Aging in Europe

Just read an interesting article in Business Standard by Samuel Brittan (syndicated from FT). He talks about the usual stuff about demographic changes that are taking place in the OECD countries. Couple of interesting points that he makes:
a) I like the phrase: "It is not just a matter of financial machinery to provide entitlements. It is a question of high real transfers"
b) Interesting numbers: ratio of older inactive people to workers will double from 38% to 70% in OECD (and to 100% in Europe!) by 2050.

He has an oft-touted solution: allow immigration. (He ends there, after the mandatory I-wash-my-hands-off-after-the-intellectual-debate warning: "Of course, wider social considerations involved here, but so they are in nearly all aspects of the policy towards ageing."). Let us then look at a few aspects.

The problem, as we all know is that the population growth is slowing in the developed countries and the population that remains is becoming greyer. It is interesting that both the issues - slow pop growth and long life - are an off-shoot of the progress that these countries in particular and the world in general have made in the last 50 years post WWII. These countries are trying hard - at least tactically to meet the problem midway: The Scandinavian countries have grants for the ladies who will bear the additional fruit.

Europe made rapid gains in productivity since the end of the WWII and has been at the forefront of the world growth for many a years. Their time has sadly come: the last decade was not an economic story about Europe, it was about China. The next decades will also not be about Europe, they will be about China and India! Manufacturing doe not seem to be the forte of most of these countries. The less we talk about the subsidized agriculture, the better: the WTO negotiations will quickly chew away at that protectionist barrier. However, one respects the past and looks at the wealth that the past efforts have created for Europe. It is hard to expect that the people of that land having slogged so hard to create the wealth to accept the life with lesser entitlements when they retire. They are caught in the classic "wealth effect" (ratchet-effect, I believe it is called in economics, but like Bertram Wooster, I will have to check that up!). What they hence need is some economic force that will keep the economy going so strong that the retirement bills of the grey population are tended to.

I remember the summer of 2003 when I headed to Barcelona for a conference there: the city, in conjunction with ESADE, the business school had organized a meet for the future leaders (a euphemism for current B School students) from across the world. There were two key take-aways for me from that conference:
a) Spain (in particular and Europe in general?) had realized that its time for being the manufacturing hub had come to an end. The city was proud that it served as a significant manufacturing base for quite sometime till the early 90s but was now facing immense competition from East Europe and Asia. (I remember since one discussion I had was on how manufacturing keeps moving eastward!)
b) Barcelona was proud on how it changed its character from an old (and reasonably dirty city!) to a world-class city in the 8 years before Olympics.

The solution that Barcelona had thought of was simple: it traced the development of human progress and saw how Man had moved from agriculture to manufacturing to (knowledge-based) services. It has decided to follow the same path. It boasted of world-class facilities that it could offer in various fields of research and government support for the same. It agreed and understood that its labour was high cost but that, it hoped, was mitigated by the quality infrastructure. So the economic solution is to keep the high value-add with itself while it let goes off the dirty and cut-throat manufacturing jobs to the third world countries (Who wants to keep the dirty jobs anyways?). It is not easy to be at the forefront of technological progress but that is the risk that these countries will have to take.

What interests me is that Europe realizes that it is cost disadvantaged. It has to necessarily be a place where the wage rate is high. That is because of the wealth that it has generated for itself. The way I look at it is that a certain percentage of income will always be spent in "maintaining the wealth": that is to live according to the status demanded by the wealth. One gets used to a certain life style and it is very painful to have a step-down from the life style that one has become used to (the ratchet effect we talked about earlier). It is hardly surprising then that the social support system in Europe is one of the best and billions spent on the same every year. Wages once high hence tend to be sticky.

However, put that in light of the solution given by Mr. Brittan. He wants freer policies on immigration. If there is one thing that an immigrant does not bring with him, is his wealth (he rarely would immigrate if he had wealth in the first place!). He looks upon the new land as a place that will provide him the economic opportunity to build his wealth. In many cases, the immigrant comes to the economy lured by its wealth (past) and its ability to sustain him in the future. What he does bring with himself, though, is his culture.

Note that the people that Europe will need to attract would be the top-notch people, as they have to lead the innovation and value addition that will keep Europe going. When I say labour, if it gives you the impression of a blue collared mechanic, be forewarned: it is the white collared knowledge worker that Europe is after. (One just needs to look at the demand for India doctors and nurses in UK to get the picture).

Let us look at the economic implications and social consequences of the Arrival of the Immigrant: The immigrant who goes to a country with grey hair needs to remember that he will not only be working for himself but also for an older native there. What the older native holds there is not just wealth but the political power that makes the laws of the land. The older native will need to design laws that will keep two things in check with the arrival of the immigrant:
a) a job for his off spring (howsoever limited their numbers might be!) and
b) some method of "high real transfer".

The first will call for very protectionist (affirmative action for the Whites!) means of keeping the jobs home. I will not be surprised, if in the name of national security, there will be positions that will be reserved for natives. Whether it is through reservations or some other means, calls for protectionism will start growing stronger. (We have all seen the passion that exists in the States when it looses jobs: recall BPOs and GM closing its plants).

The way the second point will pan out will possibly be in the form of higher taxes. The State will become an enormous and huge Robin Hood, a financial monster whose objective will be to collect money from the working immigrant and pass it on to the older infirm native. What will be interesting if countries come up with differential tax norms: charging a higher rate of tax for the immigrants so that the income of these immigrants can be used to support the natives (Was that not the original purpose of inviting the immigrants?)

The problem becomes interesting because glass ceilings and higher taxes actually reduce the incentive for the immigrant to come over. His prime incentive to come to the country was to gain monetarily and if possible, in social status. He will begin to clamor for more rights in his chosen place of work. It will not be long before the realization dawns upon the various immigrant communities that it is they who run the economic system of the country - not necessarily the political one though. Calls for movement to the political system, though bitterly opposed by the natives, will only grow stronger and eventual crossovers will happen.

I juxtapose this with what I hear about the Rise of the Right in Europe. I have read with horror the Burning of Paris and the growing significance of the Right in Germany (not that the country welcomes immigrants with open arms even today). A quick look at the countries that will be labour rich - and hence will supply labour - is also illuminating. It will mostly be the African. Middle-Eastern and Asian economies. Interestingly, though I am not sure that such a classification has been made till now, a very high number of these immigrants will possibly be Muslim. If the 2000 years of Christian-Muslim relations are anything to go by, one does not look forward to a future brimming with peace and harmony. In any case, almost all the labour rich countries will be non-Christian.

What hence is economically most important (almost existential) will possibly the least desirable socially. How Europe decides to balance the two will determine (not only its but also the world's) growth and its peace. More thought needs to go into how to open the societies for more immigration: it will not be an overnight task. It will need effective handling by the politicians and leaders of that land. There is no single answer that is true for all societies: they will have to develop their responses on their own. The responses no doubt will be molded by the circumstances and the questions that individual societies face but it will be instructive for the leaders to start framing the answers now! Barcelona evolved itself in 8 years, Europe will have a couple to decades to think this problem over: it better be ready with the right solution!