Possibly the most famous phrase by an economist is John Maynard (Lord) Keynes' "In the long run we are all dead." Where his statement was meant to signal that he found the short run, i.e. developments within a few years to be of most importance, his phrase is uncomfortably close to reality in most of Eastern Europe. Latvia provides a good example: For every single quarter (and there have been around 50 of those) since independence, Latvia's population has decreased. The country has seen the world's fastest declining population - together with Estonia - down some 13 percent since 1991.
Somewhat paradoxically, this actually implies that the Latvian economy has performed even better than the most quoted figure on development in economic activity states. Latvian GDP is currently expanding at a breakneck speed, 8.2 percent annually - Europe's highest growth rate. But a more relevant figure, namely GDP per capita, is expanding even faster than that due to the declining population. An even closer look at the numbers would show that the fine performance over the past decade is largely due to better technology and more capital: Machines, equipment, construction - also very positive since this tells us that Latvians are much more productive now.
Demographic changes are slow but relentless. The population decrease is partly due to emigration, especially in the early 1990s, and partly due to the grim statistic of very few births combined with high death rates. In 1995 life expectancy for men dropped below 60 years. Since then it has recovered to 64.8 years, but is still the lowest in the EU25 (as is also the life expectancy of women at 76 years). As an example, look at the most recent year for which full data is available, namely 2002: Around 20,000 births but no less than 32,500 deaths, i.e. 62 percent more deaths than births. This trend has now persisted for 13 years and will thus soon start having an impact on the labor force. Starting in just a few years and continuing for many years to come, the Latvian labor force will shrink and especially one demographic will be negatively affected - the number of economically active to the number of pensioners.
Fewer hands will have a negative impact on the growth rate and fewer working hands, combined with more pensioners, will make it hard to improve the lot of pensioners, single mothers and others who depend on welfare.
What can be done to counter this? As mentioned, demographics is relentless; the very few births and the many deaths during the transition period cannot be quickly reversed but some remedial measures exist - except, as I shall argue, that the most important of those don't work in the case of Latvia.
A typical policy would be to increase the retirement age. This is currently 62 years, but how do you persuade men to work longer than that when they can only expect to live for 65 years? Another policy is to increase the participation rate, i.e. the share of persons of working age who actually either work or look for jobs. But the participation rate is already quite high here, a typical and for once positive feature of the Soviet Union. The government tries to stimulate births via quite generous child support. Nice, but I doubt the significance. And then there is the most obvious but also the most contentious one: immigration. However this is anathema to most politicians (and by far the easiest way to commit political hara-kiri here) due to ethnic Latvians already being just a small majority in this country.
Demographic development and the lack of solutions to the problems posed by it wedge Latvia between two rocks. No wonder that economics is referred to as the dismal science!
Morten Hansen
Economics lecturer, EuroFaculty, University of Latvia and Stockholm School of Economics in Riga
