1. Leaving One Crisis Behind Only To Come Face To Face With The Next One?
The Demogaphic Challenge Facing Eastern Europe
Edward Hugh - Riga: April 2011
2. In this presentation I will argue that
• The most recent crisis was not an arbitrary phenomenon
• There is an underlying process we need to understand
• The worst is undoubtedly over in the last crisis
• Unresolved issues may leave a legacy. One which could weigh
down any recovery and lead to more serious problems during the
a) The Existence of a Debt Overhang
b) The Impact of Ageing and Declining Populations
3. What Was The Last Crisis All About?
It was all about
debt, and about
were going to be
able to claw their
way back to
The Key Point To Grasp – This Process Is Structural, Not Cyclical
4. So Just Why Was There So Much Debt?
• Badly Structured Financial Products?
• Poor Regulation?
• Or Was There Something Else Going On?
5. Case Study: The Eurozone
Here is a key part of the
puzzle. During the first 10 years
of the Euro some European
countries borrowed heavily,
while others lent. As a result
Spain’s households contracted
a lot of debt. Yet German
6. One Conventional Account
The “one size fits all”
didn’t work. Spain
had negative interest
rates during the key
years of the housing
But that still leaves us with a question: why didn’t it work?
7. Credit Driven Private Consumption Booms
In fact both Spain and Germany have had these.
The only real difference is in the
Germany 1992 – 1999
Spain 2000 - 2008
Why do some
8. Current Account Blues
Germany didn’t always
run a current account
surplus. All through
the 1990s the current
account was in deficit.
And Spain won’t
always run a current
account deficit, even
if that seems hard to
believe right now.
9. The Key 25 to 49 Age Group
This group peaked in
Germany – as a % of
total population around
the turn of the century.
And in Spain it peaked
towards the end of the
first decade of this
10. In The BackgroundThose Famous “Global Imbalances”
But Just Why Did The Imbalances Build Up?
Japan, Germany and
China – the usual
suspects – had
While that other group –
the debtors, countries
like the UK, the US and
Spain – ran substantial
11. Could Something As Simple As Median Population Age
Help Us Understand?
Ours is an age of rapidly
ageing societies. What is
so modern about our
current situation is not
the ageing itself, but its
velocity, and its global
12. Population Ageing – A Unique Historical Challenge
The economic and social implications of the ageing
process are going to be profound. According to a recent
report from credit rating agency Standard & Poor’s:
• the process is seemingly irreversible.
• No other single force is likely to shape the future of
national economic health, public finances, and
policymaking over the coming decade
Strangely, the issue receives only a fraction of the
attention that has been devoted to global climate
change, even though, arguably, ageing is a problem our
social and political systems are, in principle, much
better equipped to deal with.
13. As far as we are able to understand the issue at this
point, population ageing will have major economic
impacts and these can be categorised under four main
i) ageing will affect the size of the working age population, and
with this the level of trend economic growth in one country after
ii) ageing will affect patterns of national saving and borrowing, and
with these the directions and magnitudes of global capital flows
iii) through the saving and borrowing path the process can
influence values of key assets like housing and equities
iv) through changes in the dependency ratio, ageing will influence
pressure on global sovereign debt, producing significant changes in
ranking as between developed and emerging economies.
14. While population ageing is universal the short term impact
will be much more localised. The pace of aging varies
greatly across countries and regions.
The effects of the process are expected to be most
pronounced in those countries that remained complacent
in the face of ultra-low fertility rates (total fertility rates of
1.5 and under), which in effect means Japan, the German
speaking countries and much of Southern and Eastern
15. Another way of looking at these demographic
changes is in terms of the dependency ratio, which
can be defined in a number of different ways
depending on the problem being addressed.
16. In In Germany total population is expected to fall from its
current level of 82 million reaching anything between 69 and
74 million by 2050, depending on the future course of life
expectancy, immigration and fertility. And the proportion of
people aged 65 and older is projected to rise from just under
20% today to just over 33% by 2050. At the same time, the
number of very elderly (those aged 80 and over) will nearly
triple to as much as 15% of the total population.
17. Eastern Europe Will Be Very Hard Hit
Among emerging economies, the East of Europe stands out
as by far the worst case in the short term. In 2025, more than
one in five Bulgarians will be over 65 - up from just 13
percent in 1990. Ukraine’s population will shrink by a fifth
between 2000 and 2025. And the average Slovene will be
47.4 years old in 2025 – one of the oldest populations in the
18. Importance Of The Prime Age Groups
Estimates of the exact age
extension of the different
groups vary, but 25-40 would
be a good rule of thumb
measure of the borrowing
range, 40 to 55 for the peak
savers, and 35 to 50 for the
prime age workers.
Beyond this, the question is an
empirical one of measuring
and testing to determine more
precise boundaries and
The key groups are prime
savers, prime borrowers, and
prime productive workers.
Where these actual age
brackets lie, and the extent to
which they may overlap, is still
a subject of some controversy,
One of the key points to grasp, is that
the proportion the population which is
to be found in one of the ‘prime’ age
groups at a given moment in time, is
absolutely critical, and much more
important for understanding the
processes at work than the mere size
of the working age population.
19. Life Cycle Effects
There is a generally accepted wisdom in academic work known
as the “life cycle hypothesis” (Modigliani). This suggests that the
population’s financial behaviour changes depending on age. In
terms of adult life, those in their twenties and early thirties tend
to be net borrowers as they are relatively low earners at the
same time as they look to buy housing, expensive durables and
fund their burgeoning families. At some point around middle-
age this group then tends to move from being net borrowers to
net investors as they move into their economic prime and
accumulate financial assets to hopefully fund their retirement.
As they approach retirement this group then start to shed the
financial assets they’ve been accumulating to fund their
20. The Demographics Of Export Dependency
As I have been arguing, if economies transit from being
consumption driven to export driven, and it would appear
that the process is not merely random, then we are not
talking about choosing between options or “growth
models”. There is not a choice here, since there are deep
underlying structural dynamics at work, and these dynamics
seems to be intimately associated with the dynamics of the
21. Dangers of Sovereign Debt Default?
According to the recent Standard & Poor's report, the cost of
caring for the growing numbers of dependent elderly will both
affect growth prospects and dominate public finance policy
debates across the globe, and for many years to come.
Even if most governments have long been aware of
the need to prepare for the looming problem, the
rapid build-up of government debt over the past
three years has effectively heightened the need to
do more to advance reforms aimed at containing
the risks to sovereign budgets, especially in
countries with high expected future increases in
22. And The Numbers Are Daunting
Assuming no policy change, Standard and Poor’s estimate that
developed country deficits could rise from 5.7% of GDP
currently to over 7.4% of GDP by the mid-2020s. The interest
cost of the growing debt burden may exacerbate the budgetary
impact of demographic spending pressure. And if nothing is
done deficits will rise inexorably to 10.1% of GDP in 2030 and
24.5% by the middle of the century. This would lead the general
government net debt burden to increase to 78% of GDP through
to 2020, only to then accelerate thereafter. By 2030, the net
debt burden is projected to be at almost 115%, at the same
time as being on an explosive path to which would see average
developed country sovereigns hitting 329% of GDP by 2050.
23. A Delicate Balancing Act
Reasonable empirical confirmation exists that the
recent surge in global imbalances was, in part, an
offshoot of slow-moving underlying demographic
determinants of global capital flows.
The near-term adjustments will mean more emerging
market current account deficits and less developed
At a global level, demographic pressures will continue to
imply that the increase in desired saving will exceed the
increase in desired investment. This has one clear
implication: globally interest rates can be expected to
24. Longer, Healthier Working Lives
In terms of policies to address the pressures of ‘ageing’,
the debate in terms of social security and healthcare often
focuses on raising retirement ages to reduce dependency
rates and alleviate fiscal pressures.
Extending working lives relative to the time spent in
retirement will not only help address the pension issue, it
should also serve to accelerate the tendency towards
larger current account surpluses across most developed
economies, in particular in those parts of Europe which
are in the process of private sector deleveraging as part of
their fiscal sustainability programme.
25. Time To Act – What Can Be Done?
- Continuing and Continuous Structural Reform
• Labour Market Reform
• Pension Reform
• Heath System Reform
• Immigration Longer Term
• Raise Fertility Rates
• Global Rebalancing Initiatives
• Acceptance that the Modern Growth
Era – like modernity itself – doesn’t