"Can Germany Be Saved?"

While Germany has seen an economic upswing in the last two years a lot of the proposed reforms have been toned down. Longtime readers of this blog will be familiar with Germany's demographic outlook but there a number of issues including social, labour, business, and market reform that still need to be resolved. One of the most prominent critics in Germany is Prof. Hans Werner Sinn, also president of the German Economic IFO institute. Back in 2004 Sinn wrote a book giving an historic overview of how Germany's wirtschaftwunder came to be and how Germany came into the positon it is now in, "Ist Deutschland noch zu retten?" Which, to the dismay of others, took a hard and critical look at Germany's economic problems and what solutions are possible. As they say: "die wahrheit tut weh".


Prof. Sinn has now published an updated english edition available from MIT Press: "Can Germany Be Saved?-The Malaise of the World's First Welfare State". This book is meant for Germany but a lot of the lessons apply to other countries as well. Germany will be the first country to face these challenges but not the last.

What has happened to the German economic miracle? Rebuilding from the rubble and ruin of two world wars, Germany in the second half of the twentieth century recaptured its economic strength. High-quality German-made products ranging from precision tools to automobiles again conquered world markets, and the country experienced stratospheric growth and virtually full employment. Germany (or West Germany, until 1989) returned to its position as the economic powerhouse of Europe and became the world's third-largest economy after the United States and Japan. But in recent years growth has slowed, unemployment has soared, and the economic unification of eastern and western Germany has been mishandled. Europe's largest economy is now outperformed by many of its European neighbors in per capita terms. In Can Germany Be Saved?, Hans-Werner Sinn, one of Germany's leading economists, takes a frank look at his country's economic problems and proposes welfare- and tax-reform measures aimed at returning Germany to its former vigor and vitality.

An introduction with sample chapters can be found at MIT Press.

Polish Fertility

This post is a brief "state of the game" one to accompany our recent material on capacity problems in the Polish labour market. First off, it is interesting to note that there is a debate inside Poland which is begining to wake up to this problem, as the following link from the External service of Polish Radio shows. In fact they make the claim that in 2005 Poland had the lowest fertility in the EU, at 1.24:

The declining birth rate observed for years has prompted the government to come up with a long-term pro-family program, which is expected to encourage women to have more kids. Poland’s fertility rate - that is the number of children per one woman – is the lowest in Europe. In 2005 it was 1.24, whereas the EU average is 1.5, according to a report just published by the statistical office of the European Union – Eurostat.

Actually, it isn't clear that Poland still has the lowest fertility in the EU, since according to the 2006 CIA factbook, by 2006 Polish fertility had sneaked back up to 1.26 Tfr, whilst the Czech Republic was down at the 1.24 level. However - as can be seen from the graph below - whichever way you look at it, Poland has a serious fertility problem, and one which is set to only make those labour shortages currently being experienced worse with time.




Poland's population has been in natural decline since the early years of this century:




“Since 1984 the number of children born in Poland has been decreasing. In 1999, for the first time, the number of deaths exceeded the number of births. We have a truly difficult demographic situation”. A number of factors are at play causing women to postpone childbirth and to have less children. Aneta Seibert from the Gender Equality Coalition explains.

As suggested in the article, one for the reasons for the strength of the decline in Poland has been - as elsewhere - birth postponement:



Since the median age at first birth of Polish women is still in the mid twenties, and thus some way below the current Western European norm of 29-30, it would appear that this postponement process still has some way to run.

But in addition to the general postponement process, there are number of other factors at work, which stem from the traditional nature of Polish society:

“One is very evident discrimination of women on the labor market associated with the fact that that they are mothers or that they may become mothers. There is a very wrong assumption among Polish employers that once you become a mother somehow your qualifications disappear along with your commitment to work.”

and

Another important factor is lack of institutionalized good quality and affordable child care, especially for children under 3. “In Poland only 2 percent of children under 3 attend organized child care while in other countries it’s over 50 percent, similarly with kindergartens.”

Now the response to all of this has been an attempt by the Polish government to give more support to would be parents, the problem is that this costs money, and money is what the Polish government is not exactly flush with given the need to control the deficit and reduce the tax wedge (as mentioned in the last post). So there seems to be a kind of self-reinforcing double-bind at work here.

The government is preparing a comprehensive program of support for the family. Some 5.9 billion US dollars may be spent until 2014 on pro-family measures such as extended maternity benefits, tax breaks for families with several children.

As some of the skeptics claim, all of this may be far short of what is needed, but the question still remains, where is the money going to come from?

The BBC also had an article on the new initiative as well as this more general article on the decline of childbirth in Poland. Essentially the BBC also highlight the missmatch between a rapidly evolving society - and in particular a changing labour market - and the presence of traditional values:

If you asked many people which countries are the most Catholic and traditional in Europe, they would probably answer either Ireland or Poland. And in many respects they would be right. Anna Jurczak, who has six-month-old twin boys. Women's expectations of men are changing, says Anna Jurczak According to surveys, around two-thirds of Poles go to church every Sunday and 70% say that family and children are the most important things in their lives....

So why are family-oriented Poles having fewer babies? It is partly because there is a difference between what people say and what they do. And it is also because Polish society has been undergoing profound changes in recent decades.

First, more and more young people, especially women, are going to college and university.

"Women are becoming more and more demanding. They want to get a job and career first so they're not dependent on their husband later," says 34-year-old Anna Jurczak, who has six-month-old twin boys. "Twenty years ago you had to get married young but in our generation, my friends and I, first of all we want to find a good job and then we can find someone we can love." And women are getting more choosy when it comes to picking a suitable husband, she says.

Another dramatic change came with the transition from communism to a market-based economy. Under communism unemployment officially didn't exist. Now, at 18%, it's the highest in the European Union.

As well as concerns about job security, there is a chronic housing shortage and many young people live with their parents because they cannot afford a flat. The cost of raising a family is also increasing.Another reason why women are reluctant to break their career to start a family is because they fear they won't be able to get their jobs back after taking maternity leave.

Finally, I think one think needs to be borne clearly in mind here. Any success in nudging fertility back up again using the kinds of measures which are presently discussed will only have any kind of impact on the labour market in over 20 years time, and in the meantime the brunt of the labour shortages problem I spoke about in the last post is really going to lock in between now and 2020.

Which isn't to say that you don't need to address the low-fertility issue, but simply that this alone isn't going to be enough.

Poland, Is The Party Over?

Claus has been posting on some of the macroeconomic capacity issues which face the East European "Lynx" economies in the light of massive demographic exodus that has taken place in some countries in this group in recent years.

I had long meant to post about this article from the Financial Times, which drew attention to the way in which young university graduates have been leaving Poland, and in particular Eastern Poland, in very large numbers:

Poland has seen one of the largest peacetime migrations in history as about 1m people, many of them young, have moved west to find work, although there are no hard official numbers. There are estimated to be 250,000 Poles in Ireland, about 500,000 in Britain and more than 600,000 in Germany.

While those numbers include doctors, plumbers, welders and office workers, a large number of migrants are young people fresh out of university looking for foreign experience and wages four or five times higher than they could earn at home.

Sitting in the Jadlodajnia Filozoficzna (which translates as the Philosophical Diner), Beata Tymkoff says that the effects of the migration have been even more dire in eastern Poland, where wages are lower and where there are very few foreign investors. In Lublin, in Poland's north-east, "the nightlife there died. Everyone left," she says. "The bands that played there and the people that listened to them, they're all gone."

The missing clubbers are recently graduated 20-somethings, a generation that in former times would have been enjoying its first pay cheques. Their migration is causing labour shortages, even though Poland's official unemployment rate is 14.9 per cent, the highest in the EU. The real rate is probably much lower once people working at home or abroad but still officially on the unemployment rolls are discounted. Many others, particularly former workers at now dissolved collective farms and older miners and workers in communist-era heavy industries, are often unemployable.

So the key issue here is what is happening to Poland's human capital stock? As the Polish economy grows and this stock steadily diminishes, something somewhere is going to hit a limit. (Same story - even if on a rather gentler scale - Italy, and same story Serbia, to name only two more cases of what is now evidently a very general problem).

The article tries to end up on a rather positive note:

"If Poland's young migrants return home, attracted perhaps by rising wages and increasing demand for their labour, they'll be able to find the same kind of music they partied to in London, Glasgow and Dublin."

As they say, if they return home. The if in question is rather a big one it seems to me. Especially since the level of wages necessary to attract people back would be unthinkable in terms of the kind of slow and steady economic development which Eastern Europe needs in the medium term.

Coincidentally I came across this article on Poland in Bloomberg this morning. In particular there is this:

Poland must cut labor costs urgently to halt emigration, lift employment and avoid a slackening of economic growth, Deputy Finance Minister Katarzyna Zajdel-Kurowska said.

The nation must end the ``vicious circle'' in which employers face growing difficulty finding workers as people leave for jobs abroad and the unemployment rate remains the highest in the European Union, Zajdel-Kurowska said in an interview on May 31.

and then this on the state of the budget deficit:

Poland must maintain fast growth to bring down the debt burden and reduce the budget deficit to 3 percent of gross domestic product, meeting euro-adoption criteria laid down when it joined the EU in 2004.

The ruling Law & Justice party plans to cut employees' contributions to social welfare funds by 3 percentage points this year and by a further 2 percentage points next year. Employers' contributions will be cut by 2 percentage points.

``The most clear bottleneck in the Polish economy is the labor market as still-high labor taxes and high social spending do nothing to encourage greater participation,'' said Thomas Laursen, the World Bank's chief economist for the European Union's eastern members, at a press conference in Warsaw on May 31. ``There's not much you can do about emigration, but there's a lot you can do to address the situation on the Polish labor market.''

Unfortunately however the migration and the high level of social spending may well be interconnected, at least in the longer term, since with very low fertility - 1.2 Tfr - increasing life expectancy, and a hemorrhage of population in the middle age groups, the burden of meeting the health and welfare costs of the elderly will fall on an increasingly smaller proportion of the total population.

And of course the pressure to reduce the "tax wedge" which weighs down on job creation is meeting with strong resistance from some quarters:

Junior coalition partners Self Defense and the Polish Families League, will not support the cuts in costs as they want the money to be spent on wage increase for physicians, teachers and other groups threatening strikes for higher pay. The average salary in Poland is a fifth of the EU average. The unemployment rate was 13 percent in April.

In addition there is obviously now a growing skills and age mis-match. As Claus indicates some 20% of GDP still comes from agriculture, but this is produced by a population with relatively low educational levels, and after the migration, an increasingly elderly one. The same may be true of the 13% of the population which is currently unemployed. Although many of these workers could be employed in the lower skilled occupations typically occupied by migrants in a West European or United States context, and for West European and US wages, there may well be cultural and other resistance to them doing this in the Polish context and for Polish wages. Of course part of the solution would be to maintain sufficient levels of economic growth to attract inward migration in the way Spain and Ireland have done. But to be able to sustain the necessary growth Poland needs to move steadily up the value chain in terms of the profile of economic activities being undertaken. But this is just what is going to become very, very difficult to do given the recent brain drain of the young and educated.

So there is, it seems to me a growing problem here, one which is touched on in the following assessment made by the Polish Economics Ministry:


The Economy Ministry estimates that GDP may be lower by about 400 billion zloty through the year 2025 because 2 million Poles have emigrated since May 2004 and others will follow. As many as 3 million people are considering leaving in the coming years, according to a May 15 survey by IMAS Intl. for Rzeczpospolita.

Now I think any assessment at this point of GDP so far out into the future is a pretty thankless exercise, but the view expressed does at least recognise that there is going to be a problem, even if no one really knows quite what to do about it.