Latvia: The Demographic Price Of Procrastination

One of the things I think we can safely say about the impact of the current economic crisis is that the face of Macro Economic theory will never be the same again. Quite what the macro economics of the future will look like is too early to say, but what is clear enough is that the existing corpus has been tested and found wanting: it’s predictive capacity is very, very limited, and this is obviously a far from satisfactory situation.

At the same time, new ideas, and new perspectives are emerging. I have already spoken earlier this morning about the key issue of “non linearities” in the context of Jordi Molins’ discussion of the weaknesses of the stress test methodology. Claus has spoken about some of the issues raised by the attempt to put macro theory on micro foundations, and now I would like to present an important, if little known, piece of research coming from Latvia – one of the canaries in the coal-mine on the whole Eurozone sovereign debt issue. Eliana Marino’s work is both extremely interesting and extraordinarily important, since what it illustrates is the negative feedback mechanism that can be activated by having an “L” shaped non-recovery in a rapidly ageing society with extremely low underlying fertility. What Eliana did was something macro economists seldom consider doing, she carried out some qualitative research, rather than running a computer model, to find out just what was happening on the ground.

The resulting survey, which she personally conducted in Riga from September to December 2009 and which involved some of the leading Latvian experts on migration issues, lead her to estimate that around 30,000 people may well have left Latvia in 2009 and the same number are likely to follow them in 2010. These numbers are considerably greater than the official register shows. As she argues these large emigration flows from Latvia will have a significant effect on the future demographic and economic path of the country, creating serious problems of labour shortage, unsustanability of the pension system and accelerating the already significant population decline.

And just why may Latvia be a canary down the coal-mine in this context? Well think about Spain, where the housing boom attracted in the best part of 6 million people – in a country where the rate of natural change in the population was stagnant. Now imagine that with 20% unemployment as the continuing outlook for the country over the best part of the next decade, what might happen there. People could vote with their feet, and the population could contract just as rapidly as it grew, leaving that 1.5 million currently unsellable housing units even more unsellable than ever. The warning signs are there. The number of those contributing to the social security system continues to stagnate, even as unemployment remains unchanged, so where are the people? Some have obviously found their way into the growing informal economy, but others have surely left, and there is plenty of anecdotal evidence to support this idea. In addition, the rate of new household formation turned negative in the first quarter, for the first time in the series history.

At the end of the day, the truth of the matter is that we really don’t know what is happening in Spain, so would the Spanish Eliana Marino please kindly step forward?

The Social Impacts of the Economic Slowdown: The Latvian experience

by Eliana Marino

The economic and financial crisis that started in 2008 seems to be on its way to being overcome by many EU member states, but the population in some of the most touched countries is still labouring under the ongoing effects of the slowdown. Latvia, which underwent an annualised decline of 18% of GDP in the first quarter of 2009 and still has the highest unemployment rate in the EU, is experiencing a veritable revolution in its population structure and is preparing to face serious demographic challenges.

The strong recession experienced in the last few years has sadly confirmed the high propensity of Latvian people to migrate for economic reasons and generated a real “exodus” of working age population.

Before 1999, a peak of emigration was registered due to the endogenous migration potential of the collapsed Soviet Union, but, from 1999 to 2002 the outflows seemed to stabilize and to show a slowing trend. This trend changed with the accession to the European Union and the immediate application of the free movement of labour by UK, Ireland and Sweden, which decided to open their borders to New Member States immigrants without any transitional restrictions. These conditions created an increase in the number of emigrants in 2006 and the “old” member states definitely replaced the Russian Federation and the ex Soviet Republics as main countries of destination.

The decline of the outflow in 2007 is linked to Latvian extraordinary economic growth which appeared to guarantee an increase in the wellbeing of the population. This situation started to deteriorate in the second half of 2008, generating a new rise in emigration decisions and increasing more and more in the following year.
Net migration has always been negative and, combined with a Total Fertility Rate among the lowest in EU, it strongly contributed to a progressive and continuous decline of the total population.

Official data, as analyzed above, cannot provide a real portrait of migration dynamics in Latvia. While the registration of immigrants is enough reliable due to the strict controls at the external borders of the EU, emigration statistics are completely unreliable because the large majority of emigrants did not declare its departure and no alternative method is adopted to catch up their real number. The gap between registered and factual data is showed by the comparison with statistics provided by the destination countries, as showed in the graph below:

More recent data were collected through the EU funded project The Geographic Mobility of the Labour Force , consisting of a survey conducted in 2007. The study arrived at the conclusion that a bit more than 40˙000 people emigrated between 2004 and 2005 (87% more than registered data). The authors forecasted that intensive emigration was expected to continue and that, looking at the number of respondents who said that they wonted to leave and at those who already did something in pursuit of this dream, by 2010 between 10˙000 and 16˙000 people were supposed to leave Latvia, thus totaling 50˙000 to 80˙000 emigrants from 2004 to 2010.

These estimates were presented in 2007 when Latvia was going through a period of sustained economic growth and no one could even imagine the economic collapse which the country is undergoing in this moment.

The survey, which I personally conducted in Riga from September to December 2009 and which involved some of the major Latvian experts on migration issues, showed that around 30,000 people are supposed to have left Latvia in 2009 and the same number is forecasted also for 2010. These large emigration flows from Latvia will have a significant effect on the future demographic and economic path of the country, creating serious problems of labour shortage, unsustanability of the pension system and accelerating the already significant population decline.

Since the years of great economic growth, Latvia experienced a huge problem of labour shortage due not only to the lack of high skilled professionals but also to the general discrepancy between demand and offer of labour. In 2006-2007 this situation was one of the main topics of political and public debate and, under the pressures of the enterprises, the government approved a more liberal immigration policy in order to select labour force from abroad.

The downturn of 2008 caused an inversion of the trend: enterprises were obliged to reduce the labour force and the employment rate decreased together with the level of wages. These elements represented the main push factors for emigration and they are currently generating a real “exodus” of the labour force, creating dangerous structural problem in Latvian economy. Actually, lack of labour and especially of high skilled professionals will be a veritable challenge for the economic recovery of the country and nowadays it is one of the main reasons of concern for Latvian politicians and intellectuals.

From the demographic point of view, the impact of emigration can be considered under two different aspects:

- emigration of working age population makes the demographic burden increase: the number of inactive people (children and retired people) exceeds the number of active people, creating serious challenges for the sustainability of the welfare system;

- the most part of the outflows consists of working age population (from 15 to 65 years old) that includes people in reproductive age (from 15 to 49 years old). A huge number of emigrants in this particular age group means a further reduction of the natural increase of the population. In fact, they will probably have their children abroad or the migration decision itself will discourage the creation of numerous families.

This situation has to be combined with the low levels of Total Fertility Rate which characterize the country since more than 20 years ago. In Latvia, the first demographic transition to a rational regime of reproduction began at the end of XIX Century and the total fertility rate was lower than the replacement level already in the second half of the Century, due to repressions and harsh living conditions during the wars and the Soviet occupation. The replacement level was met only in the 80s after the introduction of partially paid child birth leave. Since then, the birth rate has decreased to unprecedented level and has represented an issue of serious concern for Latvian government. In particular, the decline of total fertility rate accelerated during the economic and political transition, since the Soviet centralized welfare collapsed and the national government opted for a shock therapy instead of a gradual and progressive transition to the market economy.

However, Latvian government recognised the need to ensure reproduction of the population as a prerequisite for the nation’s existence and started to evaluate adequate tools for family support. The adoption of successful family policies made the birth rate level stabilize since 1999 and start to increase at the beginning of the XXI Century. Anyway, the total fertility rate never reached the replacement level and it is still among the lowest in the EU (average 1.4 children per woman in the period 2005-2010 ).

As a consequence of these indicators, Latvian population dropped from 2.5 to 2.2 million people in 15 years and the negative growth rate is expected to accelerate in the next years.

The experts interviewed in the last months of 2009 proposed different solutions to both economic and demographic challenges but they agreed on the fact that a more liberal immigration policy might be really helpful to solve problems of labour shortage and pension sustainability as well as to contribute to the inversion of the negative demographic trends. However, this proposal, which is one of the main topic of public debate since the economic boom, is in direct conflict with the hostility of national population toward immigrants. Latvian critical historical experience with integration of different ethnicities is the clearest explanation of this hostility and probably some years are still needed to overcome these cultural barriers.

In definitive, the results of the survey allow to conclude that Latvia needs some important structural reforms (concerning an efficient social policy, a comprehensive population policy, a strong action against corruption and a reduction of the bureaucratic burden) to be implemented by the national government in order to prepare the country to play its role at the European and international level and to take the best advantages from the opportunities provided by the integration and globalization process. The first step to achieve this objective is the promotion of a cultural change whose main goal is to dump the “dependency from the past” and to open mental and factual borders to modernity.

Footnotes

1/ Latvija Statistika (Central Statistical Bureau of Latvia), www.csb.gov.lv, accessed on April 17th 2010

2/ Herm A. et Al, THESIM-Toward Harmonised European Statistics on International Migration, Country Report Latvia, Sixth Framework Programme, priority 8.1: Policy Oriented Research, Integrating and Strengthening the European Research Area, December 2004

3/ Krišjāne Z. et Al., The Geographic Mobility of the Labour Force, National Programme of European Structural Funds “Labour Market Research”, project “Welfare Ministry Research”, University of Latvia, co-financed by the European Union, 2007

4/ Eglīte P., National Policy for Increasing the Birth Rate in Latvia, in Humanities and Social Sciences Latvia, University of Latvia, Institute of Economics-Latvian Academy of Sciences, 2008

5/ UNdata, www.data.un.org accessed on January 30th 2010

This entry was posted in A Fistful Of Euros, Economics and demography, Economics: Country briefings by Edward Hugh. Bookmark the permalink.

About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

12 thoughts on “Latvia: The Demographic Price Of Procrastination

  1. What’s truly remarkable is how Latvia’s fertility rate has fallen off a cliff after the crisis. I wrote about it in the Latvia section of Crisis Demography in Eurasia.

    As you can see from Latvijas Statistika, the number of births has fallen by 21% in H1 2010 cf H1 2008. Since Latvia’s TFR was 1.45 in 2008, it may well have fallen to something like 1.15-1.20 by this year. Unless I’m mistaken, this is now the lowest rate in Europe. (Nor is there probably much scope for a rapid bounce back once the crisis passes, since the number of marriages has fallen by 37%).

    Interestingly, the other East European countries weren’t affected anywhere near as much, at least so far. Estonia’s TFR fell, but only slightly – from around 1.66 in 2008 to perhaps 1.60 in 2009, and is now showing signs of a slow turnaround. Russia’s even continued increasing, from 1.49 in 2008 to 1.56 in 2009 and perhaps 1.60 this year (based on H1 data).

    So there was something exceptional about the Latvian case, perhaps tied with not so much with the scale of its GDP decline (Estonia and Ukraine experienced similar falls without much effect on their TFR), but with its broad-based rollback of the welfare state.

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  4. “Well think about Spain, where the housing boom attracted in the best part of 6 million people – in a country where the rate of natural change in the population was stagnant”

    Stagnant ? I took a look at Spanish demography in 2006. They’ve reorganised their excellent stats website since then – and for some reason the fertility stats are now only available in Spanish – or I couldn’t find them anyway.

    “In 1975 the average senora had 2.8 babies – well above the 2.1 replacement rate. But that rate was passed in 1981, and is currently at 1.3, having been as low as 1.1 only a few years ago.

    The excellent site however shows the population actually rising from 42 to 52 million by 2060. Based on ?

    “The first situation considered is that the number of new arrivals of foreigners in Spain will evolve according to the most recent trend until the year 2010, after which they remain constant. The total number of arrivals in Spain during the period 2007-2059 increases to 14.6 million persons.”

    14.6 million high-fertility arrivals, by the look of it. These aren’t Brit retirees.”

  5. Edward – would you consider doing a similar demographic analysis for the UK ? My gut feel is that the Brits who are leaving (for Australia, the US, Canada, New Zealand) tend to be highly educated under-40s.

    “There are now 3.247 million British-born people living abroad, of whom more than 1.1 million are highly-skilled university graduates, say the researchers. More than three quarters of these professionals have settled abroad for more than 10 years, according to the study by the Organisation of Economic Co-operation and Development (OECD).

    No other nation is losing so many qualified people, it points out. Britain has now lost more than one in 10 of its most skilled citizens, while overall only Mexico has had more people emigrate. Britain’s exodus is far higher than any of the OECD’s other 29 members. Germany has lost only 860,000 highly-skilled workers, America 410,000 and France 370,000. The OECD found that 27.3 per cent of those emigrating had health or education qualifications, 37.7 per cent had humanities or social science degrees and 28.5 per cent were scientists or engineers.”

  6. ” Where are the people leaving Spain going ? ” Home I suppose. Many immigrants were paid in advance to leave, especially S.American. In Andalucia, the northern Europeans working servicing the property boom have mostly left. Retired British expats have been leaving because of the unfavourable exchange rates, and the downturn at home. Tourism is down so I suppose the number of foreigners working in the field will have reduced. The Spanish have moved within Spain’s borders, but those that are qualified or adventurous have left for better pastures. It is always hard to judge between a constant turnover of temporary residents vs. a steady permanent presence of foreigners and locals , but simply looking around out of season and there is no denying that the population overall has decreased significantly compared to recent years (at least for the south coast of Spain – maybe someone will tell me they have all moved to Madrid or Ed will comment on how packed Barcelona has become over the last couple of years ?)

  7. If they leave for the EU … they are still around. If mirgration patterns change that fast, demographic forecast aren’t worth the effort.

  8. I think that although the analysis is generally correct, it misses out two important factors diminishing the impact. I think the Latvian case is not so much different from the Polish case where I am a case study :)
    Many people, especially in their 30s, half-emigrate – they have a spouse at home and return regularly from work thanks to cheap flights for example.
    Other people, especially the youngest, treat migration as a revloving door process and might return when opportunity arises.

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