Demography In Davos

As Claus notes on his own blog, demography actually hit the agenda at the Davos World Economic Forum this year. And as Alex on Afoe also points out some of “the world’s most important bloggers” were even invited to boot, though not, of course, Claus and I: next year perhaps :).

Nonetheless it is significant that the topic is now making it onto the agenda, and of course, where there is still life there is still hope.

Perhaps the most serious topic to get an airing was the state of play in the ex-USSR:

One of the dominant themes emerging from Davos this year is the power of demographics. Population isn't exactly destiny, but it's a huge determinant in how nations, economies, and companies fare. And the demographics often reveal trends that, on the surface at least, contradict the general appearance of a nation's prosperity.

Take the case of Russia. Under President Vladimir Putin, Russia is harnessing its oil and gas reserves to reclaim its status as a power with which to contend. But at a dinner presentation on Wednesday night, demographer Nicholas Eberstadt painted a starkly different picture. Russia's mortality rate is catastrophic, its birth rate abysmal. There will come a time in the not-too-distant future when Russia's depleted population will threaten the Kremlin's neo-imperialist designs.

Now you can find more material on the state of Russian demographics onsite here, and you can find an excellent review by none other than Nicholas Eberstadt himself here (Pdf).

But of course, while Russia's demographic plight may be unusual in its severity, as Claus indicates here, the issue affects virtually all the Eastern European transition societies to some degree or another, and whatever the level of catch up growth they may now be experiencing, at some point or another capacity issues regarding their labour supply are going to hit them, and hard.

Of course some societies are not even getting the benefit of external investment driven catch-up growth: Serbia for example. And with this in mind I found this article pretty revealing about some of the issues which are building up, and about how the young people simply shut up shop and leave:

Although vast parts of the East labored to rebuild their economies in the 1990s and join European life, Serbia did not. It pursued wars in parts of the former Yugoslavia — Croatia, Bosnia and Kosovo — that in turn led to Western sanctions and NATO airstrikes. Even in the eight years since the last war ended, commerce has not revived in cities like Leskovac, in southeastern Serbia. The heavy cost is still being tallied, in the young who flee and the others who turn gray and dispirited.

Babicko, a nearby village, is simply dying. Of 700 residents, only 4 are children of school age. Houses, whether of stone or mud brick, are falling into disrepair. When the time comes, "my daughter can try to sell it," said Ljuboslava Svetkovic, a pensioner living there. "If not, it will all collapse."

Leskovac's proud industrial history, in which textiles played a leading role, dates back 150 years. In the 1860s, the city was Serbia's second-largest, and by the start of the 20th century its wool and cloth exports brought the city renown. In 1990, Leskovac had a population of 69,000, with nearly 11,000 employed in its textile factories. Today, the industry has collapsed, with just 880 workers remaining. Pensioners and the unemployed outnumber those with jobs.

"This is the Balkans," said a forlorn Ljubisa Svetanovic, 55, who lives in Babicko. "God has said good night. Life stopped here a long time ago."

Peter Drucker on Demography

Could microeconomics help us out?

I'm new here, so I think it's good to start by writing about what awoke me personally to the issue of ageing populations. About pension bombs and dependency ratios I had heard before, but it took one course book, about three years ago, to realise that there's much more involved than that. In fact, the book I read gave it only one chapter -but it was written by Peter Drucker, and he can be quite convincing. (In this one, the Mediterranean reality, for example, is described as that of "collective national suicides".)

Drucker himself (who died in November 2005) lived a long life too, a week short of 96 years, and during his lifetime he provided a good deal in the way of of visions and predictions; and with those he had an uncanny habit of being usually right. His last vision was something he called the Next Society, a kind of synthesis of three great changes -the rise of knowledge workers, the disapperance of organisational hierarchies, and the cataclysm of demographies. The Economist summed it up in a survey in 2001 (unfortunately for subscribers only) and basing myself on that survey, and the book I mentioned, I'll now try to explain why demography mattered to Peter Drucker.

Firstly, politics in many old democracies will become a mess:

winning the support of older people will become a political imperative in every developed country. Pensions have already become a regular election issue. There is also a growing debate about the desirability of immigration to maintain the population and workforce. Together these two issues are transforming the political landscape in every developed country.

In the book Drucker goes as far as predicting that, due to the new imperative, we can kiss goodbye to strong governments and their normal 4-year lifespans; instability will become a norm. There's no political system that is prepared to absorb the intergenerational conflict of interests as a major issue. On the contrary, there are some electorates that haven't so far even digested this contemporary version of the political compass -I just can't help thinking of Italians and their dilemma of how to be liberal without being a communist- so it'll be quite a chaos in 2020.

As for the (partial) resolution of the conflict -immigration, that is- Drucker stresses that the traditional migrant havens of USA, Canada and Australia will have a head start over Europe and Japan. And indeed, Europeans have been rather good at making a fuss already of their current foreign populations so how on Earth are they going to handle it on a much larger scale?

Secondly, the nature of labour will also change dramatically:

In future there will almost certainly be two distinct workforces, broadly made up of the under-50s and the over-50s respectively.

The younger group will need a steady income from a permanent job, or at least a succession of full-time jobs. The rapidly growing older group will have much more choice, and will be able to combine traditional jobs, non-conventional jobs and leisure in whatever proportion suits them best.

It's not certainly breaking news to anybody following this blog, but as people live longer they must be expected also to work longer. And this calls, naturally, for more flexibility -from employers, governments and trade unions. According to Drucker, companies that are fast enough to attract retiring knowledge workers by tailored, part-time, or part-year, contracts will gain a huge advantage over their competitors. Most people will opt for two careers; working first their conventional full-time one, and later the second one as a freelancer.

Governments, then, will have to moderate falling participation rates by well-targeted tax breaks (since I don't believe that they'll be able to reform their pension systems much further, within the new political climate) and trade unions must deal with the idea that tomorrow's employees can differ greatly in their interests and preferences. (Well, to this Drucker would probably remind us of how the knowledge worker has already made the traditional unions structurally obsolete.)

This is also interesting:

The split into two workforces is likely to start with female knowledge technologists. A nurse, a computer technologist or a paralegal can take 15 years out to look after her children and then return to full-time work. Women, who now outnumber men in American higher education, increasingly look for work in the new knowledge technologies. Such jobs are the first in human history to be well adapted to the special needs of women as childbearers, and to their increasing longevity.

Pro-natal HRM, anyone?

Thirdly, the markets will diverge too:

The bubble market of the 1990s, with its frantic day-trading in high-tech stocks, belonged mainly to the under-45s. But the customers in the markets for investments, such as mutual funds or deferred annuities, tend to be over 50, and that market has also been growing apace. The fastest-growing industry in any developed country may turn out to be the continuing education of already well-educated adults, which is based on values that are all but incompatible with those of the youth culture.

But it is also conceivable that some youth markets will become exceedingly lucrative. In the coastal cities of China, where the government was able to enforce its one-child policy, middle-class families are now reported to spend more on their one child than earlier middle-class families spent on their four or five children together.
...
But this new luxury youth market is quite different from the homogeneous mass market of the past 50 years.

So the mass markets of all sorts, and the old market positions of firms therewith, will fade away; ageing populations aren't challenging only public finances and political systems around the world, but their impact to business strategies is also something unique. And it is this micro side of the economics of ageing, that I'd like to emphasise here.

Whereas the fiscal troubles, and maybe the limits to productivity growth (as people can't adapt new skills that easily when they grow older), are something inevitable, I wouldn't say absolutely the same about the demand constraint -as such, one matter that I hadn't taken into account at all prior to bumping into this site, by the way. Although I find it realistic to presume that older consumers tend to save more and spend less, I believe that it is the least determining of those factors. And if it doesn't determine, it can be overcome.

What about if it's the companies that have been simply incapable of meeting the preferences of the senior consumer? And if so, then what is it that the senior consumer prefers?

I'm only guessing, but I'd point to the emergence of the services sector. If you're old(ish) and if you have your career behind, you probably have both time and money -and maybe it's value for time that you're now after? Drucker gave those educational services, and lifelong learning, as an example. It might be one part of the answer, and now we only need the others.

So, would someone please like to tell us: what do the old people want?

Migration in Eastern Europe - Getting it Right?

Earlier this week the World Bank published a large report on migration and remittances flows in Eastern Europe and Central Asia. The report is interesting to read and most importantly in my opinion it fields a very impressive dataset on the importance of remittances flow from emigrants towards Eastern Europe in terms of the general macroeconomic environment. However, the report has some weaknesses and some sadly some notable ones which also why I saw the need to pick on the report a few days ago over at GEM. But also the Eastern Europe correspondent at The Economist Edward Lucas directs a critique of the WB report in the latest Europe.View column.

So what are the issues here? Well, as Edward Lucas puts it ...

'Forget, for a moment, the headline stories from central and eastern Europe―the pipeline politics, the corruption scandals, the treasonous tycoons. The big story in the ex-communist world is people. Too few are being born. Too many are dying. And tens of millions have changed country.'

So this is in fact all about demographics and incidentally this is also where I am most dissapointed of the WB report; namely its lack of sensivity towards demographics in the region and generally its assumptions on future trends. In short, ... I have three overall remarks and points of criticism on the report.

• Firstly there is Russia and although the report is not wrong per se in its analysis and description on Russia I believe the perspective is biased. Consequently, Russia is outlined as almost an immigration magnet for immigrants in especially the CIS countries. However the report does not adequately emphazise, in my opinion, the general dire state of Russia's demographics. A notable point here is as is also briefly mentioned in the report that Russia's population is declining despite the influz of immigrants. Moreover, I also believe this aspect could have been illuminated by incorporating some form of fertility component in the measures and assesments of intra-regional immigration

• Secondly I am at odds with some of the reports assumptions on future trends for migration and comparisons. A notable example is how the region (Eastern Europe + CIS) in the future will be able to leverage immigration from Asia and Africa in order to offset ageing and population decline. This analysis is oddly based on the assumption that as the region no longer is to produce emigrants it will begin to demand immigration. This is of course true but it is not very likely in my opinion that this will be possible. Another similar point follows from the report's assumption that the East-West migration from Eastern Europe to EU at some point will reverse as the emigrants return to their home country. Can we really assume this?

• Thirdly and finally I am a bit dissapointed that the report albeit its very comprehensive description and account for remittances flows does not take into account the human capital component of these flows as they are associated with an outward flux of a relatively scare ressource from Eastern Europe, namely skilled labour. This has long term growth implications specifically tied to many countries' ability to push up the value chain and also more importantly this is intimately tied to the large degree of remittance flows.
  

As I said in my post at GEM I might be unfairly cherrypicking the WB report but in essence I believe that the dots could have been connected much better than is the present case.

Germany: Fiction vs Reality

The old adage that life is but a faint copy of art took a new twist in Germany this week as:

"Two veteran film-makers confronted Germany's troubled health care and pension systems, throwing themselves into a sensitive debate which many political leaders have shied away from."

Now, not having seen the film in question it is hard to judge the quality of the treatment or the validity of the specific points they make, but the very existence of this contemporary confrontation of life and art, of politics and fiction, and the simple fact that the filmakers are raising the issues they are in the way that they do, while far too many "reality based" politicians are ducking them, seems interesting in and of itself to me:

With governments apparently reluctant to get to grips with the political time-bombs, film-makers Regina Ziegler and Dieter Wedel are helping to force the topics into the spotlight with separate controversial television feature movies.

Chancellor Angela Merkel and other politicians often talk of "demographic developments" to try to explain away problems in pensions and health care.

But the population is shrinking, health care is becoming unaffordable for some and the pension system is under-funded.

Ziegler, 62, and Wedel, 64, have used fiction to hammer home the point that Germany, once one of the world's richest nations, faces what they believe are health and pension crises.

"The political leaders are afraid to be honest," Wedel said in an interview with Reuters ahead of his February film "Mein Alter Freund Fritz" (My Old Friend Fritz) that takes a scathing look at profit-hungry hospitals and doctors.

"It's unfortunate that there is so much cowardice and ducking away from problems," added Wedel, who wrote and directed the 99-minute, 2.4 million-euro ($3.11 million) film for ZDF television.

At least someone somewhere, in their own way, is trying to get this topic straight onto the table.

Ziegler's 135-minute science-fiction film "Aufstand der Alten" (Uprising of the Old People) is a faux documentary-style production set in 2030. More than 10 million viewers saw it on ZDF last week and it sparked widespread debate in Germany.

In the film, most senior citizens are on the brink of starvation with minimal pensions and almost no health care.

A journalist played by Bettina Zimmermann is investigating the mysterious death of an elderly rebel leader and "looks back" at the uprising's roots, discovering empty promises by leaders about pensions and a failure to fix the problems in the past.

The film has upset viewers, many unable to distinguish fact from fiction. One retired political leader, Kurt Biedenkopf, said "Uprising of the Old People" is a belated wake-up call.

"If films like these were made 15 years ago, we wouldn't have wasted as much time and wouldn't now be worrying about the disaster we're heading for," said Biedenkopf, formerly a leader in Merkel's Christian Democrats and premier of Saxony state.

"A film had to first come along before enough people recognized the problem," added Biedenkopf, 76, in the Hamburger Abendblatt daily.

The ratio of workers for each pensioner is expected to fall to 1-1 in 2037 from 2-1 currently -- and 8-1 in 1957.

The population of 82 million is expected to drop to 70 million by 2050. The low birth rate means average ages are creeping up -- from 42 years currently to 50 by 2050. Data from the federal statistics office projects the number of those aged 80 and above will rise to 10 million by 2050 from 4 million.

China To Retain One Child Policy

Sorry for the lack of posting everyone, but Claus and I have been fairly busy over the last week or so setting up an new economics blog: Global Economy Matters. Some of the themes (but by no means all of them) will be already familiar to regular readers of this blog, especially this one on Japan from Claus. I mean, if we are to some extent right (as opposed to the majority of mainstream economic analysts) about why the BoJ is having so much difficulty raising interest rates it is to some extent due to the sort of ideas we have been working out on this blog.

Now for the main objective of this post. This is not good news:

China has decided not to relax its one-child policy, although a top family planning official acknowledged Tuesday the policy has accelerated the nation's growing gender gap. ... Yet after a review last month, he said, the government decided to maintain the policy, which dates from the late 1970s, and limits urban couples to one child and rural families to two children. Dropping the restrictions now would risk a population surge as a baby boomer generation born in the early 1980s becomes ready to start families, he said.

Now let me be very clear at this point. China needs to introduce pro-natalist policies, and it needs to introduce them urgently. The discourse on sex-imbalances is important, but in this context it is an entirely secondary issue.

If China cannot alter (and it may already be too late) the structure of the population pyramid (and doing this like Scandinavia or Slovenia can with migrants is just unthinkable) then the whole path of savings and investment in China is going to be totally distorted.

The implications of China's rapid ageing are already significant IMHO, but quite frankly this is nothing in comparison with what we might expect 10 to 15 years from now, when it is even possible that the structural distortions may serve to crash the entire global economy. So this is not a light matter in the least. This is why all those who pursue a "demography doesn't matter" type argument should at least have a hard think about things. I can contemplate the possibility we might be wrong (and when I see the evidence, like a lasting and sustained internally driven economic revival in Germany) I am ready and willing to correct, but do those of you who differ ever even consider engaging in a 'what if' type thought experiment? Or are you happy to go to Monte Carlo and bang all your money on the red. The stakes here are high indeed.

Labour Market Data and the Economy

If there is one thing we that we been able to demonstrate again and again here at DM it is that demographics and economics are tightly interconnected subject areas. One of the crucial aspects of this interconnection is the economic notion of the macroeconomic supply side where we are looking at the number and characteristics of the workers available for an economy. This is a pretty simple conceptualization and I hardly think anyone would argue with me here. Yet, in the real world the relationship between demographics and the supply side is a dynamic relationship which fluctuates as a function of the ever changing nature of a country's population and labour force.

My main source for this entry is a speech on US labour market data by the President of the Federal Reserve Bank of Chicago Michael H. Moskow. Now Edward has already drawn attention to this speech in a very comprehensive post over at Bonobo Land but I thought that I would point DM readers in Moskow's direction because it is a really thorough speech which raises a lot of important and tought provoking points. Why then is this speech so good?

In terms of the perspective of Moskow adopts, he quite naturally looks at the need to scrutinize US labour market data in order to accurately gauge the level of potential output of the US economy going forward and as a result to think about the issue of price stability in the economy. However, what is particularly interesting is Moskow's focus on the evolving labour market and as such the evolving benchmarks we use to analyze an economy.

An important observation is that labor markets are constantly evolving, which can cause these benchmarks to change. The demographics of the workforce are constantly changing. New labor market institutions have altered the way firms hire, organize, and pay their employees. Monetary policy could go off track if we don't recognize the impact of such structural changes on the economy and the benchmarks we use to evaluate the incoming data. So today I would like to take a more detailed look at a number of these structural changes and how they have influenced some of our important benchmarks. And as I go through them, you'll see a recurring theme: research can provide us insights into the workings of labor markets that can be very valuable in making well-informed monetary policy decisions.

A good example of the above would be the recent discussion we also had here on DM about the changing labour participation rate in the US and how this affects the potential output and subsequent monetary policy decision. Another key quote is the one where Moskow - unlike many of his mainstream US labour market economist colleagues - dares to include demographic indicators as an integral part of the labour market benchmark he is trying to account for.

Of course, the proper benchmark depends on other factors as well, including growth in household wealth, the long-run health of Social Security and Medicare, and trends in fertility, life expectancy, and especially immigration. Major changes in our immigration policy, for instance, could have a big impact on the rate at which the workforce expands and, therefore, the estimate of employment growth consistent with sustainable economic growth. Research by labor economists can be used to improve the estimates of the effects of these factors on the growth in the labor force. This can help us better anticipate changes to our employment benchmarks in the future.

Now all of this was just a quick pointer, as the topic is extensive, and is only now really begining to raise its head in current macro debates. However I highly recommend a closer look at the whole speech and if you want some commentaries and thoughts as well, then Edward's post linked-to above is a good read too

A Demographic Divide?

In the post below Edward discusses the demographics of Nigeria and more specifically how economic growth also is effected by high fertility parallel with the situation of economic growth and low fertility which is perhaps more widely cited here at Demography.Matters. As Edward notes in relation to Nigeria and more generally in the context of many sub-Saharan Africa high fertility is at the heart of the growth issue. The point here is in fact the savings rate and crucially what we could call a Malthusian trap where all the income is used for consumption and thus there is no room savings/investment dynamics (capital accumulation). Robert E. Lucas also explains this process in terms of the growth feedback with Malthusian population dynamics.

Between year 0 and year 1750, world population grew from around 160 million to perhaps 700 million (an increase of a factor of four in 1,750 years). In the assumed absence of growth in income per person, this means a factor of four increase in total production as well, which obviously could not have taken place without important technological changes. But in contrast to a modern society, a traditional agricultural society responds to technological change by increasing population, not living standards. Population dynamics in such a society obey a Malthusian law that maintains product per capita at $600 per year, independent of changes in productivity.

This is a subtle point though since as also noted by Stirling in the comments section capital accumulation occurs with diminishing returns so the feedback with growth is not linear in the long run. For an excellent conceptualization of the theoretical aspect of the argument I recommend Paul Krugman's article from 1994 about the myth of Asia's growth miracle (PDF).

This has been a small deviation from my original point with this post which was to discuss the concept of the demographic divide as it is being outlined in this article by Mary Mederios Kent and Carl Haub from the Population Reference Bureau. Interestingly enough the article makes kind of the same juxtaposition as Edward does below between a country with a comparatively low fertility (Japan) on one side and a country with a comparatively high fertility (Nigeria) and how this has a profound effect on the two societies.

Public attention has begun to focus on the "demographic divide," the vast gulf in birth and death rates among the world's countries. On one side of this divide are mostly poor countries with relatively high birth rates and low life expectancies. On the other side are mostly wealthy countries with birth rates so low that population decline is all but guaranteed and where average life expectancy extends past age 75, creating rapidly aging populations.

But this gulf is not a simple divide that perpetuates the status quo among the have and have-not nations. Rather, it involves a set of demographic forces that will affect the economic, social, and political circumstances in these countries and, consequently, their place on the world stage. Demographic trends are just one of the factors determining the future of these countries, but these trends are a crucial factor.

The main point here is then to emphasize the real but very diverging impact different levels of fertility have on the economic environment as a function of how far along a country has ventured in the demographic transition. But perhaps also to point to the idea of a demographic divide and how we can use this to conceptualize the global demographic environment?