Friday, July 13, 2007

Demographics in Eastern Europe are Keeping Us Busy

Regular readers of DM should of course know by now that the posting trend here at DM tend to exhibit considerable volatility. As such, we have not posted for a while but in this post I will do a re-cap of what we have been doing since it after all has a lot to do with demographics. In many ways we are going to pick up the thread from Edward's post below which features an extensive review and preview of the Latvian population and macroeconomy. As such, there has been a lot of flurry recently about the economies in Eastern and Central Europe (CEE) and whether these economies are experiencing economic overheating with a subsequent risk of a crash and hard landing. I will not dig much into the specifics here but rather point to the fact that we, here on DM, on several occasions have flagged the potential for problems in the CEE economies as a result of their assymmetric demographic and economic profiles. A relevant note relative to the topic at hand here is my recent post on the nature of catch-up growth in the CEE economies.

So what is this all about then?

Well, in essence it began with Edward's note linked above on the situation in Latvia and how the very fast erosion of capacity (i.e. labour) was spurring brisk economic growth but also most notably thundering wage growth and inflation. This spurred me to do some investigation on Lithuania where I found that the cyclical and structural run on the labour supply through high growth (i.e. as an emerging economy) and as a result of the country's demographic profile with net outward migration and shrinking workforce is moving very fast indeed. In fact, in Lithuania, with an unemployment rate at 2.7%, we are looking at a window of something like 10 months before the economy 'runs out' of labour at current growth rates and since this is clearly impossible it is hard to see how a correction is not soon coming one way or the other. I also did a similar exercise on Poland where I noted in general how current growth rates in the CEE economies simply are not sustainable given the underlying demographic profile. In short; these economies are trying to catch up with the West but with an enormous chain ball around their ankles in the form of structurally damaged demographic profiles. Furthermore and while I do not think productivity and institutions at all are unimportant in terms of economic growth the process is currently moving so fast that some of these economies essentially end up tumbling into a whole with slippery walls from where it will difficult to climb back.

Our emphasis on demographics as an important explanatory variable as regards to the siutuation of the CEE economies is not a new one and as such there is not much news here. However, both Edward and I have indeed been struck with the absence of demographics in the mainstream discourse on the CEE economies. This is a particular fallacy in the light of the recent focus from the FT and the Economist on the topic at hand and whether indeed some of these countries might end up with a hard landing on their hand. As such, neither the Economist nor the FT seem to regard the demographic component of economic growth as important here in the short term which I, quite frankly, find remarkable given the underlying strong evidence to the contrary. Of course, we should not stomp too much on the Economist and the FT on the basis of just two notes and for the record I am a happy subscriber on the Economist for a fourth consecutive year and the FT's RSS feeds takes up the lion's share of the 'finance and econ news' section in my RSS reader. Yet, as Edward demonstrates in this fine piece over AFOE in which he levies a general critique towards the Economist the issue is more profound than you would perhaps be led to imagine. In this way the issue indeed revolves around just how much importance should be ascribed to economic growth along side institutional improvement and of course accumulation of physical capital. Now, with the reply from the Economist's European weblog (Certain Ideas of Europe) I feel that the discussion is now more open than it was before and just perhaps we can begin to move the 'demography.matters' discourse a nudge closer towards the more hefty opinion makers. This is a fool's hope perhaps but, and I do not say this lightly, even when I put myself in the most objective and unbiased corner as a macroeconomist I feel that it is urgent that demographics are ascribed the attention it deserves.


Anonymous said...

I agree with you on the importance of demography and I agree with you that eastern Europe is headed for serious problems. Heck, I don't really doubt that problems are imminent in the Baltic countries for that matter.

But a devil's advocate has got to do what a devil's advocate has got to do. So...

When you say In fact, in Lithuania, with an unemployment rate at 2.7%, we are looking at a window of something like 10 months before the economy 'runs out' of labour at current growth rates and since this is clearly impossible it is hard to see how a correction is not soon coming one way or the other. are you considering the possibility that Lithuania might start competing with Great Britain for eastern European immigrants?

I know that I would rather go to Lithuania then Great Britain if I was of a mind to immigrate. More sensible tax code.

And I would say that demographic issues are taken plenty seriously. The farther right you go on the political spectrum, the more seriously they are taken. The real problem is that these issues are not being taken seriously by the right people.

Latvian abroad said...

One of underreported news stories is that Baltics are already competing for Eastern European immigrants. This graph shows the number of residence permits issued by Latvian authorities by year (dark is temporary/fixed term permits, light is permanent/indefinite permits). There is a clear increase trend over the last 5 years (with the numbers nearly doubling). Most of those coming are from Russia/other CIS countries.

And this has been reported neither by Latvian nor international media. I found it by googling this morning and I was surprised how large the numbers there. (If I was asked to guess, I'd have guessed 1/3-1/2 of the actual number.)

My interpretation is that Latvian government is aware that there is a significant segment of electorate which is heavily anti-immigration and they are reacting to that by increasing the immigration in a very low-key, underreported fashion.

Unknown said...

Why the main-stream media is totally ignorant for demographic questions i a puzzle to me too. I tend to think that the reasons behind this silence are somehow religious (or anti-religious)

Latvian abroad said...

I messed up HTML tags in my previous comment and the link wasn't working. Here is a working link to Latvian residence permit statistics:;jsessionid=z5le1r9cy1?_p=340&menu__id=119

Wim de Boo said...

While not doubting the seriousness of demography matters I am tempted to ask you, reading the expression 'devil's advocate', why are you all so negative about low fertility rates and shrinking populations?

To be sure: I do see and try to understand the problems you are discussing and I do not want to underestimate them, but I like to see them as transition problems.

Living in a densely populated part of Holland and have worked for years with environmental problems I am feeling quite happy with the prospect of less people in the (far) future. Is it not possible that better quality of live is easier to achieve with less people on earth? Also I have the impression that for the well-being of women (50% of the population) it has been a great achievement that they have the means and freedom to decide about getting children. Thirdly for nature it would be good to have less stress from all these humans who are hacking and sawing their way through the last remnants of natural ecosystems that still exist in our world.

So don't get me wrong: I do not want to underestimate the demographic problems you are discussing but shouldn't we see also the benefits and opportunities of less population growth in the world?

Edward Hugh said...

Hi Wim

"why are you all so negative about low fertility rates and shrinking populations?"

Ok, well in a fairly brief and concise way I would like to attempt to rise to this one.

"Living in a densely populated part of Holland and have worked for years with environmental problems I am feeling quite happy with the prospect of less people in the (far) future. Is it not possible that better quality of live is easier to achieve with less people on earth?"

Basically, the answer is yes, IMHO. The question is how we get from here to there.

Economic growth in and of itself has nothing special to recommend it at the existential level. Technological change, which is ongoing, will in and of itself continually offer new and interesting lifestyle possibilities, and that may be a bit more existentially important.

However, the problem is we are hooked on growth. How do we get off it? Well not by abruptly terminating our supply of the drug I feel, that would be asking for trouble.

We call the years since the industrial revolution the "modern growth era", but behind the scenes in fact the term growth meant two different things depending on which part of the globe you were situated in.

In one part of the workd "growth" meant economic growth, and rising living standards, while in the other it meant population growth.

This has been the fundamental, and overarching, imbalance of the last 200 years, and now this imbalance is steadily unwinding.

But this unwinding also has impacts as we are seeing, and we need to be aware of these.

The point you want to address is why we should be worried about the end of economic growth in the OECD area (since that is what we are talking about mid term given the rates of population decline we are looking at, and given, as we are discussing here, the labour shortages that this is going to produce as the well of immigration runs dry).

So we are in a transition, and it needs to be a stable and sustainable one, if it is not then quite simply we are going to crash the system.

I mean given the rate of pyramid structure change in some societies there are going to be serious problems about offering ongoing health and pensions systems at anything like the level which people have become accustomed to.

I could go on and on at this point. Claus and I have really gone into a lot of detail about the macro economic ageing impacts we are already seeing (check around our posts on Germany and Japan), and the Eastern Europe labour supply issue is simply the latest twist in the tail.

So, I don't know whether you are a homeowner or not, or whether you are anticipating having a pension when you are older or not, or whether you will want the availability of intensive medical care at a subsidized rate when you are old, or not. If having a line drawn under all this now, and the accumulated value you have invested in them written off, then go ahead, be more concerned about overpopulation in the short run. But if you wouldn't be happy with this outcome, then you need to give some serious thought to why we - especially here in Europe - need to slow the process of population decline down a bit, to give us the time to find our way from where we are to where we would like to be.

Wim de Boo said...

Hi Edward,

The main subject now I am worried about fertility rates is emotional: my three children living their busy lives in their twenties do not show any sign that we will have grandchildren in the future...

But may I make a comparison? Several years ago the book 'The Skeptical Environmentalist' by Bjorn Lomborg argued that, yes, environmental problems are serious but at the same time we are solving them and quality of life for a ever bigger part of the population is improving. Lomborg became not very popular with gloom-and-doom environmentalists, but I do think he had an important point of vue.

Is this kind of reasoning not also possible with demography matters? Yes we do and will have serious problems with pensions, health care, available labor force, etc. And yes, we are probably still not serious enough to deal with them properly like you and Claus convincely argue. I believe that also, certainly for less wealthier countries.

But at the same time shouldn't we try to place the disadvantages of lower fertility rates in perspective of the advantages?

CV said...

Hi All,

Well, it is some pretty fundamental questions which are being treated here. For starters I will address two of them in particular ...

The first one is this by Ape Man ...

And I would say that demographic issues are taken plenty seriously. The farther right you go on the political spectrum, the more seriously they are taken. The real problem is that these issues are not being taken seriously by the right people.

I completely agree with the thrust of this argument and as such I think this question has a lot to do with discourses. Basically, the 'traditional' demography.matters discourse is indeed structured around the far right end of the political spectrum where the underlying tenet often is racism. I.e. when Le Pen said in the French presidential election that Europe needs a common population policy (or France for that matter) I agreed with him but for very different reasons. Another example here is of course Mark Steyn who is, like Le Pen and so many others, playing into the fear of many for the Muslim packs which will invade the world and alter our way of life. Clearly, one of the major dividing factors between our discourse and the far right discourse is our emphasis on migration as part of the solution (i.e. we are essentially blind, in the economic sense, to the obvious cultural/societal melange which can result on the back of migration flows). You see, this is of course the dirty little secret in all of this in the sense that(im)migration is something which the far right often EXPLICITLY cannot support which shows that it is more for specific racist reasons that economic reasons that they are playing the demography.matters card.

So, here at DM we are trying to steal this discourse from the far right since they should not be the only ones being able to claim that demography matters and saying as such should not be tantamount to petty racism.

At this point I would agree with Ape Man note that it is strange that the demographics are not getting more attention in the economic debate ESPECIALLY when the debate is dealing with countries such as Japan, Italy and Germany (Europe in General). Perhaps this is set to change. Clearly we are going to plug away here at DM in both the posting and hopefully the comment sections as well.

Turning to Wim's comments Edward already covered the initial ground I would say. First off, and this is important with respect to Wim's professional experience with environmental problems I think that the world as a whole could most definitely benefit from less people over the course of the next 50 years. In fact, as basic economic growth theory tells us it is a process of relative 'de-population' which kicks off growth in the first place as a country transists through the demographic transition which allows capital accumulation. However, also from a environmental sustainability point of view I think it is valid to claim that the world in fact needs less people.

However, the problems as I see them are two fold. First of all Edward is right to say that we are 'hooked' on growth' Basically this is how the world works within the sphere of capitalism and modern globalization. The second problem is then directly related to the first since the objective to achieve growth looks very hard indeed for some countries over the course of the next 20 years.

Now, another point which is more profound I think is also of more normative nature. As such it might be that we don't care about whether in fact there will be any Francophone left in Québec in 50 years or not (I do), but when it comes to a nation such as Japan and/or Germany/Italy for that matter there are intergenerational issues. This has to do with expectations as Edward also implies but it also has to do with the fundamental nature of the global economic system. I mean, can Japan default on its debt? Can Italy? Another point here is of course as Edward notes the fundamental structure of these societies but at the end of the day I think this is a global issue given the magnitude of the process. The sovereign debt issue is an interesting point since at some point it will just cease to make sense for S&P and Moodys to grade a country such as Japan since if you extrapolate current trends into the standard macroeconomic models which incorporate dissaving, Japan will go bust sometime before 2050. And since Japan at this point obviously still will contain people, well what are they going to do? I am not saying this WILL happen but I am saying that it might and essentially that we need structures to accomodate this OR we need to do something about the CORE problem here which is the massive overshoot in the developed world of demographic developments. In essence, this is where the dog is buried I think.

Regarding your last point Wim about putting the disadvantages in perspective with the advantages you are obviously right. However, at this point it is extremely important I think to note the imbalances which we are seeing. And this is where the waters begin to get seriously murky since what is in fact a sound fertility level and thus demographic profile?

Well, this is of course a fundamental question in itself but note also how we address this issue by holding the current economic system for given and in that light and with the current global economic development the population transitions we are seeing in many countries are just horribly out of sync relative to the way the 'world works'.

Wim de Boo said...

You did it again like several weeks ago: you both (Edward and Claus) confirm my hunch that shorting the yen is perhaps a one way bet. Sorry for this materialistic thought popping up in this interesting discussion.

Randy McDonald said...

I think that there are going to be plenty of Francophones in Québec--TFRs haven't been that low, by First World or by Canadian standards--but I do think that immigration is going to change the origins of Québec's Francophone populations quite substantially.

Within Québec, there are going to be huge variations between the more rural regions--especially in eastern Québec--which are positively Atlantic Canadian in terms of their relatively high rates of poverty and net emigration and more urban areas, especially in the west.

CV said...

@Randy ...

Good point, I was really also just shooting blanks in order to prove the point that there is a difference between intra-country changes and then the collapse of whole nations. However, the former is still very important I think since it shows us some of the general mechanisms at work. Moreover, intra-country demographic diffenrences can also create more profound distributional issues as we are seeing in Canada with Alberta v the rest and I guess also to some extent in Spain with Catalonia v Madrid.

@ Wim ...

Hmm ok, but don't be betting all your money on what Edward and I are saying :). From a markets point of view I would wait shorting the yen again until I had seen the consumption figures and inflation figures for June; they are due soon. If they show improvement my guess is that the BOJ will bite the bullit and take it to 0.75%. This would not be prudent in my opinion but that of course is another story. In a more general perspective, the yield differential will most certainly remain juicy and widening relative to the Kiwi and AUS for the remainder of 2007 I think unless the RBNZ intervenes again.

@ Ape Man ...

Regarding your devil's advocate proposal I don't deny for a moment that this might be the case but the damn problem is that if Lithuania crashes or just slumps then there is a risk that outward migration will increase. Having said that however, in a more general perspective I am sure that the Baltic countries in general are well positioned to attract enough immigrants to keep them afloat and thus continue to 'catch-up', but the window is closing in terms of acknowledging what to actually do.

Edward Hugh said...

Ok Wim,

Now while I really would like to reiterate what Claus says about not betting your money on what we have to say, since you do take the trouble to read us I would simply make this point: watch very carefully the situation in Eastern Europe as it develops, and if things should start to go in any way wrong there, row your little boat back into shore as quickly as possible, since the consequences will be most unpredictable.

On which topic the WSJ has a very timely piece today.

Note the graph on comparative export shares from the eurozone. The whole eurozone is effectively - and especially via Germany - structurally dependent on expansion in the East.

The Economist makes a similar point for Germany in this article:

"According to research by economists at the Bundesbank, the growth of overseas markets is more important in explaining the growth of Germany's exports than is price competitiveness— although prices play a bigger role in the euro area than they do outside it. By luck or by judgment, Germany is in the right businesses at the right time: China, India, Russia and other countries in central and eastern Europe are growing fast and wanting the goods in which Germany specialises. Indeed, exports to Russia and other European countries to Germany's east now exceed those to the United States."

Back to the WSJ for a moment, the quality of economics journalism these days is, afaic, almost universally low. Take this bit:

"Some of Europe's emerging economies, such as Latvia, are growing at a breakneck pace, while others, such as Hungary, have developed heavy trade deficits fueled by low interest rates and deficit spending."

This is just complete word salad. Latvia has a significant - and growing rapidly - trade deficit (due to wage inflation and the competitiveness issue) while Hungary actually has a small trade (but not ca, aha) surplus. Interest rates in Hungary are also pretty high at the moment (around 8% off my head).

Latest data point this week, unemployment in Ukraine is now around 2.3% (and growth around 6% pa if I remember aright) so I wouldn't be expecting too much more high-volume out-migration from that source barring a crash, and indeed Romania's isn't all that much higher all though they will probably empty out Moldava before they are finally done.

Edward Hugh said...

Randy sent me this link on skilled worker shortages in the Czech Republic. I think apart from the general local shortage of manpower, the skill shortage situation is likely to become a global one, and that is only going to increase the already general skill premium bias trend. I think it is going to be very unrealistic quite soon for developed economies in general to imagine they can continue to live from importing skilled labour.