Lithuania's Population

From the Baltic Times:


Hands up if you’re Lithuanian

Aug 16, 2007
From wire reports
VILNIUS - Lithuania's state institutions do not know how many residents there are in the country, it has been revealed, with different bodies giving significantly differing estimates of the population.

There are two offices subordinate to the Interior Ministry of Lithuania - the Migration Department and the Residents' Register Service.

The names of the departments may give the impression that they keep track of population levels and how many passports have been issued, but this is not in fact the case, reports the Lietuvos Zinios newspaper.

The Head of the Passport Division of the Migration Department,Danute Matareviciene,told the paper that she had no statistics on how many passports have been issued. The Residents' Register Service drew a balnk when asked as well.

The closest thing to an official figure can be found at the Department of Statistics.

During the second quarter of 2007, 3,338,000 residents were registered in Lithuania, but only 3,162,879 have citizenship.

Further confusion is created by data on official and unofficial emigration levels. Officially the number who left the country between 2003-2006 was 54,400. Unofficially the department puts the figure at 76,700, though other institutions suggest the number is actually as high as 500,000.

Given the large number of Lithuanians working in other parts of Europe, and particularly the UK and Eire, this last figure seems far more realistic.

Running out of Capacity in Central and Eastern Europe

by Claus Vistesen

Cross posted from Alpha Sources

Well, it is pretty much official now I think that some countries in Eastern Europe might be heading for an economic crash. As such, both the FT and the Economist recently ran articles on this topic in which warnings were duly handed out. On the record, I am pretty convinced myself that some countries might crash very soon among those the most notable candidates being Latvia and Lithuania. Behind this doom and gloom call is a very simple hypothesis that demographics matter for economic growth and that this fact is now hitting home big time in the CEE countries proxied by dwindling capacity to match expectations of economic growth and prosperity. Of course I am sad to say, the mainstream coverage cited above did not have the faintest squeak about demographics and the unique population regime in which the CEE countries are situated. For that reason I recommend you to read Edward Hugh's recent post at AFOE in which he pins the Economist, his note on Latvia as well as my own analysis on Lithuania. In this entry I am looking at Poland in much the same way that I have been looking recently at Lithuania. Clearly, Poland are Lithuania are different not only because of the differences in size but also because Poland seems to be equipped with much more spare capacity than is presently the case in Lithuania and the other Baltic countries for that matter. I have marked 'seems' in italic since whereas Poland's unemployment rate is still in double digit territory accounts of substantial labour shortages are mounting which suggests that high growth regions in Poland are fast running out of qualified labour. In this way, the trend in the labour force is very similar to Lithuania but where Lithuania represents a small single deck frigate which is set to quickly succumb to any water intake Poland perhaps resembles more the Titanic. However, as I will demonstrate below, through graphs, the tendency is the same which only further substantiates the claim that when it comes to the CEE economies it is in fact, at this point, all about demographics and even though I realize that I am biased in my view here from the offset I just cannot see how any reasonable economist would be able to argue otherwise.

Let us look at the data then and more specifically the short term indicators on economic growth which show how growth and wage costs have been picking up the pace lately which also shows itself in a widening current account deficit. The first graph plots (in % y-o-y) growth in GDP, wage costs and industrial production, the second plots retail sales and the third plots the evolution of the current account deficit. Note that while the graphs for GDP(etc) and the current account share time perspective in the form of quarterly indicators the graph for retail sales plots monthly y-o-y % growth rates.

As can readily be seen, growth in Poland had been indeed picking up the pace in the past year. This has naturally pushed up the demand for labour with an ensuing rather dramatic tightening of the labour market to follow. Also wage costs are beginning to rise rapidly and as the Economist Intelligence Unit reports (sorry, no link available) labour productivity is not able to follow the speeds of wage increases which of course questions the sustainability of this brisk growth spurt. This is accentuated in the following quote which cites the view of JPMorgan ...

In Poland, JPMorgan expects the dataflow over the next two weeks to confirm that “the labour market continues to tighten fast and that the labor productivity-wage relationship is deteriorating."

Curiously, wage costs are yet to show up in core inflation and producer price inflation where growth is still very moderate relative to the overall economic growth rate. It serves to remember here that the Polish unemployment rate is still in double digit territory which indicates that capacity needs to be a bit more strained for pressures in CPI and PPI indices to take hold.

Like I argued with Lithuania I believe it is important to take a long hard look at the Polish labour market and population dynamics in order to see what is really going on. Regarding the latter, Poland is inhabited by about 39 million people and as almost all other CEE countries Poland is set to age very rapid as a result of a severe stagnation in fertility from 1990 and onwards still lingering today. This is a very important point to remember as we move through the graphs below. Let us begin with a long term indicator of migration flows which demonstrate that Poland has suffered from a net-outflow since 2001. The numbers might seem puny in relation to the general population size but remember two things. Firstly, Poland's demographic profile is already damaged as a result of the fertility decline and secondly that all evidence suggests the skill component of the net outflow results in a loss of net value added from the point of view of the Polish economy. In short, even if the numbers are small Poland can hardly afford to lose these people if catch-up growth is to be sustained.

This brings us to the general labour market dynamics which are presented below in terms of short-term indicators which share the time perspective as the economic data above. Essentially, two identical time series for unemployment are presented with the first being in real numbers and the second in percentage of the workforce.

Clearly, the situation in Poland is very different from Lithuania and as such unemployment in Poland still linger in double digit territory. However, this will not go on for much longer if the current growth rates are sustained and this is where the problems begin to emerge. As such, you could choose to flag optimism in Poland on the basis of what is after all very impressive economic momentum which at this point is even welcomely deviating from nudging up core inflation rates. However, this is also at the core of the problem with almost all CEE countries in the midst of what is currently an unprecedented spurt of global growth. These economies are thus growing briskly, quite naturally, as emerging economies but with the important qualifier that they have extremely mature and essentially loop sided demographic profiles. This means that given the underlying capacity constraints these economies are faced with they are quite simply growing much faster than is sustainable in any meaningful sense of the word. This has then, at this point, obviously caught up with market participants and financial commentators but my guess is that it is moving way faster than many seem to think. Clearly, Poland is not Lithuania where the time span is already under one year but it still raises the question of just how much further this can go given the underlying structural capacity issues. Also remember here that while structural remedies such as raising labour force participation rates as well to address the skill mismatch on the domestic labour market should be strongly advised this is just moving so fast in some countries that this really does not seem to be a viable solution to address what is clearly becoming a short term issue with long term and structural drivers. In the end, what we have now regarding the CEE economies is evidence that a demographic profile wholly out of sync with the economic stage of development effectively can halt the process of catch-up growth. In order to ram this point home here at the end we need to look at productivity and how brisk productivity needs to grow in order follow suit. And this is just the point; catch-up growth and productivity increase as an economy moves up the value chain takes time and time is exactly what the CEE countries do not have at this point with the current growth rates.

Appendix

This was really the end of this entry but if you want to catch a glimpse of how fast this might be moving I invite you to read on. However, beware ... dodgy empirical methods and math will follow! Let us try then to do a thought experiment and ask the question, how far will it take for the Polish economy to reach a 'critical' level of unemployment rate where 'critical' here is defined as either a 3% or 5% unemployment rate?

Well, before we move I need to attach some important qualifiers.

Firstly, the following thought experiment does very little to represent sound empirical economics but the general approach is still worth while I think. As such, we know that rapidly ageing societies, especially those growing rapidly as is the case here, will tend to face a structural decline in the unemployment rate and/or the labour force as more people leave the labour force compared to entrants. Add to this, in the Polish case, the trend of net outward migration as well as the high economic growth rates and suddenly an unemployment rate of 10% becomes a rather small buffer. Secondly, be aware since math will now follow. I rarely do this at Alpha.Sources and I promise you that it will not turn into a habit but I think that it is important in this case.

Regarding the method I have already hedged my bets above and please do note that the underlying assumption of trend perpetuity in the following experiment makes the predictive power virtually useless, at least at the time horizon we will be looking at. So, what are we in fact looking at?

Well, based on rough and ready calculations the average monthly decline in the unemployment rate in Poland between July-06 and May-07 stood at a monthly decline of 2.4% (i.e. in absolute terms). Based on an all things equal approach, assuming trend perpetuity, how far would it take for Poland to reach an unemployment rate of 3% and 5% respectively? To answer this we use the common expression for time value of money as an imperfect yet useful approximation:

FV = PV(1+r)n (in our case -n but that is of little matter)

where FV denotes future value at time n, PV the present value at time 0, r is the compound rate at each period, and finally n denotes the periods. In our little experiment we approximate the expression to our need by assigning the values as follows;

FV: 3% and 5%

PV 10,5% (unemployment in May 07)

r: 2.4% (average monthly decline)

n: ? (i.e. this is what we want to find out)

Calculating for 3% ...

3 = 10,5(1.024)n

solving for n ... (a bit complicated but Excel delivers in a heartbeat)

In(3/10,5)/In(1.024) = -52.8

Which translates into about 53 months to reach an unemployment rate of 3% or 53/12 = 4.4 years assuming trend perpetuity.

Calculating for 5% ...

5 = 10,5(1.024)n

solving for n ...

In(5/10,5)/In(1.024) = -31.2

Which translates into about 31 months to reach an unemployment rate of 5% or 31/12 = 2.6 years assuming trend perpetuity.

So, was this useful at all? Well, perhaps not but do note that the assumption of 'perpetuity' as regards to a structural decline in the labour force/unemployment rate is not entirely voodoo magic when we think about the CEE societies. Clearly however, the process will be subject to notable nonlinearities as we approach ever lower levels and furthermore it is not certain that the current cyclical economic boost will continue. But the point is that, at the pace with which this is moving it is difficult to see how structural mechanisms such as improving labour market institutions, raising participation rates, and addressing the skill mismatch can keep up with the structural and cyclical run on the level of capacity if it continues much longer. Especially, the fact that these countries are now targets for a substantial part of new global credit suggests that the pressure is very high indeed. Note also that many central banks in the region would be effectively unable to act as a lot credit is denominated in foreign currency. As such, an aggressive turn of monetary policy to the loose side would entail severe balance sheet issues as the countries' domestic currencies most likely would plummet. Effectively this would mean strong appreciation of the liability side (denominated in e.g. Euro) relative to the asset side (denominated in the domestic currency).

In the end, whatever rate of decline we assign in our little pet model here we are looking at a horizon in most CEE countries where labour markets are set to tighten significantly in the next 2 years and in some countries it will move much faster than this.

The End of the Road In Lithuania?

by Claus Vistesen

Cross posted from Alpha Sources


I am sorry for the rather dramatic headline deployed above but I really don't think that any of this should be taken lightly. I will begin with this short yet very telling note from Bloomberg which informs us that unemployment in Lithuania dropped to a staggering 2.7% in June. This of course signifies an extremely tight labour market and quite simply this cannot go on for much longer. The clear evidence of this is first and foremost to be found in the quarterly y-o-y GDP figures which demonstrate Lithunia's sizzling growth rates much alike the other Baltic countries. As such, Q1 2007 saw an annual growth rate of 8.3% and on average the last five quarters saw a growth rate of GDP of 7.8%. This is of course putting strains of capacity in Lithunia and like in the rest of the Baltic countries the short term cyclical indicators point to very brisk growth in labour costs. Data on Lithuania shows an average increase of a whopping 21.8% in the last four quarters. However, it is the labour force we need to look at I think where Lithuania just can't keep on running up a near vertical hill; and indeed, when the hill turns into a wall the fall might be very far I fear. As such, it might serve us to go back a bit to a post here on AS about the general tendency in net migration in the Baltics. As you can see, outward net migration is particularly pronounced in Lithuania which of course only serves to exacerbate the general sittuation. Below, I field three seperate graphs (two on the labour market and one on net migration) and it should not require much mathematical skill to see how fast this is going in Lithuania and thus how unsustainable it is with the current growth rate. To put the numbers in perspective note that the total population in Lithuania is 3.384.700, that fertility (TFR) has been below 1.5 in more than a decade and that the population (and to some extent also the labour force) is diminishing by means of natural decline. Note especially the figure for unemployed persons which I have expanded with the data from the small Bloomberg piece linked above which notes that the number of unemployed stood at 63.343 in May down to 58.396 in June. In short; this is progressing very quickly indeed, especially if we take into account that the net migration most likely primarily takes its toll from the labour force.

lithuania.labour.market.lforce.jpg

lithuania.labour.market.unemployed.jpg

lithuania.labour.market.net.migration.jpg

As can readily be seen this is not sustainable much longer with the current growth rates and wage inflation. For a general economic perspective on the Baltic the FT has a nice piece this morning as well as of course Edward's recent note on the Latvian economy (linked above) is a must read. Note in particular how the tug-of-war with the rating agencies as well as Swedish banks supporting the credit boom has begun. People are increasingly beginning to smell a hard landing ahead which is of course prompting market participants to position themselves accordingly. In terms of the general dynamics we might be looking at, this I think is a good quote ...

Nevertheless, the danger facing all three states comes not so much from a collapse of foreign confidence – there is not much speculation in Baltic currencies and the banking sectors and public finances remain solid – as from the impact of any sudden change in consumer behaviour as expectations of continued future growth are dashed. This could lead to a collapse in house prices and a steep economic slowdown.

Such a “hard landing” could stop the three EU newcomers in their tracks as they struggle to catch up with western Europe. Even Estonia, the richest, is still only two-thirds of the EU average gross domestic product (GDP) per capita.

Of course, speculation in Baltic currencies could easily become the flavor of the day if rumours mounted that these countries might have to de-peg from the Euro in order to restore competitiveness. In the end, my advice will be to watch the labour market since the continuous tigtening, not only in Lithuania, at some point will put a ceiling on the current spurt after which the correction will come. Solutions are of course available in terms of bying these economies some time but time, as it were, is indeed running out. Yet, it still seems prudent to advice that inward migration is strongly stimulated and in Lithuania's case where labour force participation rates have been steadily declining for a decade it seems to be a trend which quite simply needs to be reversed although this will be difficult in the immediate short term context.

Addressing Labour Shortages in Estonia?

by Claus Vistesen

Cross posted from Alpha Sources

This is just a small pointer in relation to my note on net migration in the Baltics a few days back as well as my note on Demography.Matters on catch-up growth in Eastern Europe. At the heart of this issue is of course a severe labour shortage in many Eastern Europe fuelled in part by structural labour mismatches as well as a more profound shortage of labour as a result of very low fertility levels throughout the 1990s. In Estonia, as was demonstrated in the post linked above net migration has been virtually positive since 2000 with an ever so small net inward migration flow. Yet, policy makers and employers in Estonia are well aware of the labour shortage which will persist even if net migration is not negative. What is interesting here (see excerpt below) of course is the distinction between whether Estonia should attract low skilled labour or more high skilled labour. At this point you could of course claim that both of these labour groups should be incited to come to Estonia from abroad but it will be interesting to see where the proposed institutional initiatives will predominantly be focused. Here is a relevant excerpt from the article from the Baltic Times linked above ...

The process of bringing foreign workers to Estonia is to be streamlined under a plan to ease the country’s worker shortage. The quota of foreign workers will be doubled to about 1,300 and the bureaucratic paperwork slashed by November under an Economy Ministry proposal. Economy Minister Juhan Parts said the bureaucratic simplifications were an obvious solution to give companies faster access to skilled labor. Employers have welcomed the proposals, but said they did not go far enough in addressing Estonia’s shortage of low skilled workers. Parts told The Baltic Times that the proposal would be before Parliament by November. “Diminishing bureaucracy will make it much easier for entrepreneurs to use labor from third countries,” Parts said.

“The changes have broad consensus from both business and most political parties.” He said it was “unacceptable” that “good qualified brains” were having difficulty entering the Estonian labor market. However, he stopped short of opening the borders to low-skilled workers, saying that employers should look to hire from the 380 million available workers within the European Union to address their staff shortages. “This is not a liberalization of our immigration policy. We don’t want to see millions and millions of third country workers here,” he said. Employers seeking long-term permits for workers will have to commit to paying a salary of at least 1.24 times the average Estonian salary, which currently sits at 9,600 kroons. Those applying for six month permits will have to pay their workers the average salary for their sector, Economy Ministry executive officer Sille Rossi said.

As a final note it is also interesting to note the quibble over whether it is fair (or perhaps prudent?) for Estonian employers to systematically pay a premium for labour just because it is foreign. Of course, this might be necessary in order to actually attract the needed labour. However, with the wage pressure and inflation already at very high levels and even if net migration to Estonia were to pick up, the current inflation/wage expectations are clearly not warranted given the underlying capacity issues which inevitably will materialize in Estonia as well as other Eastern European countries at some point. In short, the longer this goes one the further these economies will fall, I fear, given the relative inability for capacity to respond on the backside of these very high inflation expectations and developments. Having said and as a very final note it does seem (for various reasons which I might go into later) that Estonia is much better suited to handle the inevitable backdrop better than for example its neighbours Lithuania and Latvia.