Is Demographic Contraction Good for Russia?

Thanks to Abu Daoud for pointing out a recent online interview in which Merrill Lynch's chief economist in Russia suggests that the country's demographic contraction will be good for the economy.

VLADIMIR OSAKOVSKIY – Yes, we put out this "Russia in 2020" report and the main message, I think, is that we do, first of all, view Russian demographic contraction as a short- to medium-term advantage because this demographic contraction effectively removes the problem of unemployment off the list of economic problems. This is a trend, which we think will support a long-term creation of a Russian middle-class. We expect the Russian middle-class to actually triple in size, for it to become a dominant layer of the general population by 2020. That is a major thing. A second thing is that we do think the Russian government will increase the general level of taxation basically in order to fulfill the pre-election promises of President [Vladimir] Putin, which are quite a lot. Therefore, we do think that the general level of taxation in the economy will be much higher then it is right now.

Low unemployment is typically associated with a robust economy, and the rise in the proportion of people in the middle class also implies a robust economy. In theory, of course, if the economy stays exactly the same and the number of people declines, then per person income will rise. This seems to be the basis for Mr. Osakovskiy's view of the situation. The UN Population Division projects that Russia's population aged 15-59 will decline from 95 million in 2010 to 81 million in 2030, despite net in-migration from the former Soviet republics, and from China. At the same time, the population 60+ will increase from 25 million to 33 million. The projected tax increases discussed above almost certainly will include transfer payments to help support the aging population, with the caveat that the elderly don't live quite as long in Russia as in most other European countries.

None of the demographic numbers look very good for Russia's economic future, as nearly as I can tell, but it is certainly understandable that Merrill Lynch hopes to create a self-fulfilling prophecy--invest in Russia because its demographics suggest a bright economic future! The wealthy Russians who have their money parked offshore in Cyprus may see the world differently.