Demographic crisis will stunt growth, harm pensions, create labor shortage

The grim demographic milestones that Ukraine will reach by 2020 is pushing population issues to the forefront of the nation’s economic debate as it could see growth stunted due to labor shortages with debt implications for its pension and health systems.

Consumer market strategy researcher Euromonitor International stated in a recent report that Ukraine will experience the largest absolute population loss in Europe between 2011 and 2020, which will adversely impact the country’s long-term economic growth.

Having already experienced an 11.8 percent population decline between 1991 and 2011, from 51.6 million to 45.5 million, Euromonitor reported, Ukraine’s population stands to fall by about 200,000 annually, dropping to 44.5 million people by 2020 due mostly to the long-term trend of the death rate exceeding the birth rate.

In an even more dramatic forecast, the United Nations projects that Ukraine’s population will decrease to 35 million by 2050. Despite two years of economic growth, the birth rate was 1.4 in 2011, still below the replacement level of 2.2.

Outgoing migration, principally among the young working age population in the 1990s has also exacerbated population decline. And the smaller birth generation during the 1990s that has recently joined the labor force coupled with few incoming labor migrants is fueling the present and future labor shortages.

“Every year 200,000 thousand more people die (in Ukraine) than are born,” said Rumane Verikaite, a Euromonitor data analysis manager.

The report said a large number of deaths are due to increasing life expectancy, an aging population and high young and working age male mortality. Men in Ukraine can expect to live 10 years less than women due to smoking, accidents at work and high incidence of suicides for men younger than 65.

“This not only means less workers now but less children in the future, making the population pyramid even less sustainable,” said Edward Hugh, a macroeconomist who specializes in demographic processes and their impact on macro performance. As a result, labor shortages threaten Ukraine’s economic recovery.

That’s not the only problem Ukraine faces.

In the wake of the 2008-09 global financial crisis, banks are reluctant to lend, fearing more bad debt. This makes the nation’s largely undiversified economy’s dependence on exports much more pronounced at a time when it needs to build up defenses to weather another economic recession, said macroeconomist Hugh.

So with the 65-and-over segment expected to rise to 7.6 million by 2020, those aged 0-64 will fall to 35.9 million with the largest contributors of income tax – people aged 15-64 –expected to decrease by 9.5 percent during 2011-2020, reported Euromonitor.

This means dire consequences for economic output and for the state’s budget to cover pensions and health care costs.

“Yes, due to the demographic trap, the Ukrainian economy can’t grow at 10 percent a year, but [will] range between 3 percent and 5 percent, which seems plausible despite a shrinking labor force,” said Pavel Illashenko, a strategist at Astrum Investment Management.

However, Illashenko asserts that the numbers exaggerate the economic consequences for Ukraine. He said productivity and investments will in the first place matter much more for economic growth than demographics. As for labor, Illashenko said the nation’s labor shortage existed before the financial crisis and only concerns qualified labor.

“This is the result of rapid economic changes and the labor force’s low mobility – for example, the quality of education in Ukraine is extremely low and this is a real threat for future economic growth,” added Illashenko.

But Hugh warned that although a labor shortage is good for boosting consumerism due to rising wages – monthly wages grew on average 13.1 percent year-on-year in real terms between 2001 and 2011, according to national statistics –inflation could rise if not accompanied by productivity improvements and hit export performance upon which Ukraine’s economy heavily relies.

Business community leaders said there’s a way to eventually reverse the ailing trends.

European Business Association Director Anna Derevyanko said goals must be set to improve health, educate a skilled workforce, provide professional development opportunities, shield household and personal incomes and ensure better pensions plans.

There are signs that the economic system is beginning to improve. Dragon Capital’s chief economist Olena Bilan said investments started to pick up in 2011, rising 21 percent over the previous year in real terms.

“This suggests Ukraine is increasing labor productivity by investing in new technologies,” Bilan said.

And immigration could compensate for the natural population loss said Verikaite, and “ensure population stability in the short-term perspective and even would lead to its growth in the long term perspective.”

However, Verikaite pointed out that this is an unrealistic scenario since Ukraine doesn’t have attractive economic and social conditions for immigrants.

Although any new policy action taken now won’t provide positive effects soon, U.N. Population Fund Country Director Nuzhat Ehsan said Ukraine can inexpensively start today to promote healthy lifestyles among reproductive-aged men, the segment in the worst demographic situation.

“This can be addressed easier than (the nation’s) fertility issue, which is not being given enough attention,” said Ehsan. “There are things that can be done about high mortality, the situation is a bit dismal, the focus is too much on numbers and depopulation…that’s not the right way to look at things; the quality of life should be addressed.”

The U.N. officer said that low quality of life, such as access to services, affects every segment of the population including people who don’t get to live “to a ripe old age like in Europe” and the young “who are leaving in droves hankering for a better life.”

Ehsand added that women could be doing a lot more on the labor end but due to the “sticky floor and glass ceiling” phenomena in Ukraine, they don’t have the level of participation and qualification that they should.

Studies have shown, Ehsand said, that incentives to promote fertility don’t amount to anything, it’s the overall sense of “wellbeing and what you can give to your children, and this means housing, employment, and reconciling work with family life.”

To do this, Ehsand explained, focus on policy direction is needed that integrates population issues into policy programs on all government levels, starting with a national plan. But to do this quality data is needed including more collection of reliable population data.

But the last time Ukraine conducted a population census was in 2000. And Social Policy Minister Sergiy Tigipko recently postponed the next one until 2013, three years overdue.

“It’s expensive, a census would cost $2.50-$3.00 per person (some $135 million), unfortunately (the government) gives it so little priority,” said Ehsand.