by Edward Hugh
This post is prompted by a comment from Alexei
on my earlier post about Serbia's severe demographic problems. I am only digging into Serbia a little bit to give an illustration of a far more general problem, one which, as I say, implicitly affects a whole swathe of countries: Croatia, Macedonia, Moldova, Ukraine, Georgia, Armenia etc. All these countries face, in addition to all the known demographic problems which face each and every one of the 'transition countries', the added difficulty of being excluded from the European Union. Unfortunately with the current climate towards enlargement inside the EU this situation is unlikely to change much in the near future, and these are likely to be critical years in the demographic history of these countries as the full weight of the second stage of the demographic transition - low fertility and medically driven extensions in life expectancy - comes increasingly to exert an effect.
As a point of entry to this problem it is well worth casting a quick glance over the two demographic maps which can be found in the first article (by demographer Nikolai Botev)
in this collection (Total European fertility rates and Mean age at first birth). What can rapidly be seen is that Eastern Europe has the very unusual combination of both very low fertility and comparatively low first birth ages (in the Serbian case this currently seems to be somewhere round 25). Now what we do know is that in modern developed economies this age seems to trend upwards, slowly and inexorably, towards the 30 years of age range. There is no special mystery about this process, since by and large it is associated with the high levels of human capital accumulation which are needed to operate in the higher income ranges in the new services based information economy. To the extent that this phenomenon then affects wider social layers there is also a 'copy-cat' process to be observed. Either way the result is the same: higher first birth ages. There is no counter-evidence to be found of societies who move in the opposite direction.
So eastern Europe is set to experience a continuing process of rising first birth ages, this is also likely to last for a good number of years, and during this process one outcome is guaranteed: a continuing birth dearth as people postpone having children. In many ways these countries are now firmly set between the proverbial rock and the hard place, as they badly need to raise the level of their economic 'net worth' and yet in order to achieve this objective they are only likely to produce less and less children, which means the structural problems in their population pyramids can only deteriorate.
As I say, those excluded from the EU can only expect an even worse variant on this process, since they are very unlikely to experience significant inward migration, while young people from those countries can be expected to leave in search of work in ever growing numbers. The main problem is that many people, and Alexei is more or less typical here, are in complete denial on the importance of all this. It is 'carry on regardless' mode all round, and this failure to even begin to address the issue only means that the problem gets worse.
Typical of this approach is a recent article which appeared in the Financial Times by Anders Aslund (
full text here). Now Aslund - who wishes to contrast what he considers to be the rather better economic performance of the non-EU Eastern countries with the malaise affecting those who have joined the union (he obviously hasn't read the IMF staff paper linked to below) - argues the following:
Central Europe’s economic results are impressive only by European Union standards. From 2000 to 2005, Poland, the Czech Republic, Slovakia and Hungary grew on average by 4 per cent a year, compared with 8 per cent a year in the 15 former Soviet republics. Even in this boom year, central Europe will grow by 5 per cent, while the former Soviet Union comes close to 9 per cent. Star performers are Armenia, Azerbaijan and Kazakhstan.However, as he also notes, these countries are poor, and their principal priority is to grow:
Barely half as wealthy as the west European countries, the central European nations need to grow more than twice as fast to converge with them.However:
The absence of convergence breeds a sense of permanent backwardness. Unemployment remains high at 15 per cent in Poland. Budget deficits have been abundant, ballooning to 10 per cent of gross domestic product in Hungary. Apart from Slovakia, none of these countries has reformed significantly in the past half decade.....In a prescient paper of 1996, Jeffrey Sachs and Andrew Warner warned that the central European countries would not converge economically with western Europe if they did not cut their high taxes, reduce their excessive social transfers and deregulate their labour markets. A decade later, their public expenditures linger at 46 per cent of GDP, the EU average.Now Asland would blame political pressures associated with EU membership for what he perceives to be the current 'malaise', but there is a significant factor he fails to mention at any point here: their demographics. Not only do these countries face rising health and pensions expenditures as their populations age rapidly (some indication of how this is affecting Hungary
can be seen here, and
here) but they also need
to invest resources on pro-natalist policies, all of which make the low tax, low social spending scenario virtually impossible to maintain politically. And even if it is maintained these countries then face the problem of additional population shrinkage as the young people are forced to venture abroad to seek the higher wages on offer elsewhere simply to send money home to maintain their elderly relatives. The negative feedback effects of pension and welfare reforms just aren't being factored-in in some economic analyzes.
Thus:
Two-thirds of the much higher growth in the former Soviet countries can be explained by their far lower public expenditures. The only other significant factor is the high world prices for oil. The ex-Soviet countries have become part of the high-growth belt from China via India to the Baltics and they look to the economic models of east Asia, with low taxes, limited social transfers and free labour markets, rather than the EU.All of this may well be true, but it fails to address the key issues of the future, which is that this low expenditure is not sustainable, and indeed to blame the public finance pressure simply on 'irresponsible governments' is to miss the central point about what is happening:
Central Europe’s problem is not political instability. Until recently, it had relatively stable, but irresponsible governments, which did little while their economic problems deepened. The recent political turmoil in central Europe may be welcomed as a wake-up call. The Baltic countries are maintaining their stellar economic performance by changing government once a year.
In 1992, the grand old Hungarian economist János Kornai noticed that the central European states had developed a premature west European social welfare system. Their prime dilemma is economic and a general EU problem. Like the EU, central Europe needs to overcome its poor economic dynamism through lower taxes, reduced social transfers and freer labour markets. Possible cures are increasing tax competition from the east and freer labour migration within the EU.As can be seen demographic denial comes at a price: total ignorance about what is actually happening! Of course Anders is right in one sense, good governance is important and necessary for stable economic development, but he would do well to take a quick look at just where the countries he so favourably cites are to be found in the recently published Economist Intelligence Unit
Democracy Index.
Now for Serbia. The most recent summary of the Serbian situation is the October 2006
IMF selected issues Serbia paper, from which I will now freely quote:
Serbia has made significant economic progress since 2000. Output is up 40 percent and the share of the private sector in non-agricultural non-budget employment has almost doubled to around 60 percent. These advances have reversed the decline of the previous two decades. In light of this progress, these notes aim to shed light on the challenges ahead.Of course it is important to remember here that back in 2000 the Serbian economy was virtually in ruins, so climbing back up was not so difficult, it is what comes next which is important:
With capital formation rates regionally low and employment reportedly falling, much of the economic recovery since 2000 has reflected growth in total factor productivity. In part, this is the dividend of corporate reforms which have increased efficiency. But even with the exceptional steel investment in 2004, Serbia’s investment ratios are well below those in other transition countries. Even allowing for data quality uncertainties, these investment patterns raise questions about the sustainability of Serbia’s recent economic growth. The note infers that these investment patterns indicate that a significant further reform agenda—ranging from improved business and political climates, to bankruptcy and privatization—still lies ahead.and on employment:
With the unemployment rate at 21 percent and rising, employment reportedly in trend decline, and future restructuring set to result in further layoffs, the issues are challenging. The note is exploratory, suggesting lines of enquiry rather than firm conclusions about the way ahead. It reports that the employment structure has shifted to the private sector, but cautions that data are not yet conclusive as to whether this is re-classification due to privatization or whether private firms are creating new jobs. It suggests that Serbia’s labor institutions could be reassessed in view of the high and rising unemployment, including the complex wage setting mechanisms in the public sector inherited from the Yugoslav era.Also note the rapid growth of credit, especially to unhedged borrowers (shades of the Hungarian disease):
With rapid credit growth one of the consequences of earlier reform, notably of the banking system, the 2005 FSAP pointed to the need to strengthen banking regulation. Given that the 2005 banking law brought the legal regulatory framework largely in line with Basel Core Principles, this note emphasizes that the key challenge now is implementation. It notes that credit, which is largely fx-indexed lending to unhedged borrowers, requires strengthened regulatory capacity to monitor and manage indirect credit risk arising from foreign exchange exposures.And note these two points from the Main Findings section:
In Serbia, the large current account deficit has been associated with relatively low investment ratios compared to other CEECs (except Bulgaria)—although data doubts remain.
Given Serbia’s large external debt, financing its large investment needs will require achieving higher national savings and attracting larger non-debt
creating flows.and this:
Given these caveats, Serbia’s data suggests surprisingly high external deficits given lackluster fixed investment ratios. Such delinks are not without precedent—after 2001, the Czech Republic and Hungary both reported continued high external deficits while fixed investment ratios declined, in both cases reflecting weakening domestic savings rates. But overall, Serbia’s performance is unusual in degree—reporting large external deficits alongside low investment ratios.Now Demography Matters is now primarily an economics weblog, so I won't dwell further on all of this (although anyone really interested in the details of Serbia's economic situation would do well to read the whole text). Suffice it to say that the situation is far from being an easy one. External debt, sustainable public finance, and high individual indebtedness all combine to make for a very difficult environment moving forward, and the additional problem of the 'demographic whammy' (which most observers don't even start to think about) would seem to mean that the future of this small but significant country would appear to be incredibly bleak.
