The Latvian economy is in terrible, terrible shape. As The Economist notes, its GDP has declined by one-fifth and imports and exports have contracted by 40%. It is an economic disaster zone rarely seen outside of times of war. The European Union and the IMF have thrown the tiny Baltic country of 2.2 million a lifeline, but everyone is nervous that the country might become a victim of L-shaped stagnation, instead of an optimistic U-shaped recovery.

This makes it an intriguing test case for demographers. Latvia's fertility rate, like other Eastern European countries, is far below replacement level. It hit a record low of 1.12 in 1998, before bouncing back to about 1.4 in 2007. The question is, was that a dead-cat bounce or has Latvia entered the low-fertility trap forever?

The low-fertility trap is a theory advanced by the Austrian demographer Wolfgang Lutz. He believes that a country with declining fertility can enter a downward spiral, from which, like a nose-diving airplane, there is no escape. The key figure is a fertility rate of 1.5. No country (with the exception of Denmark) has slipped below 1.5 for an extended period and bounced back. In the Demography Matters blog, Edward Hugh cross-checks the Latvian experience against the theory and finds that they match nicely. It makes uncomfortable reading for anyone interested in the survival of Latvia. Dr Hugh seems to feel that the Latvian politicians forming its economic policy are not amongst them.

There are 4 economic factors which feed the low-fertility loop:

(1) Competition for exports depresses wages, thus making it hard for young couples to have children.

(2) Because of low economic growth, the tax burden on the working population grows in order to fund welfare payments for the elderly. This also depresses fertility.

(3) As a society ages, there are fewer jobs at an entry level for young people. This creates an incentive for them to migrate.

(4) With the welfare budget already squeezed to pay for an ageing population, there is little left over for policies which might encourage higher fertility.

All of these mechanisms seem to be at work in Latvia. Unfortunately, there is yet another which occurs more in Eastern Europe than in other developed countries. Like Russia, Latvia has a high male mortality rate. Latvian men die, on average, about 10 years earlier than German men. This means that it is very hard to increase labour rate participation by upping the retirement age to ensure that there will be more workers supporting the young and the elderly. They are either too sick or dead.

Unhappily, Dr Hugh feels that conditions for a bail-out demanded by the EU threaten the survival of Latvia.

Indeed only this weekend the Latvian Cabinet met in emergency session, in order to reach to agreement a the package of measures to be put before parliament. These measures -- I think it is hard this part really is the unkindest "cut" of all -- are actually being demanded by the leaders of the European Union (via their representatives on the European Commission) in order to agree the release of the next tranche of the Latvian "bail out" loan, and among measures being discussed are a reduction of 10% in both state pensions and maternity and child care benefit. The former may be hard, but unavoidable the latter, as we will see, more or less amounts to voluntarily agreeing to slit your own thoat.

As they say in Riga, Paldies Latvijas valsts un Eiropas Savienība par gaišo nākotni. Thanks to the Latvian government and the European Union for a Bright Future.

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