Saturday, August 15, 2009

European Demographic Economics

Last week, Eurostat released new EU population figures for 2008. Population growth for the EU as a whole was 0.43% and varied from 2% in Luxembourg to -0.5% in Lithuania. Three other countries (Ireland, Spain and Slovenia) had above 1% in population growth while six other countries (Bulgaria, Latvia, Germany, Romania, Hungary and Estonia) had negative population growth.

Ireland differed from the other countries with high population growth in that its population growth was mainly driven by a high birth rate, while population growth in Luxembourg, Spain and Slovenia was mainly the result of immigration. Ireland's birth rate is more than twice as high as Germany's, while its death rate is much lower.

There are several economic implications of this subject. First of all, because the economic growth numbers cited usually refers to GDP and not GDP per capita, this means that people in countries with negative population growth are really doing economically better than the headline number suggests, while people in countries with high population growth are doing even worse than the headline number suggests.

This won't make much difference in the case of the Baltic countries as their drop in GDP was so large that even after adjusting for their shrinking population, their per capita income has dropped more than others. For Germany however, it means that its relative ranking improves. In the year to the first quarter, Germany for example had a bigger drop in GDP than Luxembourg and Sweden (-6.7% versus -5.4% and -6.4%), but because its population dropped 0.2% while Sweden's increased 0.8% and Luxembourg's 2% the drop in per capita GDP was smaller (-6.5% versus -7.3% and -7.2%).

The point here is merely that given a certain GDP growth, countries with low population growth are doing better than they might appear to do. But as higher population growth usually causes GDP growth to be higher it is not meant to suggest that population growth is will generally lower the economic standard of living.

It is true that in the short term under certain circumstances (an increase in the number of births and/or immigrants who aren't employed will increase population but not GDP in the short term) population growth can lower per capita income. In the long term however, you will need children and/or (non-elderly) immigrants to provide for current workers when they retire. Japan and Germany are two examples of countries which for long has had a low birth rate and little (almost nonexistent in Japan) immigration. Partly as a result of this they have had stagnant economic growth for some time and now faces an ever increasing burden of providing for their elderly population.

Just as Japan will inevitably be superceded by China as Asia's dominant economy, Germany looks set to lose its dominant position in Europe's economy, though that will happen a lot later than the shift in Asia. Even though Germany still has a lot more people than France and Britain, 82 million vs 64 million and 61 million, the number of babies born in 2008 was a lot lower, 675,000 vs 835,000 and 794,000. This means that it is almost inevitable that France and Britain will eventually have bigger populations than Germany-and also a lot younger. The size of the population is of course far from the only factor determining the size of the economy (if it was, not only China and India but also Indonesia,Pakistan and Bangladesh would have long ago had bigger economies than Japan), but it is a factor, and as per capita income has been roughly similar in Germany, France and Britain and as Germany's lopsided age structure increasingly burdens its shrinking work force, there is every reason to believe that Germany's shrinking relative population size will be accompanied by a decreased relative economic importance.

Shrinking economic importance will, almost by definition, not lower the standard of living to the extent it simply is a result from a smaller population (an increased burden of caring for the elderly because of an ageing population will however have that effect). But it will however have political effects, for example in terms of influence within the EU.


Blogger All-In-All said...

I think if the problems of 'terrorism' and other various political turmoils were reduced in Ireland, it would have a strong chance at becoming a lead economy in Europe for the same reason the American colonies did in the 18th century - because it wasn't important enough to super-regulate, just police and tax.

That's just my speculation, though.

12:46 AM  
Blogger stefankarlsson said...

There's no terrorism in Ireland-particularly not in the Republic of Ireland which is what is meant by "Ireland" in this context. Northern Ireland used to have a problem with terrorism (IRA), but even that hasn't been a problem for the latest decade or so.

[The Republic of]Ireland has BTW been very successful, partly because of its favorable demographics but mostly for other reasons. Now it is suffering the negative consequences of a housing bubble. But I expect that to be transitory, especially considering how the demographic factor will keep housing demand high in the long run.

9:28 PM  

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