Yuri Yegorov, University of Vienna. Yegorov DEGIT16-SPb

Transcription

1 Yuri Yegorov, University of Vienna Yegorov DEGIT16-SPb 1

2 The goal of this article is to discuss the interaction between Russian demographic problems and its specialization on the extraction of natural resources. We have several simultaneous processes since 1990s: specialization in extraction of natural resources and demographic problem caused by low fertility in 1990s. Russia has no labor scarcity at present, but will face it in 10 years. Also, its proven oil resources are only for 20 years, and this calls for a necessity of economic diversification. While resource-extraction technology is less labor intensive, movement to technological development will require more labor, and this labor should be skilled. Thus, Russia faces a problem of optimal transition from resource extraction to technological development with simultaneous labor training in the environment of its growing scarcity. Capital from resource export can be used for both investment in new technologies and demographic recovery. Fertility is also endogenous here, depending on consumption level. The policy implications are very important. While there is little reason for boosting fertility initially (since extraction sector is not labor intensive), demography has high inertia, and it will be too late after, especially when oil resources will be close to depletion. A sequence of models of dynamic growth, starting from more simple towards more complex, is suggested. Yegorov DEGIT16-SPb 2

3 The goal of this article is to discuss the interaction between Russian demographic problems and its specialization on the extraction of natural resources. Since 1990s, Russia has a severe decline in fertility (1.29), and it will result in demographic problem in the next decade. There are two problems: increase in old age dependency rate (recognized by demographers) and shrink of the total population (and also its density), having negative effects. After transition of early 1990-s, Russian specialization in extraction of natural resources increased. This has both short and long term consequences. In the short term, this leads to Dutch disease and higher exposure to world financial crisis of In the long run, after depletion of oil resources, Russia has to change specialization. Here population and its density is important (it will need more population, since resource extraction requires too low labour per unit of capital). Yegorov DEGIT16-SPb 3

4 20 years ago, before dissolution of the USSR, Russia was a country with many specializations: industry, agriculture and extraction of natural resources were giving employment. After liberalization of economy, many sectors became bankrupt, and resource sector became the main contributor to export and GDP. The ratio of capital and workforce differs across sectors in the world and in Russia. The ratio of K/L is relatively high for the sector of natural resource extraction due to use of expensive technologies in regions with severe climate. At the same time, the required labour force is relatively small. Since oil is finite, Russia needs economic diversification. Whether it will do more agriculture, industry or knowledge econoimes, it will need more labour (and thus people) in future comparing to present. But demographic change cannot come fast, it needs a boost in fertility. Yegorov DEGIT16-SPb 4

5 In the next 10 years, Russia will face massive retirement of large cohort of baby-boomers and the entry of generation born in 1990s into labour force. However, due to tremendous fall in fertility in 1990s (partially as a consequence of reforms, high income polarization and inability of most of families to afford even two children) the replacement will be incomplete. This will cause a rise in the ratio of retired to labour force, causing problems with pensions. However, the effect of shrink in labour force will not be fatal for Russian economy, given its specialization on natural resource extraction. But if Russia would start its economic diversification, it will need more population than it has. Yegorov DEGIT16-SPb 5

6 Kuznets has discovered the inverse-u relationship between income disparity and economic growth. Similar relationship might exist between consumption and population growth rate: while poor countries (and people) have higher mortality rate, the cohort of rich normally has lower fertility since females find it optimal to have fewer children. Applying these ideas to Russia, that currently has quite unequal distribution of income (with the ratio of income in top-10 per cent to bottom-10 per cent at 15), it is possible to suggests that high income disparity hampers both fertility and growth. Yegorov DEGIT16-SPb 6

7 When we look at the dynamics of total fertility rate (TFR, number of children per woman during her lifetime) in Russia and other CIS countries, we can observe several phenomena. First, there is a substantial difference between urban and rural TFR. In rural TFR was close to 3 and urban close to 1.8, and in they stayed almost at the same level (2.9 and 1.8). The overall drop of fertility rate in Russia in that period was small (from 2.2 to 2.05) and mostly explained by continuing urbanization. However, after the transition, even rural fertility dropped to 1.6 in 1997, with urban TFR only at 1.1. Fig. 1 (next slide) shows the dynamics for TFR for 6 FSU countries (3 of them now in EU). We see the common pattern. Yegorov DEGIT16-SPb 7

8 TFR Dynamics of Total Fertility Rates 2,2 2 1,8 1,6 1,4 1,2 Belarus Latvia Lithua Russia Ukraine Estonia Year Yegorov DEGIT16-SPb 8

9 In the first 10 years of transition the drop of GDP per capita was substantial, but it recovered in the first decade of the 21-st century. At the same time, we observe growing income polarization. The index of average income of top-10 to bottom-10 per cent in income distribution in the USSR was relatively small (about 3.5, see Atkinson and Mickelwright), well below the level in USA (6) and Latin America (10 or above). However, during the last 2 decades it grew to about 15 and stays at this level without significant change. Gini coefficient in CIS countries (UNDP, from WP by Yudaeva) Country Belarus (1998) Moldova (1997) Russian Federation (1998) Ukraine (1997) Yegorov DEGIT16-SPb 9

10 Easterlin in 1969 came with the hypothesis about positive relationship between fertility and development. Now we observe negative relationship between fertility and human development index. If we will try to put together both effects, we can arrive to inverse-u shape. This is true at least for European group of CIS countries. (In many other countries, fertility is irrational, i.e. parents care little if they have enough income to give children decent life). Income polarization can only reinforce this effect. Suppose that for high income equality we stay at fertility above reproduction level. If we raise inequality, then both poor and rich group will produce less children, but for different reasons. Thus, Russian fertility drop can be explained by high income polarization starting Yegorov DEGIT16-SPb 10

11 Finally, Russia has the largest territory in the world, which has relatively small population. The population density in eastern part of Russia is comparable one in rural Canada and Australia, and much lower than in EU countries. If population density is too high (like in India), there are few land and natural resources per capita, and this hampers growth. But in another limit of under-populated economy too high resource endowment per capita cannot generate growth, because of lack of human resources to build infrastructure (roads, etc) to bring these resources to the market. If Russia would put more attention to exploitation of renewable resources (like forestry and agriculture), it will face the problem of roads, originated in this low density of population. There is no other way to deal with this problem except for increase in population. Yegorov DEGIT16-SPb 11

12 Yegorov (2009) suggested a model capturing the influence of population density on growth. The basic idea is interplay of two factors: natural endowment of resources per capita and cost of building infrastructure. The technology is Cobb- Douglas in capital and land, and consists of many small spatially distributed firms, managed by one farmer, or worker. There also exists state firm that collects all output and then exports it. The major choice is the selection of spatial grid covering the country. It has a form of vertical and horizontal roads that access all spatial points (production takes place everywhere). The more dense is road network, the higher is fixed cost of its construction. On the other hand, it decreased the average distance of transportation without road. If population density is low, there is high land endowment per capita (which is a proxy for natural resource endowment). At the same time, the cost per capita of building road network of fixed density is also higher. Thus, there exists an optimal population density. The profits per capita in extracting sector are too low for low population density (like in Russian case, where population is not enough to build dense transport network over the whole territory). Fig. 1 shows the relationship between profit and population density. Yegorov DEGIT16-SPb 12

13 Profit, growth Growth and population density 0,5 0,4 0,3 0,2 0,1 0-0,1 0 0,5 1 1,5 2 2,5 3 3,5 4 4,5-0,2-0,3 Density Yegorov DEGIT16-SPb 13

14 The profit function of export-transport firm, collecting output from the whole territory has the profit Yegorov DEGIT16-SPb 14

15 Assume that oil resources are fully depleted. Then we have an environment of one-sector growth model. The higher is initial capital stock, the better will be performance and obtained utility. Formally we can deal with a model of A-K type. For linear utility and linear-quadratic investment cost we get: Yegorov DEGIT16-SPb 15

16 Economic growth model typically use labour and capital as production factors, using either Cobb-Douglas or AK model. If we use Leontieff production function instead of A-K, then imbalance between capital and labour has an adverse impact on growth. There exists optimal fertility policy associated with optimal growth of capital stock, that brings no unemployment and at the same time does not have labour scarcity. Consider the production function: Here we get several effects. First of all, for the evolution of L(t) = K b (t) we get a simple A-K production function. Second, simultaneous growth of capital and population leads to higher capital endowment per worker, and thus to higher production and consumption. Third, we get scale economies, and one person endowed with the same capital becomes more productive. Yegorov DEGIT16-SPb 16

17 It is well known that population growth is determined by fertility and mortality rates. Over short time horizons each of these factors matter. However, for a sustainable reproduction of population (given low infant mortality, achieved for more developed economies) we need total fertility rate of about 2.1 children per average woman. Fig. 1 shows that in 1990 TFR was (only slightly below sustainable level) for Russia and 5 other European CIS republics4, while in 2000 it has dropped to and was in the range in Many EU countries also have TFR below 2, but in most of EU countries adjusted TFR is in the range There were many changes in transition economies. The GDP per capita has declined in CIS countries after the reforms of 1992, but after 2000 it grew and has reached quite high levels, especially for Russia. Another important factor is income disparity, that also grew, but did not change much afterwards. It can be measured by Gini coeffcient, that measures the integral below income distribution curve. Gini varies between 0 (full equality) and 1 (maximal inequality). In 1992 Gini in Russia was 0.26, but grew to 0.48 in Most of EU countries have more income equality today, than Russia. In our model below we will employ the assumption about negative influence of Gini coeffcient on fertility rate for CIS countries. Yegorov DEGIT16-SPb 17

18 Further we will not make distinction between population and labour force, assuming them proportional to each other. Consider the equation Yegorov DEGIT16-SPb 18

19 There are two possibilities for objective function: maximization of average consumption (1) and maximization of the product of consumption ad population (2, caring about nation size as well). Model 1: max average C Model 2: max C*L Yegorov DEGIT16-SPb 19

20 Consider the model 2, with max (CL). We get the dynamic system: Its steady states are given by algebraic system that is likely to have multiplicity of equilibria: Yegorov DEGIT16-SPb 20

21 Yegorov DEGIT16-SPb 21

22 K Yegorov DEGIT16-SPb 22

23 The policy of constant saving rate is typical for macroeconomic analysis. The following set of equations was used for simulations: In this simulation the condition of under-population was maintained during simulation interval, and thus the model was correct. Fig.2 shows the dynamics of population in the case of moderate inequality, G = 0.4. Dynamics pf population growth L(t) for A=1, del=0.1, s=0.3, K(0)=0.5, L(0)=0.5, b=0.4, G=0.4, eps=0.05 1,2 1 0,8 0,6 0,4 0, Yegorov DEGIT16-SPb 23

24 K(t), L(t), C(t) For G=0.75 there is a catastrophe: economic growth goes along with population decline. Consumption first grows, but then declines catastrophically. The reason is too low population for production. This can correspond to Russian case at present. Dynamics of capital and population growth. A=1, =0.1, s=0.3, K(0)=0.5, L(0)=0.5, b=0.4, G=0.75, =0.05 1,5 1 0,5 0-0, C(t) K(t) L(t) -1 Time Yegorov DEGIT16-SPb 24

25 K,L,C Simulation for initially overpopulated economy (L>K b ). In this case we have rapid accumulation of capital, leading to overconsumption and population decline. At some stage model no longer valid, since current L(t)<K b (t). 5 4,5 4 3,5 3 2,5 2 1,5 1 0,5 0 Dynamics of capital and population growth. L>K^b. A=1, del=0.1, s=0.3, K(0)=0.5, L(0)=0.5, b=0.4, G=0.5, eps= Time C(t) K(t) L(t) Yegorov DEGIT16-SPb 25

26 One of the problems revealed by this numerical research is related to parabolic shape of function (C,G). Since it vanishes to negative infinity for large C, we observe too pronounced negative externality of overconsumption. In reality, the effect should be finite. That it why it makes sense to modify function (C,G). Consider =C exp(1-c). It is positive for all C, also has a unique maximum at C=1, that equals to 1. If we subtract 0<G<1, we always have two positive roots. Yegorov DEGIT16-SPb 26

27 The recent negative demographic process in Russia and other CIS countries call for urgent policy measures. The goal of this article was to attract more attention to this problem as well as to propose some theoretical mechanisms of interaction between economic and demographic processes. The dynamic economic-demographic models presented in this article are based on two streams of literature: about economic growth and economic-demographic interaction. It is argued that high income disparity has a negative effect on fertility, and the dynamics of TFR is CIS countries confirm this. Low population density has negative effect on economic growth. By boosting fertility, Russia can weaken this and reach higher growth level. In numerical simulations, it is shown that the policy of constant saving rate may have catastrophic consequences, if income disparity is above a certain threshold. Yegorov DEGIT16-SPb 27

28 1. Atkinson A., Micklewright J. (1992) Economic Transformation in Eastern Europe and the Distribution of Income. - Cambridge Univ. Press. 2. Barro R., Sala-i-Martin X. (1995) Economic growth. 3. Yegorov Y. (2009) Socio-economic in uences of population density, Chinese Business Review, vol.8, No. 7, p Yudaeva (2002) Globalization and Inequality in CIS Countries: Role of Institutions. - CEFIR, Moscow, WP24. ( r.ru/papers/wp25.pdf) 5. fertility rates by federal subjects of Russia 6. controversy Yegorov DEGIT16-SPb 28

29 Author s yury.egorov@univie.ac.at Yegorov DEGIT16-SPb 29