Ukraine's Demographic Crisis Is an Economic Time Bomb

This article originally appeared at Business New Europe

According to a certain school of thought, Ukraine is on the verge of following the same path trod by successful post-communist reformers like Slovakia, the Czech Republic and Poland. If it follows the established playbook, Ukraine can take advantage of, in Carl Bildt's entertaining formulation, "the convergence machine" that is the EU. For the optimists, including many of the people now running the government in Kyiv, Ukraine's "European choice" is a very straightforward one. Everyone knows the appropriate policies, primarily implementation of Washington consensus macroeconomic and financial reforms, and if Ukraine implements those policies, it will get dynamic market-driven growth. Ukraine, then, will rapidly converge with Western levels of economic development if it cleans up its act.

The problem with this happy tale of reform and convergence is a simple one: due to a withering, decades-long demographic crisis (one, incidentally, that has gotten much worse since the start of the Maidan protests) Ukraine’s population is structurally much older than Poland’s was when it first embarked upon its programme of liberalizing shock therapy.

Looking at the population pyramids below of Poland in 1989 and Ukraine in 2014 gives some indication as to the enormous magnitude of the differences.

Poland, in 1989, had essentially a “normal” age distribution: the older generations, on average, were smaller than the younger generations. Yes there was some skewing caused by the horrific impact of World War II, but it was basically what you would expect to see in a country recording a very modest level of natural population growth. Poland set out to reform its economy with a labour force that was expected to grow.

Ukraine’s age distribution, on the other hand, is almost the inverse of what you “should” see. The youngest generations, the people who will make up the Ukrainian labour force 10, 15 and 20 years from now, are much smaller than the generations they will replace. Ukraine’s labour force is not only shrinking right now, it is projected to shrink forever.

And that unfortunate truth, that Ukraine’s labour force is shrinking and will continue to shrink, is the fundamental difference between it and its more successful Western neighbours.

“Demography is destiny” is a popular slogan, but it is only half true: demography is important, but it is not necessarily insurmountable. The negative economic consequences of Ukraine’s shrinking labour force could be offset if, for example, the country was given an extremely generous package of financial assistance. Money has a way of making seemingly irresolvable problems disappear, and if Ukraine had the ability to use German money to backstop its national pension fund, then it could conceivably find a way to generate reasonably rapid economic growth.

It should be obvious, however, that this sort of generous financial assistance is not forthcoming. The Europeans were insistent from the very beginning of the negotiations on the free trade and association agreement that Ukraine would have to pay its own way. Even the most gung-ho proponents of reform – the Poles, Balts, and other East Europeans – admitted that the EU would not subsidize the requisite programme of legal, economic and political reform. Kyiv will need to foot the bill for its “European choice.” The problem is not only that the country’s ability to pay these bills is currently limited, but that it will grow ever more limited in the future. Ukraine’s economically active population is in free-fall, which means that the potential output of its economy gets that much smaller with each passing year.