economy would be income per capita negative, to say nothing of making the welfare system even less sustainable.

"Lower expenditures for infrastructure, schooling etc."

Well lower school costs for sure, although education generally may not drop, since a higher proportion will be spending more time (we hope) in tertiary education etc. But remember, apart from declining it will also be getting 'upper age group heavy' and this is expensive in terms of both pensions, care, and the health system. Generally speaking the burden on the Italian State is going to go up (and significantly) rather than down over the next 20 years.

"Lower unemployment rates"

This certainly is true and very interesting, since you get a tightening labour market, wage inflation, and a productivity deterioration. We are seeing something of this already, and in Japan. In theory this should then be offset by more investment in machinery, but we would be well advised to wait and see how theory and reality balance out here.

Anonymous said...

More than twice as many children as she /planned/ to have?

In 1990, the average desired family size was 2.3 children. (Bongaarts 1998.) In 1997 it was 2.1. (Bongaarts 2001.) This is unlike, say, Germany or Austria. So increasing fertility may not be that impossible.

I don't agree with the postulated relationship between demographic and productivity growth, but that's a whole 'nother question.

Anonymous said...

Oh, sorry. The above comment is from Noel.

Edward said...

Hi Noel,

"In 1990, the average desired family size was 2.3 children. (Bongaarts 1998.) In 1997 it was 2.1. (Bongaarts 2001.) This is unlike, say, Germany or Austria. So increasing fertility may not be that impossible."

I have picked this up a bit in a post on ideal family size. As your extract indicates this is an evolving situation (since IFS seems to be dropping steadily). I am sure it is not impossible to increase fertility, in a sense I agree with McDonald. But this is only a short term fix if the long run evolution of fertility is downwards.

We also have the probelm that most low fertility societies are heading towards fiscal crisis and so are resource constrained (Australia and the US are examples of societies which by acting now could do domething effective).

What we need to understand is what it it which is driving the ever lower fertility readings, and that in a way is one of the reasons why this blog is here. Please stick around.

Scott said...

Well said, Marcelo! You have captured the essence of Italy's demographic problem very well.

I don't see the fertility rate increasing in Italy anytime soon. The cultural changes causing the decline in fertility have taken place over some four decades, and any cultural changes that would increase fertility are likely to take a long time to filter through Italian society as well. In the comments the subject of Italian womens' desired family size was raised. I think it is clear that whatever they are saying about their desired family size is not being translated into action.

I believe that in countries today with low fertility rates, women have strong disincentives to having more children. Reduced personal income due to taking time off from work to bear and care for a child, and reduced personal time for studies, play, or work factor into the child-bearing decision. My impression of modern women of childbearing age in Europe and Asia is that careers and leading an independent life take precedence over raising children.

Clearly Italy is not going to be able to attract migrants in the numbers or of the caliber that you have described. Skilled workers leaving eastern Europe have a plethora of choices when looking at where to move to, and Africa doesn't have relatively many skilled workers to begin with.

Meaningful increases in productive life expectancy are unlikely in my view. Increasing resistance of microbes to medications mean that more people are going to be dying of diseases previously thought as easily treatable, such as tuberculosis. Also, the fruits of cultural liberalization during the mid-twentieth century in the form of health problems from drug use and sexual promiscuity will take their toll. Finally, solutions to health problems experienced by the old, such as Alzheimers', don't seem to be quickly presenting themselves.

Finally, I agree with Edward that EC projection of 1.5% growth as a baseline is not credible. So Italy is in a deeper hole and thus needs more radical changes than you explored.

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