Finno-Ugric neighbors face dire demographic challenges

  • 2005-03-16
  • By Aleksei Gunter
HELSINKI/TALLINN - Estonia and Finland are on the brink of what experts say has become Europe's most pressing demographic trend 's an aging population. Despite their significant difference in size 's Estonia has 1.3 million people, while Finland has 5.2 million 's both countries have many cultural and social affinities, and, unfortunately, shared demographic problems.

Timo Lindholm, chief economist of the OP Bank Group, the second-largest bank conglomerate in Finland, said the country would be the first Western economy to suffer from serious problems caused by an ageing population. Namely, that it would be almost impossible to reach full employment capacity, as the ranks of the 2.5 million working-age people will begin to decrease in 2006.

According to Lindholm, Finland's GDP growth was 3.7 percent in 2004, but it will take the country "a couple of new Nokias" to reach the economic growth it enjoyed from 1996 to 1998.

In Estonia, the index of demographic pressure on the labor market, calculated by dividing the number of residents aged five to 14 by the number of residents aged 55 to 64, has been steadily decreasing. From 2000 to 2003 the index gradually dropped from 1.19 to 1.09. An index of less than one point means the country's labor force is decreasing.

The official population statistics for 2004 have not been released. But judging by the Ministry of Interior's monthly reports, the trend will likely continue, said an expert from the Statistical Office of Estonia.

According to the Estonian Ministry of Social Affairs, the population decrease is due to a low birth rate, although the government's recent parental-allowance program pushed this number up a bit.

"The demographic situation in Estonia is worse than in Finland because the gap between the number of working people and dependents is wider. Estonia acknowledged this problem already in 2000, when pension reform preparations were launched," said Marika Raiski, media relations specialist from the Ministry of Social Affairs.

Raiski added that the reform's initial results would be visible in 2007.

"We follow the pension reforms of other countries and, if necessary, we can follow the experience of not only Finland, but also Germany to work out our model," said Raiski.

Markus Sovala, head of the economic policy unit at Finland's Ministry of Finance, said that the country's GDP could shrink by 1 percent in the next several years due to the diminishing labor force.

"Earlier we saw the labor market growing by about 10,000 people every year, and today the picture is almost the opposite. We need a rapid labor productivity increase to compensate," said Sovala.

Meanwhile, Finnish organizations have arranged a number of recruiting events in Estonia to attract doctors and other medical workers to the country. But according to Sovala, Finland cannot rely on immigrant workers to solve this problem.

"On average foreigners are still more often unemployed," said Sovala, adding that the language barrier could be a factor.

Finland has eased its immigration rules, estimating that the net number of people coming into the country will reach 6,000 per year.

Perhaps more importantly, Finland needs to employ domestic workers to the maximum, Sovala said. The pension reform, in force since January, sets the retirement age from 62-68: the longer one works, the higher his or her pension.

"Earlier many people retired at the age of, say, 59. But tying the pension size to the age of retirement is a very strong stimulus," said Sovala.

The Finnish government also plans to gradually increase the share of personal income tax designated to pension funds from the current 21.5 percent to 28.5 percent within the next 30 years - the reason being that today, only one-third of a retirement pension is paid from money earned, while the rest is covered by taxes.

Ilkka Kajaste, deputy head of the same economics department in the Ministry of Finance, said many Finnish experts have agreed that a long transition period for the free movement of labor - a temporary restriction imposed on new EU member states 's would be suicidal.

Kajaste added that there was a high probability that Finland would not prolong the two-year transition period for workers from new EU member states.