Saturday, June 23, 2007

WB Report on Demographics in Russia and Eastern Europe - Getting it Right this Time?

The demographics of the Eastern Eurpean acession countries and Russia has been a recurring topic here at DM. Recently, I had a note up on the nature of the economic convergence/catch-up process which I hypothesized would be affected by the fact that the demographic transition in Eastern Europe has moved far beyond the process of economic development. More pertinent in the context of the immediate reference at hand I also had a note up some time ago responding to a World Bank report on migration and remittance flows in Eastern Europe, former Soviet Asia and the CIS. At that time, I was rather critical towards the World Bank report mainly because it did not seem to take into account the general demographic situation in the region as well as the fact that it failed to take into account the obvious (especially in some countries) relative human capital implications of remittance flows.

Now, the World Bank has just published a very comprehensive report on the demographic future of Eastern Europe and Russia entitled From Red to Gray - The Third Transition of Ageing Populations in Eastern Europe and the former Soviet Union. In many ways, this publications implicitly responds to many of the critical points I levied towards the beforementioned World Bank report on migration. In fact, I would say that by combining the two reports you should a very good picture of the general situation in the region. I still have one small quibble though which is contained within the quote below from the lead economist at the World Bank, Gordon Betcherman. The important point is emphasised in bold.

If measures are taken to improve labor productivity, this would clearly outweigh the losses due to a smaller labor force. Output in aging countries can also receive a boost from increases in labor force participation through raising retirement ages and encouraging flexible forms of employment. And politics permitting, shortfalls in labor supply can be minimized by interregional migration.”

Once again as it was the case with the previous report on migration, this is an assumption I am very skeptical on. Perhaps some countries will be able to leverage intra-regional migration to mitigate the structural decline in the labour force but surely not all. Moreover, given the general and universal trajectory of the demographic transition as well as the steady net outward flow of labour from some countries towards the west this remains a very thin hypothesis and assumption I think.

Regarding the issue of intra regional migration and the prospect for countries to leverage this in the future this assumption in particular (from chapter 2 0f the report) is what I am skeptical of ...

The uneven aging patterns across countries mean that intraregional migration can play an important role in boosting labor supply in older countries. The flow of migrants—primarily from Central Asia to Central and Eastern Europe and to middle-income former Soviet countries—could be an important source of income for the sending countries while meeting the labor needs of the receiving ones. An effective framework for regulating both temporary and permanent migration will make this process more efficient and equitable.

Especially, the notion of 'uneven' is odd here I think since whilst this is no doubt true it is also true that almost all countries in the region is set to age rapidly over the next 20 years. In short; it is unclear I think whether in fact those countries who are supposed to supply migrants will want to/can shed the workers when push inevitably comes to shove.

Having said this however I do think that this WB report is much worth while and indicative of the issues at hand. Of particular note I think is in fact chapter 2 (PDF) which discusses the impact of demographic change on the labour market. Here is the general intro ...

Demographic trends can have direct implications for labor markets through three primary channels: labor supply, labor productivity, and labor demand (because of shifts in the structure of aggregate demand). This chapter focuses on the first two. The conventional wisdom is that aging societies will face difficult economic and social challenges because of what will inevitably happen in the labor market - that is, output will be reduced because the labor force will shrink as large numbers of workers retire and because older workforces cannot produce at the level of younger ones. These are legitimate concerns; however, the story is more complex and may be less demographically determined than conventional wisdom suggests.

Especially the outlook to raise what seems to be structurally low participation rates and early retirment age seems to represent a very sound general policy advice on a regionwide scale. Before I sign off I also want to note chapter 3 (PDF) which tackles the issue of ageing, financial markets and saving and thus also the inevitable and very complex question of just how the life cycle pattern of saving/consumption looks and will look in the region. Here is the intro ...

A common view is that aging societies can expect reduced levels of domestic savings because older people save less and that low savings will lead to lower capital accumulation, which, in turn, will depress investment and growth. Where aging is occurring in Eastern Europe and the former Soviet Union, will savings decline and thus constrain economic growth?

Different factors come into play in determining the specific financial consequences of aging in the region. Certainly, there are reasons to question whether the impacts expected under pessimistic scenarios in the older industrial countries will necessarily happen. In the first place, it is not clear how well the age-saving profiles that have emerged from research in those countries apply to transition countries. Not only is there very little analysis of this relationship in the region, but also it is far from clear whether the saving patterns of the past 15 years can be extrapolated into the future.

In the end and even though I have my reservations of the assumptions on the nature of future intra-regional migration this WB report is much worth while I would say so be sure to bookmark it for later reference.

13 comments:

Randy said...

Claus:

"In short; it is unclear I think whether in fact those countries who are supposed to supply migrants will want to/can shed the workers when push inevitably comes to shove."

They might not wish to, but I think that the migratory pressure would be pretty intense. The rapid depopulation of the most marginal post-Communist states in Europe--Moldova, Georgia, and Armenia come to mind, as does Ukraine and most of southeastern Europe to a lesser extent--has come about despite the benefit that would have accrued to these countries if they had managed to avoid that sort of depopulation.

We might be seeing the formation of permanently depressed zones in Europe, places where the labour force available just isn't productive enough for catch-up to take place, creating a self-perpetuating situation.

Robert said...

In the broadest sense, if the number of labor participants is going to decline, and if today, economic growth occurs where there is a sufficient density of workers with the right skills, it seems inevitable that labor participants will congregate, and parts of the world will be mostly abandoned.

CV said...

@ Robert and Randy ...

Well, I don't deny that this might be the case in so far as 'adjustment process' goes. But this adjustment process while bening perhaps overall will also be painful for some regions and especially in the context of ageing which tend (I would presume) to make the labour pool/people more inelastic/imobile to movements across borders. There is also the bequest motive here and in some parts of the the CIS the young people simply won't be able to leave that swiftly since they have to take care of the elderly population. Clearly, remittance flows show us that this might work out anyway but my guess is that there is a structural limit.

So, I pretty much agree with the both of you but I guess I am skeptical as to how this whole adjustment process plays out for the people who cannot move.

colin said...

The trouble is that an exodus of young people may cause quality of life in the source country to decline for those young people who remain, strengthening the migratory pressure further. I'm not just thinking economically here: if you're in your 20s and keen to socialise, how would you feel about living in a town where there are hardly any people of your age? (Lowest-low fertility and the inverted pyramid will also factor in here of course.)

The major cities of Eastern Europe will hopefully retain enough population and job generation to avoid this fate (excepting those that were very specialised in Communist times and still haven't recovered from the departure of heavy industry, the military or whatever). But the countryside might be a different matter. As in much of the world, there are big push factors in the countryside to start with, and young people from there would normally be flocking to domestic cities, especially the highly educated. But given the chance, maybe they'd rather move to a foreign city in a more prosperous country?

As for Moldova: Moldovans have an interesting position, because although their country hasn't got anywhere near EU membership, they can easily apply for EU citizenship via Romania. Apparently more than 1/5 of Moldova's entire remaining population has already applied for dual citizenship, which presumably means an even greater proportion of the young, and this figure is expected to rise even further (though of course the Romanian bureaucracy has been completely overwhelmed just by those who have applied already, so very few have actually got citizenship so far). Given the way things are going this is only common sense on the part of individual Moldovans even if most don't plan to emigrate right now, but it doesn't look good for the Republic of Moldova's future viability as an independent state.

georges said...

I'm curious about Poland. As a UK resident I'm conscious of the large number of Poles now working in England. Are they mostly saving up their money to put a deposit on a house or flat back home, or are they planning to settle permanently in the UK? Maybe Ryanair and Easyjet will create a class of people who are permanently bi-national, working in one place, and spending their earnings in another. If they spend some of their money in Poland they will boost the economy there a bit.

I expect some will decide they can get reasonable money in England, but they're more likely to ascend to the top jobs (general manager etc) in Poland.

Colin said...

@georges: I think surveys show that back in 2004, almost all intended to work in the UK temporarily, but now a significant minority want to settle in the UK permanently. Based on past experience it's likely that many of those who still say they don't want to settle will also change their minds, and a fairly large proportion (perhaps the majority?) will eventually settle in the UK. Given their youth, generally high education levels and the lack of any serious cultural barriers, I expect most of those who stay will assimilate quite rapidly (and in the case of children, almost completely), and a lot will get 'high-ranking' jobs once they've had time to work their way up the career ladder. Second-generation Polish Britons and beyond may even be better off than the average indigenous Briton, due to a more pro-educational upbringing in the areas of maths and science, both of which are often met with an infamous disdain by indigenous British parents.

But your comment about 'permanent bi-nationals' is an interesting one. Do you think this could be as important as remittances in the usual sense? I think it could certainly have an effect on the Polish housing market, though I don't know what else Poles living in the UK would travel to Poland to buy.

Scott said...

A very interesting thread...I have a few comments. First, a few years ago I moved into a brand new subdivision in Washington state in the US. About 50% of the homes in our neighborhood were occupied by families that had immigrated to the US from Eastern Europe. My direct neighbor on one side was from Ukraine, as were most of the other families. One family was from Romania. Needless to say, none of them had any intention of returning to their home country. I was given to understand that Ukrainians liked Washington state as opposed to other places in the USA because its climate and forested landscape were reminiscent of the old country.

I have not been able to locate the source of the story, but I recall recently reading a piece in a US monthly (I thought it was Atlantic Monthly, but couldn't find it on that website) that described how the countryside of Russia outside of Moscow, St. Petersburg, and a few other cities is rapidly emptying of people. In any case, "Into the Wooods" is an MSNBC report describing the depopulation trends throughout Europe. One point from that story that backs up Randy's contention about permanently depressed zones is "One third of Europe's farmland is marginal, from the cold northern plains to the parched Mediterranean hills. Most of these farmers subsist on EU subsidies, since it's cheaper to import food from abroad."

The marginal farmlands are likely to be abandoned, precisely because they are relatively unproductive.

I think that Claus makes a good point about some young people being stuck having to take care of elderly family, but I wonder if entire families including the elderly might not make the trek westward. I would think even for an aged person with attachments to the homeland, a flat in an old East German apartment block would be preferable to say a rapidly disappearing village in the Carpathians. My Ukrainian neighbor brought his aged mother to the US.

Tne MSNBC article makes another point that supports colin's conjecture that major cities in Eastern Europe could avoid collapse; its author says "attractive areas within striking distance of prosperous cities are seeing robust revivals, driven by urban flight and a rising influx of childless retirees."

Scott said...

I wasn't aware that the British public think little of science and math as worthy of study or pursuing as a career. Would someone care to elaborate on that? If a significant number of British feel that way then I'd say Britain's long-term prospects are limited.

colin said...

@scott: well, I don't want to exaggerate there's by no means universal hostility to maths and science. But it would be fair to say the UK has two fairly strong currents of anti-intellectualism, both somewhat bound up in class attitudes. One is working-class, part of the peculiar phenomenon of inverse snobbery or aversion to all things 'posh', combined with a despair of climbing up the ladder through education, which is partly due to the real disadvantages poor families face if they want to get their children into high-status schools, which are usually fee-paying, selective or located in an area with very high house prices.

The other is middle-class and a more subtle bias, based on a particular notion of 'culture' that is promoted by media that are dominated by arts graduates. In this view, knowledge of arts, literature, humanities and good English are seen as essential to being sufficiently 'educated' to be considered middle-class, whereas maths (beyond basic numeracy) and science are not. This is not to say maths and science are seen as harmful, it's just that they are seen as only being of interest to a specialised few. In addition there has been a backlash against empirical science in recent years, and I wouldn't be surprised if the UK came fairly low down the list of levels of trust in scientists. There is a widespread belief, even among the 'well-educated', that the results of scientific experiments are determined more by the source of funding than by the laws of nature, and that any evidence level short of certainty is just a matter of opinion, best resolved by debating the 'issues' in a political fashion.

The UK is still in a good position culturally with regards to research, as the lack of respect for intellectuals also manifests as a somewhat anarchic academic culture in which undergrads feel free to argue with world-renowned professors, which is a good thing for innovation (in more hierarchical cultures, the conservative influence of elderly professors tends to reduce the turnover of new ideas). However, the UK lacks strength in depth: while the top of the tree is world-class, people with the moderate levels of maths and science knowledge so often demanded by industry seem to be in very short supply.

Of course, many of the same things could be said of other countries in the West. But it is in marked contrast to attitudes in Europe from Germany eastwards, India and the Far East, for example.

I saw an interesting article on the BBC recently about educational attainment: it said that among those poor enough to be eligible for free school meals, 'White British' is the census group with the greatest proportion of kids who do very badly at GSCE level, with 40 percent of such kids failing to get so much as a single D grade. This suggests that relatively unhelpful attitudes to education among poor White British parents are at least enough to 'cancel out' any prejudice or cultural difficulties ethnic minorities might face, including the oft-discussed disadvantages apparently faced by Afro-Caribbean children (though they were admittedly the second-worst performing group in the study).

Scott said...

Colin,
Thanks for the explanation; that is all news to me, and very interesting. I've read a lot of British history, but I have to admit that I'm pretty unfamiliar with the country's culture is like now.

Colin said...

@scott: Well, I'm basically giving a sketch of how it looks to me. I don't know what detailed research has been done about this. Reverse snobbery and the 'arts graduate mentality' certainly exist, but assessing how strong/prevalent they are is another matter. As a maths student, I probably have a biased perspective.

There's a third type of anti-intellectualism, the 'hard-nosed businessman' school that frowns on anything that isn't commercially profitable. Indeed, Margaret Thatcher, the only science-educated British prime minister I'm aware of, certainly subscribed to this attitude. But this is hardly something unique or peculiar to Britain, and has probably been of net benefit economically.

Colin said...

PS: Here's an archetypal example of the 'arts graduate mentality', in case you don't know what I'm talking about:
http://www.guardian.co.uk/commentisfree/story/0,,1921278,00.html

However, I'm sure this article provoked an angry response from many readers, and not just scientists. So maybe there's hope yet.

Борис Денисов said...

I am a newcomer here, and wish to comment on output reduction stemming from aging, which is a thesis from WB report.

It is very doubtful. Surely retiring cohorts might be more numerous than those entering labor force. But. Considering wages as an output, it migh grow up, since wages's distribution is very similar to fertility one = younger make much more money than their parents.
best
BD