Tackling demographic challenges in Central, Eastern, and Southeastern Europe
IMF News, July 15, 2019
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- Published: July 15, 2019
Introduction
- Speech by IMF Deputy Managing Director Tao Zhang at the IMF/Croatian National Bank Conference, Dubrovnik, Croatia, July 15, 2019.
- Focus: demographic trends in Central, Eastern, and Southeastern Europe (CESEE), policy options to counter adverse trends, and the role of technology.
1. Demographic trends and challenges
- Core observation: the population in CESEE is rapidly shrinking and becoming older.
- Positive background:
- GDP per capita has more than doubled over the past three decades.
- Life expectancy increased from 67 to almost 74 years since 1995.
- Key projected outcomes and impacts:
- Population (excluding Turkey) will decline by 12 percent by 2050 due to aging and migration.
- Labor force is likely to decline by 25 percent over the next three decades.
- The working population will have to support more than twice the number of elderly people that it currently does.
- Shrinking labor supply, lower productivity of older workers, and greater pressure on public finances could cost countries about 1 percent of GDP per year.
- Income convergence effects:
- Without demographic pressures, per capita GDP in the region could have reached 74 percent of Western European levels in 2050, up from 52 percent in 2020.
- With demographic headwinds, CESEE’s per capita GDP is projected to reach only 60 percent of Western European levels in 2050.
- Comparative context: CESEE is experiencing demographic pressures at an earlier development stage than many advanced economies; countries risk "getting old before becoming rich."
- Supporting statistic notes:
- The old-age dependency ratio (ratio of those aged 65+ to those aged between 20 and 64) is projected to increase from 25 in 2015 to 51 percent in 2050.
- Between 1995 and 2017, CESEE countries, excluding Russia and Turkey, lost around 7 percent of their workforce (computed from the UN Migration Database).
- Female labor force participation in the region is 60 percent, almost 10 percentage points lower than the average in Western Europe (computed from World Bank, World Development Indicators, for women aged 15-64 in 2018; Western Europe includes EU-15 economies).
2. How to address the demographic transition?
- Proposed three broad responses to mitigate demographic effects:
- Expand the size and effectiveness of the labor force:
- Stem emigration and create incentives for return migration.
- Support hiring of more foreign workers (noted as a political choice).
- Encourage higher female labor force participation through:
- Investment in childcare facilities.
- Part-time contracts.
- Flexible work arrangements.
- Encourage older workers to remain employed by:
- Considering raising the retirement age.
- Ensuring pensions are compatible with work.
- Improving health outcomes for older workers.
- Acknowledge limits:
- Research finds that measures to increase labor force participation among women and older workers, alone, cannot fully compensate for the demographic transition.
- Emphasize country-specificity:
- Priorities and solutions will differ across countries in the region.
3. Can technological advances help address the demographic challenge?
- Observations on automation and technology in CESEE:
- Many firms in the region have embraced automation.
- Robot penetration rates in Hungary, Poland, Slovenia, and the Slovak Republic are well above those of other middle-income economies.
- Slovakia has 2.5 robots per 1000 workers, half the ratio of Germany.
- The International Federation of Robotics projects a 21 percent annual growth rate in robot shipments to the region by the end of this decade, implying that soon the region would have double the robots of the average European economy.
- Automation is present in the automotive, food and beverages, and life science sectors.
- Despite automation, CESEE has seen rising employment alongside increased automation.
- Policy conditions for technology to be part of the solution:
- Policies that invest in human capital and enhance welfare:
- Comprehensive reform of education systems.
- Substantial investment in lifelong learning and retraining schemes.
- Policies to prevent permanent brain drain.
- Enhanced safety nets to ensure benefits of technology are widely shared.
- Policies that enhance governance, upgrade infrastructure, and modernize regulation:
- Better institutions can reattract educated émigrés.
- Modern regulations and better infrastructure can improve the business environment, promote innovation, and help share technology benefits.
Conclusion
- The demographic challenge in CESEE is daunting and varies across countries.
- It requires robust, imaginative, and country-specific policy responses.
- Policymakers should focus on boosting the labor force and ensuring technology benefits are widely shared to address demographic headwinds.
Source: Speech by IMF Deputy Managing Director Tao Zhang, "Tackling demographic challenges in Central, Eastern, and Southeastern Europe," as prepared for delivery, July 15, 2019.