Monday, October 5, 2009

Plans and Markets: A Matter of Life and Death

The twentieth anniversary of the Fall of the Berlin Wall on 9 November 1989 has generated a mushrooming of conferences on the subject on the run-up to that date, often taking place in parallel. On 18-19 September 2009 in Helsinki, WIDER – the World Institute for Development Economics Research, United Nations University – organized a major international conference: “Reflections on Transition: Twenty Years after the Fall of the Berlin Wall”. One of the most exciting papers was presented there by Elizabeth Brainerd (Brandeis University), on “The Demographic Transformation of Post-Socialist Countries: Causes, Consequences and Questions” [still password protected until the end of the month; I will provide a link anyway in the near future]. This excellent paper really drives home the fact that plans and markets are a matter of life and death. In the past twenty years transition countries have experienced spectacular demographic changes, remarkable both in scope and speed, in many ways converging towards Western Europe.

Fertility, marriage, childbearing

“The formerly socialist countries were characterized by a distinct pattern of fertility and family formation: marriage and childbearing took place at relatively young ages (compared with Western Europe) and were near-universal”. Rates of childlessness were near the biological limit of about 5 per cent; in 1965-1989 the Soviet fertility rate had stabilized at about the replacement level of fertility of 2.1 children per woman. Abortion rates were high.

In contrast, “Virtually every country in Eastern Europe and the Former Soviet Union [FSU] experienced a steep decline in fertility beginning in the late 1980s or early 1990s”, as illustrated in Figure 1. Bulgaria and Ukraine fell below the lowest fertility level ever recorded in a European country during peacetime. The abortion rate actually fell (in Russia it plummeted from over 100 per 1000 women aged 15-49 in 1990 to 50 in 2000; in the early 1990s Poland introduced a near-ban on abortion). The decline in birth-rates was due to contraceptives being better and more readily available and to the rapid increase in the financial cost of abortion.

There was a rapid shift towards later (first) childbearing throughout Eastern Europe (see Figure 2); former Soviet republics continued early and near universal first births, with the postponement of second and higher-order births, but are generally moving in the same direction.

Figure 1. Total Fertility Rate. Selected Countries.

Figure 2. Age at first birth. Eastern Europe and France, 1970-2007.

The connection between this trend and the post-socialist transition process is confirmed by these changes being slower in the transition laggards like Belarus. Age at first marriage has also increased, approaching that of Western Europe (Figure 3).

“The share of extramarital birth increased across the region beginning in the early-to-mid-1990s; the highest rate is in Estonia (nearly 60% of all births) which rivals the out-of-wedlock birth rates of Scandinavian countries.” In Russia – and probably elsewhere – the increase in extra-marital births reflects to a large extent a shift from registered marriage to cohabitation.

Figure 3. Age at first marriage, women, 1970-2007

Figure 4. Percentage of births out of wedlock. 1970-2007

A most disturbing development is the “striking upward trend in the sex ratio [of males to females] of children age 0 to 4 in all three Caucasian republics”: Armenia, Azerbaijan and Georgia, where it has risen above the biological norm of 1.05, matching the ratios prevailing in India and China. This may reflect selective abortion, due to wider availability of sex detection before birth, and/or an actual or perceived deterioration in the condition of women.

Income, Education, Uncertainty

Traditional economic theory (exemplified by Gary Becker’s A Treatise on the Family, 1981) predicts an inverse relationship between income and fertility: while children are a ‘normal good’ (“when income increases couples desire more children”), the time-intensive nature of their rearing represents a significant opportunity cost, and its increase holds births down. Brainerd notes that “women’s relative wages have increased on many East European countries” after the transition, thus validating this theory. The trouble is that, for all or most of the ‘nineties throughout the area income per head actually fell, by more than could have been compensated for women by the rise in their relative wages. Thus, pace Becker, the impact of income on fertility that he predicts should have had the opposite sign.

A related explanation offered by Brainerd is “the increase in the [rate of] return to education which has occurred across nearly all transition countries, in turn inducing large increase in tertiary enrollment rates”. Empirical studies “indicate a negative relationship between education levels and the timing of the first birth, and … the strength of this education effect has increased significantly since the start of transition. Women with more education are also more likely to be childless than women with less education”.

But there is a much more convincing argument. “In the context of the transition countries … it seems likely that the uncertainty surrounding the change from a socialist system to a capitalist one would influence a couple’s decision to have children”. Investment theory predicts that “for investment decisions which are irreversible (e.g. children) and which can be postponed, there is an option value in waiting to make the investment”. The role of economic uncertainty is confirmed by a number of empirical studies (showing, for instance, the impact of unemployment uncertainty especially for women on the probability of childbirth in Germany 1992-2002).

There are additional factors: “One of these is the decrease in the number of state-supported nurseries and pre-school facilities and the near-disappearance of daycare facilities provided at enterprises.” Another “simply the decrease in the number of middle-aged men” due to the dramatic increase in mortality rates among men aged 25 - 54 in the 1990s (discussed below); “if women are reluctant to raise a child as a single mother, this too would be expected to account for at least part of the decline in fertility over the period.”

On lower fertility rates, later marriages and childbearing, high and rising extra-marital births, transition countries have come to look more and more like Western Europe.


Mortality trends diverged sharply in the FSU and in Eastern Europe. After a rise in life expectancy in the late 1980s, undoubtedly due to Gorbachev’s anti-alcohol campaign, “between 1990 and 1994 the death rate among working age men in Russia increased by 70 percent, from 759.2 to 1323.7 deaths per 100,000 population. Male life expectancy at birth fell from 63.7 years to 57.4 years during that period, while female life expectancy at birth fell from 74.3 years to 71.1 years. A similar increase in mortality rates occurred in many other countries of the former Soviet Union in the early 1990s, in particular in Belarus, Ukraine, and the three Baltic countries.“ Some of these declines were reversed in the late 1990s but their size and large and erratic swings are unprecedented in European countries in peace time and the absence of famines or epidemics.

These mortality trends coincided with the process of transition to a market economy, but the same process was accompanied by opposite trends in Eastern Europe, where “mortality rates fell and life expectancy rose throughout the region”, in spite of similar – though milder and less protracted – trends in GDP losses and unemployment. In particular, “The unprecedented increase in cardiovascular mortality in the former Soviet Union in the early 1990s was nearly matched by an unprecedented decrease in cardiovascular mortality in Eastern Europe.” The difference between the two groups is summarized in Figures 5 and 6.

Figure 5. Male life expectancy at birth. Selected FSU countries

Figure 6. Male life expectancy at birth. Eastern Europe

In the 1990s infant and child mortality declined almost everywhere in the region; the traditionally vulnerable groups, children and the aged, avoided significantly higher mortality during the transition. In the FSU the mortality crisis affected primarily middle-aged men. “In Estonia and Russia (and many other former Soviet countries), the increase in death rates for men age 25 to 54 between 1989 and 1994 was astonishing. In Estonia, for example, the death rate for men aged 40 to 44 increased from 5.93 deaths per 1,000 men in this age group in 1989 to 13.19 deaths per 1,000 in 1994, an increase of 122 percent. Over the entire transition period …, the increase in death rates among middle-aged men remained high in Russia, but had begun to decline in Estonia and the other Baltic republics.” An initial deterioration in life expectancy at birth occurred at the very beginning of the transition in other countries, especially Hungary, but the “pattern of large declines in mortality rates across most age groups by 2007 is similar for all East European countries for which data are available, including the Czech Republic, Poland and Romania”.

The mortality crisis among middle-aged men in the FSU republics was primarily caused by a tremendous increase in deaths due to circulatory diseases (heart disease and strokes; also rising in Bulgaria and Romania in 1989-94) and due to external causes (including suicides and homicides). After the mid-nineties these death rates declined but remained at least as high as before the transition. In the other East European countries, deaths due to circulatory diseases for men in the age-group 25-54 declined substantially between 1989 and 2007; among other things, because of improved diet and better medical care. “… the speed and magnitude of the [mortality] decline in Eastern Europe may be unprecedented”.

“Did Russians drink themselves to death?”

“Most analysts believe that alcohol consumption is one of the major causes of the large swings in mortality in the western former Soviet Union in the 1990s,” together with stress and possibly diet as contributory factors. Stress has been associated with unemployment, increase in inequality, migration and divorce. Artificially low prices for food, especially meat and fats, and scarcity of fruits and vegetables, made for a bad diet. Otherwise, other risk factors – smoking, hypertension and high cholesterol levels – in the FSU were lower than in western countries and mildly improving over the 1990s. Individual alcohol consumption is virtually impossible to estimate; probably two factors raised the impact of alcohol, namely binge drinking (leading to increased arrhythmias and heart attacks) and the consumption of “surrogate” alcohol. Surrogates, all untaxed and cheaper than vodka in alcoholic content, include homemade alcohol (samogon), and “non-beverage” alcohol, such as after-shave, anti-freeze and lighter fluid, all characterized by high content of ethanol and other toxic ingredients ”… Autopsy studies and surrogate alcohol studies provide persuasive evidence that alcohol consumption played an even more important role than previously thought in the increase in deaths due to both cardiovascular and external causes in Russia”.

Brainerd stresses that there remain unanswered questions. “Does alcohol consumption also explain the large swings in mortality in the other countries of the former Soviet Union besides Russia? … Why did drinking become so lethal in the 1990s? … Did alcohol consumption increase a great deal, or the frequency of binge drinking?” We know for certain that the price of food relative to the price of alcohol rose dramatically in the early years of transition in Russia, by a factor of three. The problem is that we do not know the price and income elasticity of demand for alcohol, nor the cross elasticity of demand for alcohol and its surrogates.

Population decline

The arithmetic of falling fertility, plus mortality rising above fertility, leads inexorably to a falling population, and indeed in the last two decades there were significant population decreases in most FSU countries. In Russia the population fell from 147 million in 1989 to 142 million by 2008. The loss, of 3.4 per cent, is much more dramatic if one excludes the substantial migration inflows of over 6 million (net) immigrants into Russia, between 1989 and 2008 – a fall of 11 million in the native Russian population. Table 7 shows that the Russian population decline is much smaller than that of other FSU countries: 20 percent in Moldova and Georgia, nearly 15 percent in Estonia and Latvia, 4 to 10 percent in Kazakhstan, Armenia, Lithuania and Ukraine. Similar declines occurred in Bulgaria and Romania. In the same period populations grew in the Central Asian republics (except Kazakhstan), Azerbaijan and Hungary.

Table 7. Population change 1989-2008

“Population declines are likely to continue in many countries due to the much smaller cohorts of women entering their childbearing years” – a factor which is nearly impossible to offset by the hypothetical increase in fertility that might occur thanks to Putin’s fertility ‘bonus’. Increasing life expectancy and higher immigration may make a more significant contribution to reduce population decline. But it is no accident that Goskomstat forecasts the Russian population to decrease from 142 million in 2008 to 137.5 million in 2025.


Elizabeth Brainard sees an immediate benefit from population decline, namely the “Solow effect” of raising the average capital/labour ratio and therefore, presumably, labour productivity. This effect is unlikely to materialize: existing capital equipment almost invariably embodies a technique designed for employing a given amount of labour per machine. The scope of ex-post substitutability between capital and labour is bound to be much lower than that ex-ante. Higher capital per man and higher productivity may happen only as a result of new accumulation, but this takes time. It may take twenty years for the higher investment per man (and the higher productivity of labour associated to it) to be diffused throughout the economy. In the meantime, lower capital utilization is more likely to occur than higher labour productivity on old equipment – while in the longer run the population ageing effect of demographic decline will still be operational. Demographic decline also leads to some destruction of human capital. Therefore population decline is bad for economic growth on all counts, in the short as in the medium and the long term.

Economic Determinism?

Elizabeth Brainerd’s riveting study is an eye-opener. It reveals how much our lives are influenced by the policies and institutions of the economic system in which we live, and how rapidly we can adapt to the transition from one system to another. It is frightening to see how much our individual decisions, literally on matters of life and death, are governed by economic incentives. When the state takes care of people from cradle to grave, there are simply more cradles but there may be a faster route to graves.


Alberto Chilosi said...

"Thus, pace Becker, the impact of income on fertility that he predicts should have had the opposite sign."

During transition the income effect of reduced per capita incomes is quite in agreement with the substitution effect in family choices of increased relative feminine wages. The ensuing reduction in fertility rates is therefore quite in agreement with the Beckerian framework.

Alberto Chilosi said...

There could be a psychological factor in the decrease of mortality rates in countries that were fred from imperial control and in the imperial country that had lost its empire. In this respect the increased mortality in Estonia is interesting. Would it be possible to ascertain whether it was mainly due to the Russian ethnic component of the Estonian population?

D. Mario Nuti said...

Thanks, Alberto. Women's wages may have increased relatively to those of men in the course of transition, but their absolute level will have certainly fallen until earlier levels were recovered. Thus the opportunity cost of maternity will have fallen, encouraging a fertility rise in Becker's approach, instead of the actual fertility fall.

The psychological impact - if any - of losing an empire does not seem sufficient to explain alcoholism and violent deaths. The high Russian component in Estonian population, instead, seems a plausible conjecture in explaining Estonian mortality trends, for demographers to investigate further.

Alberto Chilosi said...

So long as the income and the substitution effects are supposed to be contradictory (the income effect leading to lower labour supply and higher maternity, the substitution effect to the contrary) everything can be explained through the dominance of the one or the other effect (very convenient, in this case Becker cannot be disproved, which may arise some Popperian doubts, but probably econometricians should be able to deal with them). In the present case the income effect of decreasing incomes leads to higher female labour supply and to lower maternity, the substitution effect of lower female wages, to the contrary. But at the same time in the framework of family decisions the higher relative wages of the wives may, in the collective decision making concerning how the family is organized, encourage higher female labour supply, enhancing the income effect.

I have another comment, relating to population decrease. Population decrease can enhance per capita incomes (and even more per capita welfare) in densely populated areas, because of lower pressure on natural resources, especially if agriculture is the main sector of employment, and if the high density of population exerts undue pressure on the natural environment (this could be perhaps the case of Bengladesh and, as far the environment is concerned, Italy too). But certainly this is not the case of Russia. In Russia the most likely consequence of a decrease of population could what we may call the Julian Simon effect. According to Simon (Simon, Julian L.,The Ultimate Resource. Princeton: Princeton University Press, 1981, quoted by Lee, Ronald Demos, "Population." The Concise Encyclopedia of Economics. 2008. Library of Economics and Liberty; “another birth means another mind that can help think up ways of using resources more efficiently”. Thus for Simon population increase is a factor of economic progress, and population decrease a factor of economic regress. And this bodes not well for Russia. The only favourable effects of a decrease of population for a resource rich economy could be to increase the per capita raw material resources and the value of per capita exports. Of course, if you have enough manpower to extract them and militarily defend your exclusive right to their exploitation (especially in sparsely populated Siberia).

D. Mario Nuti said...

Very interesting, thanks, but inconclusive both on fertility implications of women's higher relative wages, and on the external economies associated with population growth and decline. And additional minds, just like the additional hands with which newly borns are endowed, are not much use without the associated human and physical capital necessary to reap their benefit.