Thursday, May 25, 2006

Demography in eastern Europe

Red fades to grey

May 25th 2006
From The Economist print edition

Ex-communist countries risk growing old before they become rich

POOR countries have high birth rates. As they get richer, family size drops. That is a handy rule of thumb, but one that post-communist Europe is disproving. The worst outlook is in such places as Ukraine and Bulgaria, where the population is expected to fall sharply by 2025 (see chart). In the Baltic countries of Estonia and Latvia, demographic prospects are bleak too, but their economies are rather stronger.

But everybody, including such relatively rich countries as Hungary and the Czech Republic, should be worried. As the World Bank argues in “The Third Transition”, a study that will be published later this year, old populations tend to mean slower growth. There are fewer workers. Oldies are (on average) less productive. Health-care and pension bills rise.

Bad demographics are a communist-era fluke. Female fertility normally drops when wealth and education rise. Communism created the odd combination of women who were educated to rich-world standards, but lived in countries left destitute by the collapse of central planning. Women in communist countries also bore their children young, typically in their early 20s. Choosing to have fun and make money like their rich-country sisters has cut the birth rate, at least temporarily. In Poland, the commonest age for bearing a first child was 22 in 1989. By 2001 it was 26.

This is aggravated by instability and corruption in the poorer post-communist countries. Having wasted the past 15 years, they now lag behind their counterparts, face greater difficulties and are less able to pay for them. It is not all hopeless. But the demographic outlook makes faster growth and reform a lot more urgent. Empty places in schools, for example, should make it possible to put more money and effort into the task of sorting out universities, which are mostly dire: cash-strapped, corrupt and old-fashioned.

Experience in Estonia suggests that the right incentives can help. Generous parental leave introduced in 2003 brought an immediate rise in births, with 800 more babies born in 2004 than in 2003, and 1,200 more in 2005. The government is introducing subsidised in-vitro fertilisation. It needs to: its measures so far have slowed the population decline, but been nothing like enough to reverse it.

It may be more practical to attempt to get rich more quickly than to grow old more slowly. But even here the post-communist countries have plenty to do. New forecasts published this week by the European Bank for Reconstruction and Development suggest that average annual growth in the 27 countries that it covers is likely to be only 4.5% between 2007 and 2012 , down from 6.7% in 2004 and 5.6% in 2005. That, argues Erik Berglof, the bank's chief economist, is because foreign direct investment—the biggest contributor to growth—was unusually high in recent years and will now fall. “The cost advantage will level out quite quickly,” he says.

That may be too gloomy: the best-governed countries still show surprisingly high growth and investment. But that will bring little comfort to their ageing and badly run neighbours.

1 comment:

Edward Lucas said...

thanks Pawel--very fair point. But the problems with labour supply, productivity and health-care costs are harder to unscramble