Fertility in Europe

According to the Economist last week “Reports of Europe’s death are somewhat exaggerated“. I can only whole-heartedly agree. I think though, it only fair to add, that reports of Europe’s impending old age are almost certainly not, indeed generally it might be felt that the significance of this phenomenon were rather underestimated, than overstated.

Let me explain.

As the Economist article itself points out, here in Europe a good deal more attention has been being focused on the potential impact of climatic change (which is in and of itself undoubtedly an important topic), whilst, and in contrast, comparatively little coverage is being given to our need to develop a population policy:

though every rich country has a climate-change policy, few have a population one (there are historical reasons for that). And just as everyone whinges about the weather, but does nothing about it, so everyone in Europe complains, but does nothing, about population.

Again I tend to agree. Part of the difficulty comes, I think, from our undoubted tendency to try – as the Economist also notes – to simplify what are undoubtedly complex topics. This simplification processes can in itself produce rather sudden and noticeable shifts in opinion, as we have recently seen in some quarters in the case of climate change. What was previously thought by some to be benign, now is thought to be not quite so benign, and in the process a new global consensus emerges, even if comparatively little seems to have changed in the way of available evidence.

And so it will probably be with demography. In part, if this does turn out to be the case the Economist itself may turn out to be one of the guilty parties, since interesting and useful as this article is, it does most definitely fall into the complacent – things aren’t so bad as was feared – camp.

The article makes 6 main points:

i) “This article will argue that pessimism is no longer justified. It would be too much to say Europe’s population is bouncing back. But its long-term decline is starting to bottom out, and is even rising in a few places.

ii) A long list of US observers – ranging from American observers from Walter Laqueur, an academic, to Mark Steyn, a conservative polemicist – who have been arguing that “Europe is fast becoming a barren, ageing, enfeebled place” are wrong.

iii) That changes in population are not – in and of themselves – either a good or a bad thing in economic terms, since “there is no short-term correlation between population change and wealth” and “Japan and South Korea have even lower fertility than Europe”.

iv) Europe is simply not in decline. “Rather…. it no longer makes sense to talk about Europe as a single demographic unit at all” since “There are two Europes.”

v) Some “very-low-fertility countries can fall into a trap”. (This is a reference to a hypothesis which has been advanced by the Austrian demographer Wolfgang Lutz and his collaborators at the Vienna Institute of demography, although strangely, even while the Economist author uses adjusted data from the VID for the article, Lutz himself doesn’t appear to warrant a mention. I have posted on this hypothesis extensively both on Afoe and elsewhere, and a list of posts can be found here)

vi) “16 European countries, with a total population of 234m, now have fertility rates of 1.8 or more…..They are rare examples of bucking the trend that, as countries get richer, their birth rates fall. Why? There are no obvious answers.”

Of these (iv) (with qualifications see below) and (v) seem to be arguably very much to the point, (vi) is undoubtedly true, (iii) is highly questionable (in substance, though not in the rather constrained form in which the argument is presented, again see below), (ii) is undoubtedly the case, due to the simplistic way in which the argument is often put, and (i) is really not only deeply questionable, but fall foul of exactly the same kind of oversimplification process which the article’s author would want us to reject from Europe’s US critics. A case of double standards?

Well, let’s take a look at what is actually happening.

In the first place, as the Economist argues (and this is undoubtedly one of the strong points of the article) it is simply not satisfactory to talk about Europe as one single demographic whole. There are several Europe’s, and perhaps not two, but four. The general situation can be rapidly grasped by a quick glance at this map which I have put online here.

In the first place we have those countries – essentially France, the UK, Ireland, the Netherlands and Scandinavia – where fertility is at, or near, population replacement rate. The population path here, if you add in a certain quantity of immigration which the comparatively strong economic dynamic of these countries naturally attracts, would certainly seem to be pretty sustainable, and at least a lot more sustainable than in many other countries. As noted above these countries vary considerably in their welfare and tax systems, so it is hard to identify any specific feature which has contributed to their relative stability. This being said, that isn’t the end of the problem, unfortunately, since demographic processes are not only about fertility, they are also about life expectancy, and increases in the latter, which seem to form part of what Federal Reserve Chairman Ben Bernanke recently referred to as an ongoing demographic transition, a transition which is associated with rising population median ages and which is destined, with or without fertility-related problems, to place growing pressure on the health and pensions systems of all OECD countries.

In the second place, and at, as it were, the opposite extreme, we have the former member States of the Eastern Bloc. I single this group out as a special category since they are arguably still operating under the weight of what could well be termed an “asymmetric demographic shock” since their fertility generally plummeted following the coming down of the Berlin Wall. In addition, prior to the coming down of the wall, the mean age at first birth of mothers was significantly below that which could be found in Western Europe (see this map here for an at a glance appreciation) and below ages which are now considered to be the norm for developed societies with services-oriented economies. As a result these countries face what could be called a continuing “birth dearth” as mean first-birth ages move steadily upwards over – and probably over a good number of years to come – as women systematically put off having children to ever-higher ages.

This postponement process can lead many astray into thinking that the impact the process has on Total Fertility Rates (TFRs) is benign, since eventually TFRs may well recover somewhat (if there is not a trap, again see below), and although this debate gets incredibly technical involving comparisons of Completed Cohort Fertility Rates and TFRs, and the study of an issue which has become known as Quantum vs Tempo, one of the obvious impacts is easy enough to understand: with each passing generation the size of the cohort base from which children can be born is reduced, and substantially so – as a result of the missing births. The structural damage which this does to the shape of the population pyramid is known as the negative momentum effect, and this is one of the mechanisms which has been identified as a factor in any possible low-fertility trap.

In the third place we have the ‘Latin’ cultures of Southern Europe – Spain, Italy, Portugal and Greece – where, by and large, significant birth postponement has already taken place (Portugal is something of an outlier here), but where fertility still stubbornly sticks near to the lowest-low TFR 1.3 zone. I think entering the specifics of these countries is going to have to remain beyond the scope of the present post, but my feeling is that Portugal and Italy are much more stuck in the fly-trap than Greece and Spain are (this remains outside my present scope since the explanation of why I think this is the case rests on a development of the economic dynamics of the trap which Claus Vistesen and I are currently working on, which I briefly outline here, and which I sort of spell out in the case of Italy here. In a nutshell, it depends on whether – as a population – you are still young enough to get a housing boom or not).

Fourthly and lastly we have the case of the German speaking countries, namely Germany and Austria (and a part of Switzerland). The German case is by now reasonably well known. Aggregate fertility was, of course, negatively affected by the fertility “crash” in the former DDR, but as the graph appearing in the middle of this post – and which compares the two constituents independently – reveals, fertility in the West is low in its own right, and has been so for a very long time now.

As the Economist notes:

Germany not only has low fertility now, but has had for more than a generation. This suggests that “exceptionally” low rates can persist for decades. Admittedly, points out Michael Teitelbaum of the Sloan School in New York, Germany may simply be odd demographically.

Now while the German fertility pattern is decidedly odd, perhaps one of the oddest of odd features in the recent childbirth patterns there is omitted from mention in the article, namely the relatively higher numbers of women in German-speaking cultures who remain childless (see this chart where you can see the very rapid and significant rise in childlessness – up towards the 25% mark – among German women since the 1950 cohort) and indeed the proportions of women in these cultures who have considered it normal not to have a child. As can be seen in this chart, in answer to the question asked of women in the 2002 Eurobarometer survey about what their “ideal” number of children would be some 16.6% (in the 18-34 age group) declared “none” to be their ideal number of children in Germany and 12.6% in Austria.

These results do tend to give credence to the idea that some part of the low fertility in Germany is structurally different from low fertility in other members of the “lowest-low” group, in that a more significant part of the childlessness may be due to a free and voluntary decision rather than a result of biological infertility produced by excessive postponement.

But high levels of childlessness are not the only significant characteristic of low fertility in Germany, as can be seen from a glance at this chart, which compares the parity composition of childbirth (ie numbers of children) in six EU countries – Italy, Federal Republic of Germany, the UK, the Netherlands, Finland and France – for the 1935 cohort. If we make a direct comparison between Germany and France we can see that not only does Germany have more women who remain childless, of those who have children, a far lower percentage were having third and fourth children.

If we then take a look at the time-series chart for the percentages of children born out of wedlock to mothers in a number of EU countries which I have at the bottom of this post, we can see that in the case of Germany it is noticeable that the percentage of children born out of wedlock remained low in comparison with the UK, Sweden and France right though the second half of the last century, and that the level had stabilized by the 1990s (at around one-sixth of the birth total): this is an interesting result since marriage and the family are specifically protected by the German Constitution and since we have seen how since unification the number of such births has been halved in the east, where “illegitimacy” was previously massive.

So we may well have a rather perverse situation here, whereby “family” (as opposed to child oriented) policy specifically targeted married couples, and – at least in terms of tax concessions – favoured the father rather than the mum, with the result that – given the significant social transformations which were taking place in family types during the period in question – less children where born. Such at any rate is the opinion of the Max Planck Institute for Demographic Research demographer Jan M. Hoem, as argued in this paper (PDF).

So now lets go to point (iii) in my list from the Economist, namely the idea that population change is economic growth neutral. I would say that this was perhaps the most controversial idea in the whole article. The key point to note here I think, is that it is not population SIZE that matters, but population age structure. Changes in age structure effectively produce – as was mentioned in the context of Ben Bernanke and the Demographic Transition earlier – shifts in median ages, and these shifts in median ages do seem to have significant economic consequences. Basically, if we look – yes, actually look – at those societies whose median age has reached the highest level – around 43 – so far – Germany, Japan, and Italy – we can note straight off that each of these has been experiencing economic problems in recent years which to some extent break away from the traditional pattern. I do not wish to go into this in any great detail here (that will be, I think, another post), but basically it could be argued that these three countries all tend to be suffering from congenitally weak domestic consumer demand, and as a result tend to depend on export lead growth for increases in GDP (increases which in the case of Italy remain exceedingly small, due to the inability to meet the export-lead growth challenge).

I have recently gone into all this in some considerable depth in the German case (and here) so I will simply refer the interested reader to this line of argument. But this kind of economic problem will undoubtedly feed-back into the fertility trap problem (if one exists), and in particular by maintaining downward pressure on the disposable income available to young people, both via the tax squeeze that ageing and the associated higher elderly dependency ratios produces (viz, the 3% VAT rise in Germany) and the downward pressure on wages which is being systematic and relentless in both Germany (see this remarkable Q1 2007 wage data from Eurostat, just 0.1% growth in wage costs y-o-y after the boom year of 2006) and Japan (where again wages continue to fall, and here).

So, in summing up, what can we now make of the Economist’s claims that “pessimism is no longer justified” and that “Europe’s population is bouncing back”? Well, I would say that pessimism is rarely justified, since it tends to produce fatalism. On the other hand realism leads me to want to qualify the Economist’s claims in the following way:

* Europe is only bouncing back in parts, so it is hard to draw any real conclusions, in particular a very large part of Europe still has – as can be seen here – around 70% of its population with TFRs below 1.7, and 1.7 is already significantly below replacement level.

* Demographic changes are not processes which only go to work in the very long term, the short term consequences of changing median ages are already real and present.

* The economic consequences of changing population age structures are not growth neutral, but are real and significant.

* As a consequence of all of this we simply cannot afford to continue to give demographic changes the back seat. Europe needs above all policy – rather than complacency – in the face of these changes, and such policies ought to be just as evident in the minds of our citizens as the recent declarations of good intent about the need to act on climate change.

Eurozone Economy: When Paradigms Collide

When scientific paradigms collide everyone should duck, at least that is the best advice I can offer at the present moment. The provisional German retail sales for January are now in, and they don’t make especially pleasant reading:

European retail sales dropped for the first time in 10 months in January as spending in Germany slumped, adding to signs economic growth is slowing, the Bloomberg purchasing managers index showed…..German retail sales had the biggest drop in two-and-a-half years, with its index declining to 43.9 from 55.2 in December

Now for those who have been following the German economy in recent months none of this should be particularly surprising, since as is reasonably well known Angela Merkel’s government has just upped VAT from 16% to 19% in an attempt to address the ongoing federal deficit problems. And of course, one months data never offer a complete picture. But this decline in retail consumption in Germany forms part of a much longer ongoing weakness in domestic consumption (and here), one which many were arguing had finally come to an end in 2006. Some of us, however, seriously doubted that this was the case, and hence the initial significance of today’s reading. In particular what we may be faced with are changing structural characteristics of economies as median population ages rise. In particular – and following the well-known life cycle pattern of saving and consumption – more elderly economies may have a higher rate of saving and a lower rate of consumption increase than their younger counterparts.

Some more evidence to back this point of view comes from Japan, where today we learn that household spending in December declined for a 12th straight month, dropping 1.9 percent from a year ago. Yet the Japanese economy is not in recession, and output is actually rising. As Bloomberg say:

Japan’s factory production rose to a record and household spending fell, underscoring the central bank’s concern that growth has bypassed consumers and left the economy dependent on exports.

So please note: growth appears to have by-passed consumers, and the economy is ever more dependent on exports. The same goes for Germany, and this is why I talk about paradigm collision, since the neo-classical theory of economic growth – with its core conception of ‘steady state’ growth – was never built to handle median age related changes in economic performance and structural characteristics. Something new is clearly needed.

Over the coming weeks I will undoubtedly have more to say about all this, as we get to see more of the 2007 Eurozone data, but for now let me point you in the direction of Claus Vistesen, who has been patiently toiling away trying to work through a hypothesis which, in terms of the data we are now seeing, certainly seems more in keeping with current economic realities than the view we currently see emanating from the ECB. His arguments on Japan can be found in depth here, and his latest piece on the eurozone is reproduced below the fold.
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Serbia: That Incredible Shrinking Country

This weekend’s election results in Serbia, and in particular the gridlock state of the political process and the resilience of the vote for the nationalist Serbian Radical Party (as ably explained by Doug in the previous post), pose new, and arguably reasonably urgent questions for all those who are concerned about the future of those European countries who currently find themselves locked outside the frontiers of the European Union. What follows below the fold is a cross-post of an entry I put up earlier this afternoon on the new global economy blog: Global Economy Matters. I don’t normally like cross-posting, since I would prefer to put up original Afoe content, but my time is a bit pressed at the moment, and I feel the issues raised are important enough to merit a separate airing on this site.
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Italy’s Supply Constraint

The OECD estimates the current potential capacity growth rate of the Italian economy at 1.25% a year. Actually I suspect even this very low number is over-optimistic. Growth since 2002 has been as follows: 2003 – 0.1%: 2004 – 0.9%: 2005 – 0.1%. To be sure forecast growth for this year is somewhat higher, at 1.4%, and optimists are expecting this to be more or less repeated next year. But I suspect this outcome is unlikely simply because the global economy now seems to be slowing (and in particular the ever important US economy),so the strongly advantageous situation of 2006 is unlikely to be repeated, while next year the Italian government has promised to introduce an important package of spending reductions which are bound to negatively affect growth, at least in the short term..

But why is potential growth capacity in Italy so low?
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Of Population Pyramids and Value Chains

It is by now well known that the main hope for developed societies subject to rapid population ageing who wish to maintain their relative standard of living lies in increasing their collective productivity more rapidly than they increase their dependency ratio via-a-vis the older age groups. Now in the comments thread on the recent ‘Reform is a Dirty Word‘ post I ventured to say that I found it obvious that at some stage we would reach a point where the rate of population ageing was going to outstrip the rate of productivity increase (in which case relative income per capita would inevitaby start to fall). David, unsurprisingly, asked me why I thought this to be the case. I was not happy with the response I offered (which was essentially some ‘rigmarole’ about the biology of ageing which is coming in a separate post), and since that time I have been scratching my head trying to find a simple way to get this point across. Perhaps I now have one.

All you need to get to grips with what follows is a basic understanding of geometry and a vague interest in football.
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Montenegro III: Am Not, Are So

Continuing AFOE’s first point-counterpoint debate between two posters, here’s my final post on Montenegrin independence.
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Hot Labour Anyone?

This post has one sovereign virtue: apart from in the current sentence it will not refer, either directly or indirectly, to the Catalan Statute. The topic it does deal with however is probably equally vital for the future of Spain. The issue is Spain’s housing boom, and the role of immigration in fuelling it. Two facts above all others stand out: Spain is currently ‘enjoying’ the longest and deepest housing boom (in the current round) among all the world’s developed economies (see this useful article from the Economist, or this one from Business Week), and Spain is also enjoying sustained rates of immigration which – at around 2% of the population per annum, may well be the most intense ever experienced in a developed economy. For purposes of comparison I could point out that Spain’s net migration rate of 17.6 per thousand in 2003 contrasts sharply with that recorded for the old European Union 15 for the same year – 5.4 per thousand – and is even well above the level recorded by Germany in the early 1990s – a maximum of 9.6 per thousand in 1992 – or by France in the early 1970s. So there is a housing boom, and there is immigration, the question is, what is the connection?
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Spain’s Immigration

As Spanish commenter Pepe would probably say, ‘hot labour’ is moving into Spain at a nifty clip: 2% of the total population per annum. In 2004 the number increased by 700,000. Last year, although we don’t have the numbers yet there was probably the same number or more. Here is a story from El Pais which was linked-to in the IHT based on this press release (in Spanish). Note that these numbers are for 1 January 2005, we still have to add 2006.

The number of immigrants in Spain rose last year to the equivalent of 8.5 percent of the total population as of January 1, 2005, according to figures released on Tuesday by the National Statistics Institute (INE). Of the total 44.1 million people registered as residents, 3.7 million were non-Spanish. The total population rose 2.1 percent from the year-earlier figure, while the number of immigrants rose 23 percent from the figures released on January 1, 2004.

The regions that registered the largest rise in population were Catalonia, Andalusia, Madrid and Valencia, largely due to immigration. Only in the North African enclave of Melilla did the population decrease, the INE said.

The largest immigrant group hails from Ecuador with 475,698 residents, followed by Morocco with 420,556, Colombia with 248,894, Romania with 207,960 and Britain with 174,810.

For towns with more than 10,000 inhabitants, Rojales in Alicante boasts the largest percentage of foreign-born residents. Of the total population of 13,807, 65.3 percent are immigrants, the INE said. Rojales, about 35 kilometers from Alicante, is a popular spot for British citizens to buy vacation and retirement homes.

In November, the Center for Sociological Research (CIS) released a survey showing that three out of every five Spaniards responded that there are too many immigrants in Spain. Immigration also was shown to be the second-most important problem for Spaniards (40 percent) after unemployment (54.1 percent) and ahead of terrorism (25.3 percent).

Nevertheless, the same survey showed that nearly 61 percent of Spaniards feel immigrants should have the right to vote in local elections, while 53.4 percent would extend that right to national elections.

Garden Of The Forking Paths?

“Global imbalances matter” seems to be the favoured warcry over at Brad Setser’s blog these days (I’m not sure anyone really disagrees with the idea that they matter, all the arguing seems to be about how much and why). Recently however Brad seems to be drawing support from a rather unexpected quarter: “one part of the Economist” (well, one part is definitely better than none), the part which believes that despite what happened in 2005, 2006 will be the year of the “great dollar decline”: And why would this be? Because, of course, global imbalances do (here read the US CA deficit), in fact, matter.

Now there is another view available on this.

However this issue is more interesting, since the part of the Economist which believes that the US CA deficit will prove decisive in 2006, also seems to believe that global ageing isn’t in fact a terribly important phenomenon (and here).

The Economist seems to take the view – as Claus Vistesen puts it – that “Rich countries’ populations are shrinking … not to worry though“?

In fact Claus seems much nearer the mark than the part of the Economist which seems to be arguing that ageing doesn’t matter too much when he says:

I agree with the zest of their arguments, namely that the new realities mean that there will be fewer people in the workforce to support more old people in the future. In a global perpspective I also believe that the world would benefit from having fewer people on the whole. However, the point that escapes The Economist in the midst of their optimism is that some countries will have a hell of a lot more difficulties adapting than others, and as such these demographic trends might have a real negative effect, at least some places in the world.

Yes, I would say that this is just the point that escapes the ‘ageing doesn’t matter so much’ part of the Economist, who seem to believe that population meltdown in Japan wouldn’t be a problem since “the last Japanese will (only) die as soon as 2800.” (Actually the article on Japan is near to scandalous, since it only focuses on the legal minimum pensionable age, and misses entirely the important point that most Japanese already continue working after 65, and even by the age of 75 25% of the population are still working).

I have already posted extensively on the population turning point in Japan (and here). So now I would simply make two points. Firstly it is the age structure of the population which matters, not its size, and secondly, it is curious how all those people who seem to want to argue that the US current account deficit is the most important determinant of today’s global economy also feel themselves impelled to downplay (if not actually try to ridicule) the idea that changing global demography (from Bolivia, to Vietnam, to Turkey, to China, to France, to Germany, to Japan) has any important role to play in helping us understand current economic phenomena. I think there is a choice here: two world-views are colliding, and the paths are forking.

All Gas Or Just Hot Air?

This is a kind of bits-and-bobs post without a lot of coherence, as I am trying to make sense of something which is hard to make sense of, so anyone with more specialist knowledge, please chip-in.

Now I think what we have here is a highly complex situation, and if individual actors behave strangely in a complex situation, this should not in fact surprise us. The big picture scenario is the economic take-off of what are going to be two enormous energy consumers – India and China – and a growing per-capita consumption of energy in the rest of the OECD towards the previous US ‘highs’. This has lead to a large and significant increase in oil prices, and the rest of what is happening can be seen as the scrum which has assembled in the wake.

Now what else do we know?
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