Facebook Blogging

Edward Hugh has a lively and enjoyable Facebook community where he publishes frequent breaking news economics links and short updates. If you would like to receive these updates on a regular basis and join the debate please invite Edward as a friend by clicking the Facebook link at the top of the right sidebar.

Friday, June 29, 2007

Russian Growth and Labour Supply

According to this article, iinvestment in Russia's economy hit a record annual level of 23.1% in May 2007, while Russian GDP is now growing at an annual rate of 7.7%:

“The figure is 20.8% for the first five months of the year,” German Gref said. The minister said the growth was largely due to macroeconomic stability and companies' growing revenues. But he said the other side of the coin was that the $70 billion capital influx expected this year could create inflationary pressure. Inflation was 0.6% in June 1 until 25 and is expected to reach 0.6-0.7% this month. Compared to 0.3% inflation in June 2006, the minister attributed this year's higher rates to lower imports of vegetables, which picked prices 23% in May. The minister said the government hoped to keep the indicator no higher than the 8% target.

Now this mention of inflation should begin to alert us to something which may not be what we were expecting. Russia may well be beginning to experience inflation due to its increasing labour supply problem.

Russia itself is already feeling the population pinch:

Russia's annual inflation rate rose in May to the highest in four months, as a new law on foreign workers boosted prices of fruits and vegetables.

The inflation rate jumped to 7.8 percent from 7.6 percent in April, the Moscow-based Federal Statistics Service said in an e- mailed statement today.

Russia, the world's 10th biggest economy, passed new restrictions this year for foreign employees working in the country's booming retail industry. The government limited the number of trading places given to non-Russians, which boosted food prices and created inflationary pressures, economists said.

And the observant among you will note that Russian economics minister German Gref cites precisely this problem with the supply of vegetables as the explanation for the upward creep in wages.

But the real underlying problem is the growing domestic labour shortage (the population of working age is already falling, and many Russians have been migrating west.) In the Russian case the impact of this general East European labour supply problem is pretty substantial. John Litwack, the World Bank's chief economist in Moscow, estimates that Russia is going to need about a million migrants a year.

To compensate for this(the labour force decline, EH), Russia would need an annual inflow of 1 million immigrants, which is three times as the average official annual flowover the last 15 years, and five times the official flowin recent years.

But this is not only going to be a problem for Russia, since soaking up labour at the rate of around 1 million a year is pretty quickly going to run dry the East European and Central Asian well.


Scott said...

This labor supply problem will hurt the competitiveness of European exports, which is the single leg that European countries are standing on as far as maintaining GDP growth. There may be a short-term benefit to domestic consumption as wages rise, but subsequent reduction in export-driven GDP growth will negate that benefit.

Perhaps elimination of subsidization of certain industries could free up workers for prospering export industries, but that would be a short-term fix as well.

I find it remarkable that no EU country grants citizenship as an automatic right to children born there. That is a policy that needs to be changed.

Edward Hugh said...

Hi Scott,

The point I would emphasize at this stage is the diversity of Europe. This would be the central point I was trying to make in my Afoe fertility post.

I think we need to screen out first the East European EU 8, who are obviously special in oh so many ways.

Among the rest you need to think about the rapid agers - Germany, Austria, Italy, Finland, Sweden - and those who are (of have been) receiving substantial immigration in a way which changes substantially the population pyramid - Ireland, the Uk, Spain, France, Greece.

(Denmark and Portugal don't fit comfortably in either of these groups, but they are nearer the latter than the former at this point, and it is still all to play for).

Now, among the rapid agers, my feeling is that the two Scandinavian countries are very flexible, and adaptable, so my impression is that they could well fare better (although Finland really needs to do its homework on immigration I feel). Which leaves us with the other three:

"This labor supply problem will hurt the competitiveness of European exports"

It is these three (Italy, Austria, and Germany) where I think this will bite (is already biting) first. Then we will really be able to see how all of this is going to work (or not work).

This diversity is already raising its head in Brussels, since France has far more short term leeway, than say Germany does. So Sarkozy wants, yet one more time, to break ranks on the Stability Pact. Wolfgang Munchau draws attention to the possible political implications of what is happening (and it is indeed an irony that it is poor Portugal, who was turned into the sacrificial lamb of the old version of the Pact -and still hasn't recovered from the consequences - while Germany and France effectively got off stock free should be holding the Presidency at this point).

It is important to realise here that France has effectively a 20 year demographic time advantage over Germany at this point - that is France is now where Germany was say in 1985 in ageing terms. So France does have a lot more room for manoeuvre, and while they obviously need to address long term structural issues in their pension and medical funding, they aren't under the same short term pressure to run a balanced budget (very similar to the US in many ways all this). I don't doubt these are the sort of points Sarkozy will be making at the meeting.

Also, what is happening on the migration front (where maybe you have Latvia, Lithuania and Poland at one extreme, and the UK, Ireland, Greece and Spain at the other) is very similar to the sort of internal movements you might see in the US labour market. This is how the theory says it should work I suppose. And all of this is curious given how so many people at the ECB and elsewhere say that the eurozone can work just like the dollar in the US (true, 7 of the EU8 are not in the zone, but they are in its orbit, and enjoy a sort of "gravitational" effect).

So the labour flows which some expected from the creation of the single market (and which didn't take place), are now happening in another context. So what is the big problem here. Well, the EU is not a federal state like the US is, and each country is left holding the liabilities end of the balance sheet here (medical costs, and pensions for the increasingly elderly population who are left) without - beyond remittances - really sharing in the benefits.

What the long run consequences of the structural rise in unskilled wages which is likely to eventually follow from a global exhaustion of the large migrant source potential remains to be seen. There will obviously be a correction, but let us hope it is of the "soft landing" and not the "hard landing" variety.

I would remind you that the US effectively closed the door to inward migration in 1922, so let us hope that what happened next isn't a foretaste of anything.

"I find it remarkable that no EU country grants citizenship as an automatic right to children born there."

Well, the position is a rather complex and fluid one, as this article explains to some extent.

"That is a policy that needs to be changed."

Yep. I agree.