EUROPEAN PAPERS ON THE NEW WELFARE

Intertwining of Ageing and Sustainability in Eastern Europe

Abstract

According to a recent World Bank report most East European countries are expected to experience a population shrinking and aging by 2025. They call this effect a transition from red to gray. An analysis of the sustainability of this demographic transition is presented here. We demonstrate that in order to mitigate most of the negative effects of this transition it must be accompanied by the building of a knowledge-based society.
If the development of a knowledge-based society is successful, East European countries have an opportunity to overcome many challenges and improve their economic performance and simultaneously achieve sustainability.

1. Introduction

Former communist countries in Eastern Europe have recently been undergoing four major transitions. First, almost 20 years ago they transformed from a one party state to a democracy. The level of democracy varies. In some countries for quite a long period there were some kinds of authoritarian systems, and in some this is still the case. A large fraction of East European countries are already members of the European Union (EU), and most of the remainder are striving to become members. Second, they transformed from either planned (all former Warsaw Pact countries), or from special forms of self-management based economies (in countries of the former Yugoslavia) to a market economy. Third, the financial instabilities of 2007 have become a significant global economic crisis1 (albeit different in different countries) causing specific changes in the free market economy, e.g. large interventions by states. One of the most relevant socio-economic consequences is an appreciable increase in all forms of socio-economic inequalities2 (GINI indices, ratios of incomes and wealth of the richest 10% relative to the poorest 10% of the population, and particularly the ratio of the salaries of chief executive officers (CEOs) to average workers’ salaries, which is as much as 500:1, while Plato argued that the optimal ratio for a stable society should be 5:1. Even J. P. Morgan at the turn of the 19/20 century argued for a 20:1 ratio. Fourth, their populations are shrinking; the average age and the share of population over 65 years are increasing. Increasing inequalities are different for different age groups.
Table 1 summarizes the gains (left column) and losses (right column) in population in millions3. There is also a remarkable change in the percentage of the population older than 65. In 2025 in Slovenia, Croatia, Czech Republic, Bulgaria, Hungary, Latvia, Poland, Ukraine and Serbia 20% of the population will be over 65, and it will be similar for the Slavic population of FYR Macedonia and for Serbs and Croats in Bosnia and Herzegovina. In the year 2000 only Croatia, Bulgaria, Latvia and Ukraine had over 15% of those older than 65, and in 1950 none of these countries had more than 10% of their populations older than 65, demonstrating that the demographic transition is occurring quite rapidly. In addition, there are differences between male and female life expectancies affecting the working-age population. Of course, the population projections are not only influenced by the fertility and mortality rates but also by migrations. Migration itself is influenced and generated by economy (e.g. current economic crisis) and politics (e.g. integration into the EU).
During 2000-2025 the population of most East European countries will decrease by about 5-20%, and it will age by 15-25%. In most of these countries the working-age population, defined as the cohort including 15-64 age, will decrease by up to 5%. The most severe decrease is for the age cohort of 20-40 years: about 2 millions in Poland and Romania, and about 200,000 and 150,000 in Croatia and Slovenia, respectively. There is also a significant difference between East European countries and OECD countries in the age of entry and age of exit. While average entry ages are about the same, the exit age in OECD countries is 60.6 vs. 56.9 for East European countries
In a global world demographic transition in a given country or in a given region is influenced by global demographic trends. Global fertility rate has decreased from 5 in 1950-65 to just below 3 in 2000, and it will decrease to barely above 2 in 2050. Global life expectancy has increased from 47 in 1950 to 65 in 2000 and it will increase to over 75 in 2050. Differences among various regions, countries and even within a country (as we have already pointed out) have dramatic effects on migrations.

Table 1: Projected Change in Population (in millions) 2000-2025

slaus-tab1.gif

* The population of FYR Macedonia is composed of two main ethnic groups: Slavs and Albanians and their fertility rates differ considerably. It can be estimated that the Slavic population by 2025 will decrease by about 0.2 millions, while the Albanian population will increase by 0.25 millions.
** Serbia and Montenegro has transformed into three states: Serbia, Montenegro and Kosovo. It can be estimated that by 2025 the population of Serbia will decrease by 0.4 millions, that of Montenegro will remain almost constant while that of Kosovo will increase by 0.1 million.
*** The population of Bosnia and Herzegovina is composed of three ethnic groups: Bosniaks, Serbs and Croats living in two so called ‘entities’ — Federation (mainly Bosniaks and Croats) and Republika Srpska (mainly Serbs). Fertility rates of these ethnic groups differ: those of Bosniaks are above 2.1 and those of Serbs and Croats about 1.3.

Source: World Bank staff calculations, based on United Nations 2005.

2. Effects of Demographic Transitions

An aging demographic structure has a strong effect on work force productivity, health care and pension system as well as on the educational system3. These effects will be analyzed in more detail in Sections 3, 4 and 5.
According to the World Bank study3 the economic growth (measured as gross domestic product (GDP)/capita) of East European countries has been affected much more by labor productivity than by demographic transition. However, this analysis depends on a number of factors that are constantly changing and will be grossly affected by the current economic crisis. Namely, labor productivity which is assessed from the ratio of GDP to employment depends on two factors: GDP which is known to be inadequate4 and employment. One of the goals of the EU is to increase employment to above 70%, but presently only Denmark is above 70%, while Croatia, Hungary and Poland are at the bottom of the table of European countries with 50-60% employment. It is easy to see that labour productivity can be artificially increased by the selective dismissal of those who are less productive. The concept of the working-age population needs major discussion, and we will address it in Section 5.
The contemporary world characterized by globalization and rapid changes has already reached a level where the use of resources and the produced waste is considerably greater than the capacity of our Earth by over 27%. The world is dangerously in a state of overshoot and it is imperative that the number of Earths required to provide resources used by humanity and to absorb their emission for each year is reduced to 1 by the year 20505. Then we will satisfy the condition of sustainable development expressed in the Brundtland’s Report.
Demographic structure of each individual country obviously influences sustainability due to differences in productivity, consumption, needs and demands of different age cohorts. In addition, previous economic activities accumulated for instance in savings are different for different age pyramids.
Effects of the demographic transition on sustainable development have been analysed by Ono and Maeda6. They have argued that aging can be beneficial both to economic growth and the environment, albeit only under perfect annuitization, while it could be possibly harmful under imperfect annuitization. They also found that aging could be beneficial to growth and the environment even when the annuitization rate is zero, on the condition that the original longevity is low and consumption is low. This provides a possible recipe for the path to sustainable development for aging economies. Namely, in this case an industrialized country with high longevity must lower the degree of consumption externality and set the annuitization rate at zero. While this suggestion is interesting, it seems very unlikely that it could be implemented in most countries, particularly in East European countries.
The saving pattern in general has an inverted U shape achieving maximum at the age when a person reaches a career peak. However, there are appreciable differences among East European countries reflecting different experiences that people in various countries have with the stability and reliability of their personal savings.


Aleksander Zidanšek: J. Stefan Institute, Ljubljana, Slovenia and Jožef Stefan International Postgraduate School, Ljubljana, Slovenia, e-mail: aleksander.zidansek@ijs.si.
Ivo Šlaus: Ruđer Bošković Institute, Zagreb, Croatia, e-mail: slaus@rudjer.irb.hr.
1 World Economic Outlook, (2008): Financial Stress, Downturns, and Recoveries, International Monetary Fund, October, Washington, DC.
2 World of Work Report (2008): Income Inequalities in the Age of Financial Globalization, International Labour Organization, International Institute for Labour Studies, November, Geneva, Switzerland.
3 Chawla, M., Betcherman, G., Banerji, A., Bakilana, A.M., Feher, C., Mertaugh, M., Sanchez Puerta, M.L., Schwartz, A.M., Sondergaard, L. and Burns, A. (2007): From Red to Gray: Third Transition of Aging populations in Eastern Europe and the former Soviet Union, The World Bank.
4 Tinberger, J. and Kennedy, R.F. (2007): The Inadequacy of the GDP Has Been Pointed out already, November. (Aware of this inadequacy the European Commission, European Parliament and the Club of Rome have organized in November 2007 a conference “Beyond GDP”).
5 Wackernagel, M. et al. (2007): How much Longer Can We Overshoot?, Nov 9, 2007, PNAS, 99 (July 9, 2002), 9266-9271, marketplace.publicradio.org/display.
6 Ono, T. and Maeda, Y. (2002): “Sustainable Development in an Aging Economy”, Environment and Development Economics, 7, pp. 9-22.


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