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Saturday, June 16, 2007

Migration in the Baltics

I am back from Barcelona with and ready to slowly pick up the pace again. I am going to start easy and leave the heavy stuff for some later posts in the beginning of next week. One of these posts will be on my view of the recent flurry on rising bond yields and global interest rates. Will the trend linger? How far will rates go? and is Greenspan's famous bond market conundrum finally unravelling? All these vexing questions will be answered here at Alpha.Sources (ahem, attempted I think :)) next week so stay tuned.

For this one I really only want to present one bar-graph for you in the spirit of the proverb that a picture says more than a thousand words. Consequently, the graph below plots net migration in the Baltic states (Latvia, Lithuania, and Estonia) from 1995 to 2005.


Now, to put all of this into context you might want to head over briefly to Demography.Matters where I posted recently on the economic convergence/catch-up process in Eastern Europe. In many ways, the general analysis quickly converged on the nature and availability of human capital which is becoming an increasing scarcer ressource. This is mainly due to two factors and in some countries three. The two factors which are common across the region seems to a structural mismatch on the labour market with a lot unemployed people in lower value added sectors and a very tight labour market in high value added sectors. Secondly and more profound is the very rapid and essentially unprecedented speed by which these countries have ventured throught the demographic transition. The third factor represented by migration does not present the region's countries with equal effects and as such this is the point of this entry. This is a case in point in terms of the Baltic countries where there are considerable differences between the reality in the respective countries. Of course, the relative large negative net migration in terms of Lithuania should be seen in the light of the fact that it has a comparatively larger population than Estonia and Latvia. Since the Y-axis shows real numbers it obviously biases the result. However, there is still a clear trend to be inferred I think. Whereas Estonia and Latvia have managed to decrease the negative migration flow in the last five years it has actually accelerated in Lithuania. In Estonia, the last five years even show a small positive net migration rate even if it is ever so tiny.

The bottomline here seems to be clear. The Eastern European countries face, on a whole, a tremendous challenge in terms of human capital. This relates to a general mismatch between the desired economic activities (high value added) and the educational composition of the labour force. Yet, more worryingly labour is set to become a regionwide scarce ressource and in the high value added sectors it already epitomized by very tight labour markets in the service sector on a region wide scale. Also, there is the perceived drainage of well educated young people to Western Europe. I say perceived here since the dynamics are very different across countries and also subject to change very quickly as labour markets tighten and wages increase in the domestic markets.

As a litmus test to discern which countries are better at creating employment and opportunities for people net migration seems to be a very important indicator. In this light there is a clear difference between the Baltic countries where especially Estonia seems to be fairing much better than Lithuania and also Latvia. This does not mean that complacancy is warranted though. My guess is that the inevitable flipside to the capacity constraints, which are obviously materialising themselves with the whopping increase in labour costs as a proxy, will soon emerge as a real ceiling for economic growth and thus convergence. Quite simply the labour supply will be perfectly inelastic in the long run which again means that in stead of worrying about soaring labour costs now we should really worry on what comes next after that. And now I guess I have already opened up pandora's box on this whole global interest rate and bond yield discussion. As such, it is all well and good to note that global rates are going up to reflect inflationary pressures mounting but what happens in those countries (read, the rapid agers!) where capacity will largely be inelastic to any stimulant which may come as the central banks decide to call it a day and perhaps loosen the string again? Well, as I said above, this is for another day.

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