The Clock Is Ticking Away Under Latvia

As the European Commision and the IMF toil tirelessly away, testing out their latest post-Keynesian “social and economic experiment” in Latvia – in an attempt to see whether it is possible to revive an economy which is contracting under the weight of massive debt deflation at an annual rate of 18 percent (Q1 2009) by relying almost exclusively on a process of drastic fiscal cuts (a process which today is glorified with the name of “internal devaluation” but which in the 1930s was simply called what it is: wage and price deflation) – a new problem now starts to looms its head before us. What, we might like to ask ourselves will be the long run consequence for Latvia’s already fragile demographic dynamic if we don’t get a most-optimistic-scenario-best-case outcome here? That is, if instead of a devaluation-driven “V” shaped recovery, we get not a “U” shaped one (the optimistic scenario), but rather “L” shaped stagnation (a distinct possibility on my view, if wages and prices simply take too long correcting to competitive rates) what will be the implications for the longer term future of the country?

The question I want ask here is simply whether or not short term decision taking on the part of the Latvian government (the crisis “exit strategy”) may not produce knock-on effects on the short term decision process of potential Latvian parents leading them to postpone decisions on parenthood, such that the impact of the crisis is a further deterioration in long run population dynamics, and hence, ironically, in potential economic performance? What I am asking is whether or not there may be a kind of “vicious circularity”, whereby one negative feedback process influences another in a way which produces a very unfortunate outcome. Not for nothing do we say that social systems are complex ones!

But before we go into the nitty gritty of all this, I would like to just take a quick look at two charts.

Structurally, they look quite similar don’t they? They are both output charts, showing year-on-year changes in production. The second is a chart for industrial products, and the first is a chart for children. Strange they should look so similar, isn’t it? Or is it? Below I will go into some recent work by economists and demographers which providing a theoretical background within which we may be better able to understand the sort of complex processes we can see operating in Latvia. At the end of the post we will then breifly take a brief look at some of the conclusions it might be possible to draw from what is happening.

Theoretical Background

Basically there are two key line of approach which may help get to grips with the present situation, one of these is the Low Fertility Trap hypothesis advanced by the Austrian demographer Wolfgang Lutz. The other is the cohort-size-driven relative-income-hypothesis advanced by US economist Richard Easterlin. You can find a nice summary of Wolfgang Lutz’s low fertility trap hypothesis in this earlier post by Claus Vistesen. Essentially Lutz argues that the negative dynamic associated with long term below replacement fertility may produce self reinforcing processes such that the anticipated “rebound” in fertility levels simply does not take place. Needless to say there is considerable (negative) evidence in support of the idea that societies where fertility falls to “lowest-low” levels (defined as below 1.3) have considerable difficulty in reovering sustainable longer term fertility levels (circa 2.1) even if the reasons for such difficulty are still a matter for debate. Essentially there are three components to the Lutz hypothesis, and these can be seen in the diagram below:

As Lutz says the key idea is that once fertility falls below a certain level (and even in the event that the hypothesis proved to be well founded this level could only be determined empirically, on the basis of actual experience) a self-reinforcing demographic regime may be established from which it is hard to escape, in the sense of raising fertility back up towards replacement levels. The cut-off point which Lutz et al start from is 1.5 (and in this they take their lead from a proposal by Peter Macdonald in this paper ). This figure does seem to have some coherence in terms of actual experience to date, since with the exception of Denmark – which did briefly fall under 1.5 tfr in the 1990s – no country seems to have gone below this and come, and stayed, back up again.

Now Lutz identifies three potential self reinforcing processes – population momentum, ideational processes, and economic factors – but in this post I want to focus on one of these, the economic one. The explanatory mechanisms we are offered are full of self-reinforcing feedback processes, as can be seen from the diagram below (incidentally please click over the image for better viewing):

Based on work which Claus Vistesen and I have been doing applying Modgigliani’s Life Cycle Model of consumption and savings in the context of rising population median ages I think it is now possible to flesh out just how some of these processes work (see, for example, this post, or my Taking Solow Seriously – Does Neoclassical Steady State Growth Really Exist? post, or Claus here on Japan’s engine failure).

Essentially, the argument we are developing is that as median ages rise beyond a certain point – 42/43 let’s say – the structural characteristics of an economy change. While younger economies – let’s say with median ages in the 35 – 39 range – are driven by large scale borrowing (on aggregate), domestic consumption surges, and, of course imports and current account deficits to match the domestic savings weaknesses. More elderly societies exhibit higher relative savings levels (Japan, Germany and Sweden would be the classic cases), can no longer rely on domestic consumption to anything like the same extent, and increasingly come to depend on export growth and lending abroad to achieve economic growth. This situation is highly unstable, as we are witnessing now in the Swedish case, since as the consumer booms in the younger societies fail, exports slump and many of the loans go bad. This is not a very satisfactory state of affairs, but it is in fact what is happening. This is the demographic transition we are all part of.

Basically, I would argue it is possible to think about four economic mechanisms which “feed” the low fertilility “loop” in the longer run.

1) In order to compete for exports the elderly export-dependent economies have a permanent pressure on their tradeable sectors, whereby outsourcing is continuous and ongoing, wages are continuously compressed, and structural reform is permanent. Since the very export dependence is only further reinforced by the continuing process of change in the population pyramid (ie domestic demand never “recovers” as such) this is all self-reinforcing. That is to say, the more time passes the more there is downward pressure on the wages of young people, and this pressure evidently influences decision taking about parenthood among young people.

Indeed the negative re-inforcing mechanism on domestic consumption can be even stronger, as can be seen from this chart for German retail sales. These, it will be noted, have been falling since the start of 2007, despite the fact that 2007 was a “bumper” year for the German economy. This has nothing to do, please note, with any supposed impact of the global economic crisis, since it evidently pre-dates this. And what happened in January 2007 which set this decline in motion? Guess what, a three percent hike in VAT consumption tax. The hike was, ironically, introduced in order to help pay ageing society health costs. So just like the theory predicts, the consumption of young people is squeezed to help pay the cost of high elderly dependency ratios, and it is squeezed with important structural consequences for the economy. There has been a great deal of noise and hot air spoken of late about who did, and who did not, see this crisis coming, but I would direct your attention to this post by Claus Vistesen on A Fistful of Euros in February 2007 – a (then) 22 year old business school student in economics at the Copenhagen Business School giving Master Classes in economics.

So watch out Latvia, since you just hiked your VAT consumption tax!

2) Due to the comparatively lacklustre economic growth performance there is a constant shortfall in the tax income necessary to guarantee existing welfare and pension commitments. This shortfall is produced by the low levels of trend growth (think Italy, Germany and Japan) which you can generate exclusively on the basis of export growth. Since the changing pyramid structure (here is another part of the feedback loop) means that an increasing part of the voting population comes to be over 50, the tendency, as we are in fact seeing, is to attempt to maintain welfare commitments by increasing the tax burden, which affects the consumption and earning possibilities of the young directly.

3) Migration factors. As societies age, the general lack of economy growth, and the tendency towards increased retirement ages and higher participation rates at the older ages, all mean that there is a relative lack of well paying jobs at the entry level, a phenomenon which makes outward migration an increasingly attractive proposition for educated young people (again, as we are seeing in Germany and in Italy). This out-migration once more feeds back into the structural evolution of the population pyramid. If the out migration is in part compensated for by in-migration of lower skilled workers, then this tends to retard the process of moving towards higher value work, a feedback which one more time would seem to find reflection in lower wage levels on average in the younger age groups.

4) Impediments on pro-natal policies. The pressure on fiscal resources which result from the previous three factors mean that effectively it becomes increasingly difficult to generate the resources to finance really meaningful pro-natal policies which might attempt to “tease” fertility back up towards a higher level. As time goes by this problem only gets worse.

Easterlin and Macunovich

Lutz, for his part, bases his economic feedback mechanism on the cohort impact theory of Richard Easterlin and on the relative income hypothesis he uses as the transmission mechanism for this. According to Easterlin changing cohort size produces either a crowding-out (the baby boom) or a crowding-in (declining fertility) phenomenon. The hypothesis posits that, other things being constant, the economic and social fortunes of a cohort (those born in a given year) tend to vary inversely with the relative size of that cohort, which is itself approximated by the crude birth rate in the period surrounding the cohort’s birth. The cohort mechanisms operate mainly through three large social institutions – the family, the school and the labour market. Diane Macunovich has a good summary of Easterlin’s ideas and their application to fertility changes in Relative Cohort Size, Source of A Unifying Theory of the Global Fertility Transition (Macunovich, 2000, online here).

The operation of this general ‘crowding mechanism’ means that large birth cohorts face adverse economic and social conditions, higher unemployment, and lower than expected wages, outcomes which are significantly at odds with their material aspirations. As a result, they postpone family formation and have fewer children. This line of research now represents a long-standing tradition in the United States, where an ongoing body of work (Easterlin 1975, 1978, 1980, 1987, Macunovich 1998a, 1998b, 2000, 2002, Bloom, Freeman, and Korenman, 1987, Korenman and Neumark, 2000) has posited the idea that the relative size of young cohorts entering the labour market has far-reaching implications for wages, inflation, unemployment rates, etc, as well as for a variety of cohort impacting factors like living standards and family behaviour. The core idea behind the crowding thesis is also now being applied in studies of the ‘greying’ phenomenon in the United States as the large ‘boom generation’ steadily approaches retirement age. .

On the other hand, the crowding-in syndrome should mean that the reduced cohorts which follow the fertility decline should find employment opportunities easier to obtain, and salaries relatively higher. The result of this is rising income expectations and aspirations for a better life all round. Insofar as these are realised there is an associated “birth spurt” as young people’s confidence in starting families (or adding to them) grows and grows. This is the phenomenon we saw at work in Latvia – complete with the very high rates of wage inflation – in the years of boom – even if the heightened aspirations was more the product of a “pinching” of young labour supply through out migration than it was of lower fertility at that point, that impact is still to come basically. Now, however, we see the other side of the coin, as the sharp contraction produced by the rapid deflating of the earlier boom throws everything into reverse gear.

The argument here is not that demographic movements produce the boom bust, but that such processes serve to amplify the distortions, and this is what we can quite clearly see happening in Latvia I feel.

So far Maconovich and Easterlin, but Lutz and his colleagues offer a further, and most suggestive) direction for analysis: low fertiliy (via the population momentum impact) accelerates the process of societal ageing, and boosts the importance of the elderly dependency ratio. This in turn cuts growing pressure on health, welfare and pension benefits, generates a general pessimism about the future and lowers expectations about future income growth. Thus the earlier rising income expectations which were previously associated with those “narrow” cohorts, now become more difficult to sustain as the fiscal burden weighs down on younger generations, and this has the consequence that they continually postpone starting families.

The general pessimism that ensues, coupled with ongoing pension reforms which effectively reduce guaranteed benefits at a time when life expectancy is increasing, only serves to produce an increase in saving for the future, which, of course immediately represents a drag on current consumption. The drag on consumption leads to a far more lethargic level of economic growth, and this only adds to the negative cycle since it effectively induces young people to delay further having children in order to attempt to maintain current income. This type of economic chain reaction, especially plausible in the light of what we have actually seen happening in Germany and Japan (the two countries who have advanced furthest in this particular demographic transition), does seem to be one of the possible mechanisms through which Lutz’s trap – should it in fact exist – might operate.

In fact Macunovich takes the Easterlin theory even further, and tries to use it to develop a general theory of the whole demographic transition as a process operating almost in its entirety via cohort effects. At this level I find her argument not entirely convincing. The cohort dimension is however very evident in the US baby-boom phenomenon, and the subsequent fertility reaction, and indeed this has had the consequence that population ageing is being seen very much as a cohort phenomenon in the United States, but this US experience is perhaps hard to generalise. What is evident though, is that the cohort phenomenon, and the changes in economic dynamic that it produces, does generate very real and important short run effects, and this is just where Lutz’s idea becomes important, since if the population process is not a homeostatic (self regulating) one (which it isn’t at this point) but rather a path-dependent one, where long run outcomes are highly sensitive to short run changes, then the short run impacts we are seeing operating now in a country like Latvia (and Hungary, and Ukraine) become potentially very important indeed, since – via another of Lutz’s pathways (the population momentum one) they can in fact make the difference between long run sustainablility and unsustainability for a country, and I do wish that the EU Commission and the IMF would open up their ears, and listen to this argument, at least just a little bit. The evidence is mounting, the only thing which is not clear is for how long people are effectively able to ignore it. Not until it is too late to react, I hope.

The Relative Income Low Fertility Trap Mechanism At Work In Latvia?

Well, as I said ealier both the argument and the evidence on how a restricted cohort might lead to strong rising income expectations are clear enough, and now there is little doubt that Latvia is facing a very sharp economic contraction. This is leading to falling living standards, deteriorating employment stability expectations, growing pessimism, and of course (as we will see below) falling births.

Indeed only this weekend the Latvian Cabinet met in emergency session, in order to reach to agreement a the package of measures to be put before parliament. These measures – I think it is hard this part really is the unkindest “cut” of all – are actually being demanded by the leaders of the European Union (via their representatives on the European Commission) in order to agree the release of the next tranche of the Latvian “bail out” loan, and among measures being discussed are a reduction of 10% in both state pensions and maternity and child care benefit. The former may be hard, but unavoidable the latter, as we will see, more or less amounts to voluntarily agreeing to slit your own thoat.

Monthly Births The New “Lagged” Indicator For Latvia?

Let’s take a look at the problem. Births have long been falling in Latvia. In the mid 1980s they hit a peak, at a little over 40,000 annually. Then, in harmony with what most economists and demographers would expect, fertility dropped sharply, and hit a historic low in the mid 1990s (under the impact of the transition shock) – with a peak to trough fall of something over 50%. As we can then see in the chart below, fertility rebounded in the late 1990s under the impact of rising living standards, and due to the fact that more or less record numbers of people entered the childbearing age group.

Unsurprisingly then, the Latvian period fertility measure (the total fertility rate) started to tick upwards again from the record low of 1.12 hit in 1998.

But what has been happening to births since the crisis broke out? Well, fortunately the Latvian statistics office do publish monthly live birth stats, so this is one indicator we can track fairly easily. Here’s the chart from the start of 2007, but there is so much volatility (seasonal variation?) that it is hard to see exactly what is going on.

However, if we apply an old economist’s trick, and look at the year on year variation, the pattern gets a bit easier to see.

And then if we apply another seasoned economist’s “quick and dirty” procedure to iron out a bit of the seasonal variation by smoothing with a three month moving average chart, the picture seems very clear indeed. As output drops, and living standards fall, so to does Latvian society’s “production of children”.

And of course, the negative population dynamic goes even further than this, since we have out-migration to think about. We have official monthly figures from the stats office, and even if these undoubtedly underestimate the size of the movement, the data quite possibly does give reasonable evidence of the trend, and what we can see in the chart below is not good news, since the rate of emigration is obviously rising.

Now these two factors, migration and births have a direct impact on a third indicator – population median age, and as we can see this is rising in Latvia, and very rapidly, with pronounced and important implications for both elderly dependence and economic performance. And of course, the median age assumptions for future fertility between now and 2020 where made on the more postivive outlook of improving fertility which prevailed before the crisis.

Now, from our more general studies of the economic impacts of ageing population, it is apparent to Claus Vistesen and I that the medain age of forty is something of a watershed for any population. The entire structural characteristics of an economy begin to change from this point in the ageing process, and the economy becomes increasingly export dependent as we can see in the case of high median age societies like Japan, Germany and Sweden.

But something is different in the Baltics, since male life expectancy is much lower than in the above mentioned countries, on average nearly 10 years lower, as can be seen from the comparison between Germany and Latvia to be seen in the chart below.

Now, from a strictly pragmatic point of view someone might be tempted to say, well “where’s the problem there, less pensions to pay” (leaving aside the obvious humane issues), but this isn’t the point, since the dependency ratios are set to rise sharply even assuming this mortality rate. The problem is that most of the remedies for offsetting the ageing population dependency issues assume the viability of raising labour force participation levels in the 55 to 65 age groups, and in the Latvian case many of the men involved – the ones whose infusion into the labour force is set to “dynamise” the economy – either simply aren’t there, or are in very poor health.

So no, this is not simply one more plea for leaders of Latvia to get to work and devalue the currency. It is a plea to those leaders to stop and think a little about the implications of what they are doing. Surely no one can be happy to see their country flushed down the tubes in quite this way?

And for purposes of comparison, here is the chart for Hungary. Actually this one really is fascinating for those of you who know anything about what has been happening in Hungary. In June 2006 there was a major financial crisis in Hungary. And guess what? You can see this in the births nine months later. Then births recover again, and then, of course, they start to deteriorate. Now the crisis hit Hungary sharply in October 2008, so if this theory is at all right, we should see another sharp deterioration in Hungarian births around August/September 2009.

References

Bloom, D., R. Freeman and S. Korenman. 1987. “The Labor Market Consequences of Generational Crowding”, European Journal of Population, 1987, 131–176.

Easterlin RA (1975). “An Economic Framework for Fertility Analysis” Studies in Family Planning, 6(3):54-63.

Easterlin RA (1978). “What Will 1984 be Like? Socioeconomic Implications of Recent Twists in Age Structure,” Demography, 15(4):397-432 (November).

Easterlin RA (1980). Birth and Fortune: The Impact of Numbers on Personal Welfare, Basic Books: New York.

Easterlin RA (1987). “Easterlin Hypothesis”, pp.1-4 in J Eatwell, M Milgate, P Newman (eds) The New Palgrave: A Dictionary of Economics 2, Stockton Press: New York.

Korenman S and Neumark D (1997). Cohort Crowding and Youth Labor Markets: a cross-national analysis”, NBER #6031,
Cambridge, MA.

Lutz, Wolfgang, Maria Rita Testa, Vegard Skirbekk, 2006. The “Low Fertility Trap” Hypothesis, Paper presented at the Population Association of America (PAA) 2006 Annual Meeting, March 30 – April 1, Los Angeles, California

Lutz, Wolfgang, Maria Rita Testa, Vegard Skirbekk, 2005. The “Low Fertility Trap” Hypothesis power point presentation at the Postponement of Childbearing in Europe conference held at the Vienna Institute of Demography, 1-3 December 2005, Vienna, Austria

Macunovich, D.J. 2002, Birth Quake: The Baby Boom and Its Aftershocks. Chicago: University of Chicago Press

Macunovich, D.J. 2000, Relative Cohort Size: Source of a Unifying Theory of Global Fertility Transition? Population and Development Review, Volume 26 Issue 2, June 2000

Macunovich, D.J. 1998a, Relative Cohort Size and Inequality in the U.S. American Economic Review (Papers and Proceedings) May 1998 88(2):259-264

Macunovich, D. J. (1998) “Fertility and the Easterlin hypothesis: An assessment of the literature.” Journal of Population Economics 11:53-111.

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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".

22 thoughts on “The Clock Is Ticking Away Under Latvia

  1. Practical question: because this is Latvia, would you happen to have any statistics at hand showing the demographic differences between the ethnic Latvian community and the local Russian community? And yes, I know that the latter is quite segmented in itself, but for argument’s sake, I’m deliberately including Byelorussians and Ukrainians under the same umbrella.

    If the stats are anything like in Estonia, I’d imagine that there are considerable, even fundamental differences between the Latvian and the Russian community in all those sectors that you’ve mentioned: births, migration and life expectancy. And I’d imagine that the impact of the crisis on these two groups could be very different.

    I just got back from Riga, and right now, I have a feeling that no one has yet made any predictions on what kind of an impact the crisis may yet have on the ethnic balance of the Latvian population. Because aside that one cynical “Where’s the problem?”-question you’ve already mentioned, I have a feeling that there may be another similar dynamic at work under the surface, potentially providing results which may – again, cynically speaking – appear quite appealing to some people.

    (By the way, on that other issue of TFRs, it’s not just Denmark. If memory serves, the Finnish TFR also dropped below that supposedly magic 1.5 limit back in 1972, crept back above it, settled there for the next decade and a half, and then hit 1.8 during the bleak years of the depression of the ’90s, as I mentioned some time ago.)

    Cheers,

    J. J.

  2. Hello Jussi,

    “Practical question: because this is Latvia, would you happen to have any statistics at hand showing the demographic differences between the ethnic Latvian community and the local Russian community?”

    No I don’t, although I’m sure these differences exist, and are important. Especially for cultural dynamics.

    “By the way, on that other issue of TFRs, it’s not just Denmark. If memory serves, the Finnish TFR also dropped below that supposedly magic 1.5 limit back in 1972, crept back above it, settled there for the next decade and a half,”

    OK. You may be right. Eurostat data for Finland only go back to 1990, as do the US census bureau database (my other normal source) so I can’t check. It wouldn’t surprise me though, since Estonian fertility was clearly rebounding before the recent slump (trying to get monthly data from Estonia at the moment), so there may well be a Scandinavian cultural fertility pattern, in the same was as there seems to be a German language speaking one (higher than typical percentage of women who never have children).

    Incidentally, 1.5 isn’t a “magic number” – it is a working indicator to test with. If we go down to 1.3 or 1.2 the hypothesis gets on much safer ground.

    Personally, I have great difficulty seeing how the demographic dynamic of the Baltic countries is ever going to recover from the “Lehman shock”, let alone those who are outside the EU like Serbia, Belarus, Ukraine, etc.

    The whole “country sustainability” issue is going to become critical between now and 2020, on my view. And we may well see some countries who will need permanent support from the IMF, which is something no one has yet contemplated.

  3. @ Edward.

    I read this article and I really think it’s interesting. But there are some remarks that I want to make.
    You are negative about the economic development of an society if its population is aging. But then you say the following about an society with an relative young population
    “ While younger economies – let’s say with median ages in the 35 – 39 range – are driven by large scale borrowing (on aggregate), domestic consumption surges, and, of course imports and current account deficits to match the domestic savings weaknesses.”
    Else then companies, who lend money to improve their production, the lending of private consumers means consuming today a part of tomorrow’s income. What is good about this behaviour? It will indeed temporarily boost the economy when they bring in their borrowed money. But when the consumers must pay back their loans, they will have less money to spend and the economy will collapse again. Unless you think that the growing economy would cause such an income increase, that it will more than compensate for this loss of future income. But such a big grow can not be endless maintained. You don’t want to buy everyday a new car, it’s just not practical.

    “The operation of this general ‘crowding mechanism’ means that large birth cohorts face adverse economic and social conditions, higher unemployment, and lower than expected wages, outcomes which are significantly at odds with their material aspirations. As a result, they postpone family formation and have fewer children.”
    Above quotation contradicts with the (Dutch) so-called baby-boom generation (those large cohorts who are born shortly after WW-2). When this generation was leaving their schools, there was large demand for their labour. They noticed their salaries quickly increasing over the years, and find a lot of possibilities to improve their positions. The economy was booming till the oil-crises in the mid-70th. By that time they all had have a chance to make a good career. Indeed this lucky generation has produced less children then their parents, but that has to with the easy access to the anti-conception pill in the 1960th, and the decreasing influence of the church during the same period.

    A huge factor that causes Low Fertility which must not be overlooked, is the sharp increase of the house-prices. I shall explain this phenomenal from the Dutch situation, but I think this is valid for a lot of countries. An average house in Holland did cost about 55,000 euros in 1982 and about 250,000 euros today. http://www.huizenmarkt-zeepbel.nl/de-huizenprijzen/
    If you have an average net income of about 1600 euro/month and you will buy a average house, you got an obvious problem. A young couple, still at the beginning of their careers, is forced to work both to pay for their mortgage. Therefore a lot of young couples are waiting many years till have enough income, before they take their first child. Mostly one of the two partners is going to work part-time after their first child is born. Working and raising a big family at the same time is not an ideal for most parents, so they mostly take only one or two children. More children means also the need of a bigger and more expensive house, which will cause an increase on their monthly mortgage burden.
    Mind you, only a part of the society is negatively affected by these extreme high housing prices. A baby-boomer who bought his house when it was still relative cheap does not have this problem. It are just the younger couples, which are responsible for the newly born baby’s, who are facing this problem.
    Ron

  4. Interesting article. I recently got back from visiting family in Latvia. Doing some very rough surveys of public transportation in my head while over there, the percentage of elderly pensioners to people that COULD be in the workforce is shocking. But the fact is that a lot of the people that could be working and want to work can’t. Also, pensions are so small that people are pretty much living in poverty unless they have a house, in which case they can just barely get by (and that was before the pension cuts).

    I think the situation in Latvia is also simpler than in some of the other countries facing an aging population and declining birth rate, basically, a lot of money was wasted and they didn’t develop any industry that could have a market in the EU. There were opportunities for this, and German and Scandinavian companies wanted to set up production there, but nothing ever really got developed due to bureaucratic incompetence. A large and useless bureaucracy is pretty much Latvia’s only accomplishment since gaining independence and getting accepted into the EU.

    On a side note, I also noticed the soviet tradition of having a vegetable garden is now back in “style”, which is probably a good thing. A few years back many were converting any gardens into American style lawns.

  5. I misremembered the year; it was 1973, not 1972.

    The following page is in Finnish, but the population pyramid speaks for itself:

    http://www.stat.fi/tup/suomi90/joulukuu.html

    The Finnish texts on that 2006 pyramid translate as “Civil War” (small age cohort), “Winter War / Interim Peace / Continuation War” (small, large, small), “Baby-boomers” (large) and finally, “Born in 1973″ (small).

    Also, another lapse of memory; apparently it didn’t drop quite _below_ 1.5, but instead just to that plain old 1.5. The following figures would seem to be accurate, and coming from the official Finnish statistics:

    http://tinyurl.com/mgfde2

    The peak during the depression of the ’90s is quite visible, in all its weirdness.

    The potential “Scandinavian cultural fertility pattern” was exactly what I was speaking of, by the way. This is why I think it would also be important to pay attention to the demographic differences between the Latvian and Russian communities.

    To put it roughly: assuming that the other group is taking most of the demographic hit, perhaps the end result of the crisis might be that there will simply be a lot less Russians in Latvia in the coming years?

    Cheers,

    J. J.

  6. Pingback: Links: 2009-06-15 - Credit Writedowns

  7. @ Dismal

    Thanks for your reply. I was in Riga last weekend (lots of rain!) and noticed that downtown Riga looks like many polish towns should look. The roads and pavements were in good condition, the city was clean and filled with relative expensive looking new buildings and good renovated historic one’s. Not renovated old buildings, from the communistic time, were visible but relative few. The average car that drove around in Riga was more new and expensive than the one’s you could see driving around in Amsterdam. There were huge modern shopping malls filled with all kinds of articles of luxury, and lots of customers to buy them. Wondering were all the money came from to maintain such a high standard of living, I asked a friend if he was able to mention just one well known Latvian product. He couldn’t and neither could I. Back in the hotel we find out on the web, that Latvia’s main export product was wood. Well, as that product could make a country so rich, than Siberia with all its forests must be one of the worlds richest region’s. So, we came to the conclusion that Latvia’s relative wealth was most probably due to E.U. money, which they probably would find hard to pay back. Reading your reply, our estimations seemed to be right. But one important question remains; why should anyone so easily borrow money to the Latvian’s to have a much more luxury live, without any guarantee to get it back?

    @ Edward

    “But something is different in the Baltics, since male life expectancy is much lower than in the above mentioned countries, on average nearly 10 years lower, as can be seen from the comparison between Germany and Latvia”
    A huge difference between male and female live expectations is a normal phenomenal in the Slavic countries. It is caused by many years of severe alcohol abuse by the male population, which destructs their health. I personally witnessed the sad results of this evil “tradition”. Although the Russian culture is not dominant anymore in Latvia (walking through the streets of Riga I noticed that the Cyrillic scripture is still used, but much less than the Latin one, the Russian spoken language is somewhat more commonly used), but the Latvians seems to have inherit this foolish habit from their Russian occupiers. I suppose that the female life expectation will not differ much from the German one, for at least in the Slavic culture they are the one’s who take their responsibilities in the society.
    Ron.

  8. Ron Hulscher loihe lausuman:

    “I asked a friend if he was able to mention just one well known Latvian product. He couldn’t and neither could I.”

    Uh, like, you know, furniture? That’d have been the obvious answer, at least for me.

    For that matter, hadn’t you heard of the usual tourist trinkets, such as amber and Riga Black Balsam?

    “Back in the hotel we find out on the web, that Latvia’s main export product was wood. Well, as that product could make a country so rich, than Siberia with all its forests must be one of the worlds richest regions. ”

    Right. You _do_ know what was Finland’s main source of wealth for most of the inter-war and post-war periods, when this country enjoyed substantial economic growth?

    By the way, I noticed that you used the word “Slavic” twice in that last paragraph, and at least seems that it was in the general context of Latvia, not just in description of the Russian community – considering that you made separate references to “Russian culture” and “Slavic culture”. I’m not quite sure what to make of it.

    Cheers,

    J. J.

  9. Hi Jussi,

    One point only really:

    “Also, another lapse of memory; apparently it didn’t drop quite _below_ 1.5, but instead just to that plain old 1.5. The following figures would seem to be accurate, and coming from the official Finnish statistics:”

    This fits in then, since I got the claim from Lutz, and one of his closest collaborators is Vegard Skirbekk, who if I am not mistaken is Finnish. Since these are both quite serious scientists, I would doubt if their main claims were just plain wrong.

    Basically, what I want to emphasise in general here, is that my claim is not that the underlying factor affecting long term fertility is earning expectations, obviously the process of fertility decline is a multi factorial one, but that short term dynamics, as shown by the monthly birth chart, can indirectly exercise a negative impact, since a drop in births which last two, three or more years will show up again in the late 2020s and so on, as you describe in the “Winter War / Interim Peace / Continuation War” experience in Finland.

    The problem is, with the underlying weakness in fertility in the Baltics, and the fragility of the whole demographic situation, far from this birth loss being recovered in a rebound – economic growth may well also not “rebound” in the way people are expecting – more permanent damage may be done.

  10. Someone should hold a televised celebrity death match between environmentalists that fear rising population and economists that fear falling population.

    Raising the retirement age is a simple act that goes a long way to mitigate the economic problem. It does not solve health care costs in extreme old age, and worsens youth unemployment, but does dramatically rebalance the cost/revenue picture.

    It’s not just a good idea — it’s inevitable, because the math doesn’t work any other way. Sometimes “policy” is just a matter of recognizing the inevitable, and getting out in front of it.

  11. Hello William,

    Just a couple of quick points.

    “and economists that fear falling population.”

    I don’t fear falling population, it’s inevitable after we peak globally sometime this century. I am 100% in favour of measures to reduce fertility in high fertility very poor societies.

    The thing is, if you are forced to jump out of a high building, is it better to do so with or without a parachute. ie something that can slow down the pace of your fall. We need pro natality policies to help those women who want to be mums help us all. These need to be a spending priority.

    Keynes used to think one way out of depressions was to pay people to dig holes in the ground and then pay them to fill them in again. I would simply pay money to people who want to have children, pay their employers to get them back to work again, operate positive discrimination policies to then see them “fastracked” for training courses and promotion.

    Formal equality in the labour market is flawed due to biological reproductive asymmetries. Policy can pay a part here. And Latvia needs support from the EU to spend its way out of the recession – just like the US is doing – and not cut backs which mean that the short term future is bleak, while the long term one is verging on non existent. All they are getting at the moment are loans (which will need paying back – by those ever so few children who are being born) so they can defend the peg and bail out banks who made stupid loans.

    “Raising the retirement age is a simple act that goes a long way to mitigate the economic problem.”

    Well this move is positive, but I don’t know whether this alone could be said to be going a long way. Test case countries would be Germany and Japan. People work longer there now, but have you noticed the huge slump in economic activity they are having to soak up due to the export dependence which accompanies this?

    Plus Japan has gross debt to GDP about to go through the 200% mark – ie a lot worse than the US position everyone seems to be fretting about at this point.

    Plus, Latvia has an additional problem, how do you get age at leaving the labour force up in a country where men die – on average – at 65, and where health spending is just being cut by 25%. Again, short term savings are “killing off” – in this case quite literally – the future.

  12. Great article.
    .
    I will try to translate it to a set of system dynamics feedback loops

  13. Carlos,

    “I will try to translate it to a set of system dynamics feedback loops”

    Great stuff. Go for it! Mail me if you come up with something.

    Edward

  14. I found the blog’s subject matter very interesting and feel the implications of the basic case insights into aging population demogrpahics will provide some glimpse as to how markets operate when the surpluses and excess consumption of Western socities is no longer available and viable. The problem, whether based on age demogrpahics or just plain global competition, will have to be faced by the EU and beyond.

    Many Western governments have been planning for this contingency for deacdes. In the absence of creating some sort of low growth and sustainable market mechanisms, they have endorsed immigration, and the attendant increase in comsumption demand, as a solution. You import new workers, hopefully young, and once established hopefully they’ve created a continuing network for future immigration. Nothing wrong with this policy in my estimation. Somebody has to pay for our lifestyles.

    I would be interested in seeing a comprehensive survey as to why child-bearing couples forgo having families. A poster cited economic factors and the cost of housing as an impediment to rearing a family. I’m not so sure the cause and affect aspects are so simply explained. I know several young couples, who during our Celtic Tiger years, consciously decided to forgo having a family. They want the big house, two cars, plenty of holidays, and children don’t fit this lifestlye.

    Anyway, in a world of diminishing resources and expanding populations, the gradual demise of Western consumption patterns and populations may be no bad thing. There’s no free lunches in this world. If we want a high consumption lifestyle, this lifestyle comes with changes and costs.

  15. @ Jussi

    You are obvious surprised that I didn’t know any Latvian product’s, but I am sure that the majority of the Dutch is not able to do so. Remember that you are a Fin, and Finland is neighbouring the Baltic states, so it’s logic that people in Finland have some more knowledge about the Baltic’s than the average Dutch does. I did not know Riga Black Balsam, but I did use my last lat’s to buy a bottle of Vana Tallin on Riga airport. I did learn to drink this Estonian liqueur (up to 50% alcohol) during my many visits to Lemberg. The reason I did this, was that I read Edwards article’s about Latvia maybe not longer being able to maintain their peg. So I decide not to take any lat’s back home, afraid that these will suddenly loose a lot of their value.
    I do think there is money and jobs to make in the wood production. But I don’t believe it will be anywhere close to enough to pay back for all the investments the Latvians made in real-estate, nice cars, luxury, etc. Like Dismal said, it was better if they invested their money in their industry, so they could create an increase in their national income. I noticed that they did invested in their infrastructure, but infrastructure alone is not creating money.
    I use the expression “Slavic culture” to underline that something is not only valid for the Russian culture but for most Slavic societies.
    Russian culture is a Slavic culture, but not all Slavic cultures are equal to the Russian culture. Take for example the Polish culture. Ethnical and linguistically they are Slavs, but as being Catholics and using the Latin scripture they historically belong more to the “western culture” then to the Russian culture. But like in Russia, the Polish society also suffers from widespread alcoholism. Although excessive alcohol consumption is common in most Slavic countries, I am not sure if this is always been a traditional Slavic habit, or that it is ”imported” from Russia during the post war Russian control over of these territories.
    Ron.

  16. Ed,

    I came across your piece and found it quite interesting. Very well done. I was wondering if you were familiar with or have read “The Great Bust Ahead” by Daniel A. Arnold?

    Great blog and continued success to you.

    HD
    Prudens Speculari

  17. Hm, the Russian influence in Riga seems to be much bigger then I thought. Yesterday the 32 year old Russian journalist Nil Ushakov became the new mayor of Riga. Nil Ushakov is fluent in five languages and studied economics in Denmark. He is the chairman of the most important Russian-language association of the country “the Harmony Center”.
    Ron.

  18. @ t g macamhloaub

    “A poster cited economic factors and the cost of housing as an impediment to rearing a family. I’m not so sure the cause and affect aspects are so simply explained. I know several young couples, who during our Celtic Tiger years, consciously decided to forgo having a family. They want the big house, two cars, plenty of holidays, and children don’t fit this lifestyle.”

    Well I do believe in the power of simplicity, as long as you have a strong and valid argument. although I rather would call it, not loosing yourself into details to avoid loosing awareness of the main lines.
    In my example I was referring to the Dutch situation and an average Dutch income. I don’t know if the Irish situation is the same. But do you asked those young couples you spoke to, why children don’t fit their lifestyle?

    Fact is that the sharply rise of the house prices has had an major effect upon the Dutch society. Was it till about 1970 forbidden for woman by many employers to continuing working after marrying, today it is for the average couple impossible to buy a house on one salary alone. As I told in my earlier reply, the average net income is about 1600 euro/month. This is equal to a gross income of about 32,000 euro/year. (many young people at the beginning of their careers are making of course less money). The Dutch government advices the Dutch mortgagors not to give mortgage to people worth of more then 4,5 times their yearly gross income. Although many banks are willing to lend more money out then the advised amount, there is a maximum. Holland is not the U.S. in this aspect. It is very easy to find out how much you can lend on the internet. On a certain site I filled in the 32,000 euro income, and found out that i can get a 144,000 euro mortgage as maximum (I don‘t think that it is allowed here, to give a link to a commercial site). Much to insufficient to buy an average house which cost about 250,000 euro. So, if an young couple has the ideal of raising a big family and the young woman wants to stay at home to take care of the children, they could not buy a house. Well you can think that to have to work both, is no impediment for a lot of young couples to have many children. But in my opinion you are then denying the obvious.
    Ron

  19. Ron

    I understand your basic points and their validity. (Elizabeth Warren in the US has a very good video on these issues.) It’s just that cause and effect factors are complex; many depending on timing and other issues. That’s why I’d have like to have seen a detailed survey done but, of course, when the survey was conducted would alter the outcomes.

    The complexity, not the specifics, arise out of an economic actors attitudes and expectations which also change over time. Lifestyle, as I identified, became ‘the’ big theme in Ireland during the late ninties and into the 21st century. Ireland carries alot of historical baggage and the new liberal attitudes towards what constitutes success in our culture changed beyond all recognition. Without this new attitude, continually espoused by the MSM in Ireland, the property bubble would not have developed to such a pernicious degree.

    Attitudes impacted on economic developments in Ireland as much as economic decisions impacted on attitudes and expectations.

    As I’ve stated I am not arguing with your basic economic premise. As Ireland and other Euro nations created high cost base economies, economics/finaicial factors will undoubtedly impact on a conscious decision to have children and therefore impact overall demographics. However, we cannot discount expectations and attitudes changing over time either.

    The bottom line is that the attitudes we’ve developed within the overall social dynamic allied with identifiable economic doctrines may lead to the demise of the poeople who’ve adopted the attitudes and doctrines. There is a sweet irony that the focus on short term asset growth may result in long term population declines. The very markets that require unending growth may, over time and with no change in attitude, destroy the ability of growth through demogrphic change. Short-termism, a consciously adopted attitude which affects our expectations, has long-term implications.

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  21. Just a side note- we Latvian women are certainly trying- As weather has warmed it is suddenly obvious that many, many women are pregnant in Riga and as one of them I can attest to the long wait for medical procedures associated with pregnancy due to many expectant mothers. The government has a very family friendly paid leave and back to work policy, much better than many W. European/N. American countries. With the recent reduction of these benefits mothers will still get full pay 2 months before and after birth and then 60% pay for one year.