ECONOMY

Baby boom needed, now

Greeks may worry about an economic slowdown after 2004 or even 2006, complain about rigid high inflation, holding above 3.0 percent, and the inadequate provision of social services by the State but what they should be really worried about is the country’s adverse demographic trend. It is this trend that threatens its fragile social security system, the dynamic of its long-term public debt as well as future economic growth. Like other EU countries, Greece needs a baby boom. According to a relatively recent report published jointly by Eurostat, the statistical office of the European Communities and the Council of Europe, the population in all the EU member states increased in 2002 with the largest increases recorded in Ireland and Luxembourg and the lowest in Germany and Italy. More interestingly though, there were three countries within the EU, namely Germany, Italy and Greece, where the number of deaths exceeded the number of births, meaning that their populations would have fallen had it not been for positive net immigration. Ireland, France and the Netherlands were on the opposite side of the spectrum, recording the highest natural increase rates and comparatively lower net immigration rates. In the case of Greece, the so-called natural increase rate, that is, the difference between births and deaths per thousand inhabitants, stood at minus 0.02 percent versus minus 0.15 percent in Germany and minus 0.05 percent in Italy. Moreover, Greece along with Spain had the lowest average number of children per woman of child-bearing age with 1.25 each followed by Italy with 1.26 at end-2002. Given these figures, it is no surprise that the Greek population is aging and the so called old-age dependency ratio, that is, the number of retired persons to working-age people, is rising, despite an increase in immigration from Albania and other countries. Although productivity is also rising, it cannot play catch-up with the cost of the aging population which is rising faster as the number of retirees steadily approaches the number of working age people. With a debt-to-GDP ratio in excess of 100 percent and a higher share of pension and healthcare expenditure in GDP, Greece is in worst shape than other high-debt EU countries, namely Belgium and even Italy, to cope with adverse demographics. Despite taking some steps toward boosting the country’s miserable fertility rate, such as offering larger tax breaks for large families, Greece seems to have given up and chosen to rely on immigration to cure the reproduction problem and address the related issues of social security, public debt and economic growth. Although hundreds of thousands of immigrants have crossed into the country in the last 13 years, Greece has not succeeded in fixing its demographics. On the other hand, it has also avoided the social friction encountered in other countries, mainly thanks to its fast-growing economy and the ensuing need for the cheap unskilled labor welcome by many small firms, farmers and others who were interested in boosting their earnings. However, faced with a likely economic slowdown in coming years, the risk of rising social tension should not be underestimated even in a country largely alien to racism. This means Greece will have to change course and address the issue of demographics, regarded by many analysts as essential to fostering economic growth and propping up the social security system, in a serious, consistent way and with an eye on the long term. The government missed an opportunity when it attempted to reform the country’s pension system a couple of years ago. At the time, the government tried to strike a balance between minimizing political costs and fiscal discipline and ended up with a multi-year plan to shore up the finances of the country’s main pension fund (IKA). According to the plan, funds amounting to 1.0 percent of GDP will be committed each year to finance IKA’s deficit from 2003 through 2032 and the State will pay IKA a total of 9.6 billion euros to finance its past state obligations to the fund and honor IKA’s obligations to other state agencies. To help IKA meet future obligations, the State will also issue bonds to set up an IKA Reserve Fund. By choosing to disregard the effect of adverse demographics and focusing instead on financing IKA’s projected 2003-2032 deficit, the government minimized the political cost by avoiding a political landmine but also showed, according to some critics, that it did not grasp the importance of demographics. The subsequent adoption of tax relief measures for large families showed that it grasped it to some extent, but not fully. Putting aside the arguments advanced by those who say aging countries are less entrepreneurial and less dynamic, one cannot turn a blind eye to studies linking population growth to economic growth. The case of Japan, where population has been generally stable for some years now while its economy has remained almost stagnant, and the case of the US, where population is growing along with the economy, are just two examples. With its economy growing relatively fast, one may argue that Greece does not fall into these categories. This is correct but one should not forget that these strong growth rates have done very little to effectively arrest its public debt and shore up its ailing social security system. In Greece as well as in other countries, demographic trends are usually taken for granted by governments. This may explain why they do little to boost fertility rates, leaving it to the immigrants to fill the gap. Unlike some countries, Greece does not have the luxury to overlook the problem, given its ailing social security system and high public debt-to-GDP ratio. To this extent, Greece has to address seriously the key issue related to its demographic malaise – the cost of having children. The example of other countries, such as France, which seem to have dealt effectively with the problem, shows that tax breaks for families, family allowances and good childcare provisions go hand in hand. It is true that policymakers tend to ignore the issue of demographics and focus on others. Prudent Greek policymakers cannot afford to do so any longer because fixing demographics affects the long-term viability of the country’s social security system, economic growth and welfare. Greece needs more babies.