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Eastern Europe faces generation crisis

By Judy Dempsey
The International Herald Tribune
August 30, 2007

BERLIN, Germany -- ust as the governments of Eastern Europe are grappling with the labor shortage caused by young, educated and skilled citizens moving West for higher wages, economists are warning of an even more serious crisis looming: The average age of those left behind is going up, and fewer are working.

The two trends are bumping up against each other in a way that will pose immense challenges, economists say. The labor shortage will make it hard to sustain the high economic growth levels of recent years, but without such growth, cash-strapped governments will be hard-pressed to pay for the demands of an aging population - especially with fewer and fewer people contributing to the pension and health systems.

"Eastern Europe, along with the former Soviet Union, will by 2025 have populations that are among the oldest in the world," said Arup Banerji, human development economics manager at the World Bank. "The heart of the matter is this combination of the skilled labor shortage and the demographic trends."

The aging population, shrinking tax base and falling birth rates in Eastern Europe mirror what has been taking place in Western Europe, but with some big differences. "We are poorer," said Mateusz Walewski, labor expert at the Center for Social and Economic Research in Warsaw. "And our institutions are not prepared to deal with these trends, because in some ways the transition to a fully mature market economy has not been completed."

The "negative impact" is already being felt, he said. Wages, for example, are rising, which can be a double-edged sword. Low wages have traditionally given the region a big competitive advantage over Western Europe, enticing foreign companies to invest heavily in Poland, Slovakia and the Czech Republic. But they have also encouraged young people to leave for higher-earning jobs in western countries.

Walewski estimates that during the second quarter of this year, wages for skilled labor rose by 10 percent compared with the same period last year.
"If the wages increase and if the labor shortage persists, then foreign companies may well focus on capital-intensive projects, with high technology demanding less-skilled labor," said Simon Commander, labor economist at the European Bank for Reconstruction and Development in London.

"On the other hand, high wages just might attract back some of the young people who left or may be enough to attract people back into employment," he said. "It is too early to judge."

In the meantime, populations are aging and shrinking. By 2025, between one-fifth and one-quarter of the population in Eastern Europe will be 65 and older, according to a World Bank report on demographic trends in the region. The average Slovene will be 47 years old, among the oldest national averages in the world.

Between 2000 and 2025, the share of the population over 65 will grow by more than 60 percent in the Czech Republic, Poland, Slovakia and Slovenia.
Stepan Cernousek, of the Czech Labor Ministry, said the country's labor market will lack 400,000 workers by 2030 because of the decline in the population. The number of people in the prime working ages of 15 to 64 in Hungary will shrink by 600,000, the equivalent of 3 percent of the labor force, according to the World Bank.

Several East European countries, including Poland and the Czech Republic, have started to recruit skilled labor from Ukraine, Belarus and Kazakhstan to fill part of the gap. But economists are skeptical that this will resolve their deep institutional and demographic problems.

"If you take into account the persistence of the skilled labor shortage combined with the falling population, it will be difficult to maintain the high rates of economic growth even with some recruitment from outside," said Peter Havlik, deputy director of the Vienna Institute for International Economic Studies. On average, the economies across Eastern and Central Europe have been growing at between 5.5 percent and 6.6 percent since 2006.

The big challenge facing these countries is how to get more people back into the labor force so that more can contribute to the pension and health systems. Eastern Europe's employment rate of about 50 percent compares with 60 percent in Western Europe and 70 percent in North America, Commander said.

"There is a large nonparticipatory unemployed labor force," he said. "Think of what that means for state-run pension and health schemes."
Economists say the low rate is due to the rapid shift away from agriculture after the collapse of the communist systems in 1989. In some areas in eastern Poland, where unemployment is well over 20 percent, Commander said people have stopped looking for jobs.

With such low employment rates, the World Bank estimates that less than 40 percent of the population in Eastern Europe pay into the pension plans.
"To cope with the aging population, it could mean higher taxes," said Banerji. "The spending on pensions will increase, as will the cost of health care because of the rising costs for drugs."

Despite these problems, the region has been slow to come up with long-term strategies. "The governments are not dealing with the labor or demographic issues in any systematic manner," said Walewski.
The European Bank for Reconstruction and Development says the governments could introduce several programs, particularly retraining and vocational programs

"The vocational training is very poor," said Commander. The World Bank was more critical. "There is so little retraining of adults over 18 years of age," said Banerji. "Adult participation in training is 5 percent at the most in Poland, less than 2 percent in Bulgaria and in some places nonexistent, while in Western Europe it is 11 percent. With economies becoming more complex, without lifelong learning, productivity will not increase in these countries."

The labor markets could also become more flexible by reducing the red-tape in setting up businesses and reducing the social security payroll. Other measures include increasing the retirement age from 60 for men to at least 65.

"These are all manageable reforms," said Banerji. "What is needed is the political will to act now and not postpone the future problems."


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