A big, big Lett down

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

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


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