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tral bank buying bonds maybe the costs of the euro widowmaker trade will be borne by all those eager bond purchasers who thought nothing could possibly go wrong i am sure german politicians would decide a loss of credibility on psi would be less costly to them than getting german taxpayers on the hook for current italian debt levels especially in a country where they are now proudly announcing they have reduced government debt for the first time in more than 50 years so in this case maybe the turkeys just did vote for xmas the thing is despite the meeting between draghi and renzi who may also be a turkey by xmas nothing substantial is going to happen in italy the government is under no pressure to ask for help and doesn t even feel it needs it and draghi won t act before things change gridlock with rising debt naturally in the short term the mario draghi ultimately has my back feeling will still prevail but with markets continuing to finance debt levels that any official study will soon have to recognize as unsustainable lack of proactive policies from the ecb will only fuel concerns that the size of the pill may become just too big for the bank to persuade germany comfortably swallow leaving the specter of private sector involvement to once more rear its ugly head how do you tell people who have just sacrificed hard to get their debt under control that they are now about to help pardon 50 of someone else s it simply doesn t make sense these arguments are developed at greater length in my new book is the euro crisis really 0ver will doing whatever it takes be enough on sale in various formats including kindle at amazon posted by edward hugh at 1 58 pm no comments sunday may 12 2013 does portugal have its own shortage of japanese problem in a number of posts recently i have highlighted the impact of declining workforces on economic growth here for example or here or here and the way the policies persued to address the euro debt crisis are having the impact of accelerating the movement of young people away from the periphery and towards the core here or here thus accelerating the decline in their working populations and exacerbating their growth problem this issue has been already highlighted strongly in japan s ongoing crisis and has to some extent come to be known as the shortage of japanese problem following paul krugman s memorable use of this expression to explain why japan s economic performance seemed so poor to so many recently i came across a post by portuguese blogger valter martins where he looks in some depth at what is happening in portugal really despite the use of some technical details his argument is extraordinarily straightforward in fact it is as elegant as it is simple what he points out is that population growth rates serve as some kind of quick and dirty proxy for gdp growth rates and growth in working age population serves equally well as a quick proxy for growth in gdp per capita any simple growth accounting process breaks growth down into a labour input component and a productivity component so if your labour component turns negative even to get the same growth your productivity component has to be greater for societies that have considerable difficulty raising productivity in the first place this process of working population decline is going to make an already herculean task even more difficult in addition valter picks up a point few researchers seem to have noticed up to now that working age population in portugal just surprisingly peaked natural population dynamics have long been stationary in portugal and emigration has long standing and deep roots during the first eight years of this century the population loss caused by emigration nearly all young educated portuguese was masked by the steady influx of immigrants looking for work but now the country is in deep recession the immigrants aren t coming indeed some are even leaving while the rate of emigration by portuguese nationals has accelerated and continues to accelerate sending working age population and just as importantly its age distribution on an increasingly negative path during the years of austerity we have become familiar with the phenomenon that as fiscal spending is cut growth falls making the achievement of fiscal targets even more difficult well something similar seems to be happening with migration movements as part of the benefit to long term growth that accrues from making structural reforms disappears on the other side of the ledger as the workforce shrinks again we are in danger of running round and round in ever diminishing circles reading valter s post i became impressed with the power of his argument and was struck by the importance of what he had discovered i therefore took the unusual step of asking him to translate the piece and offering to publish it on my blog so without more ado here is is portugal facing a shortage of japanese guest post by valter martins so about the slow growth debt connection i ve done a quick and dirty mini rr for the period 1950 2007 focusing only on the g7 and if you look at it you see that most of the apparent relationship is coming from italy and japan and it s quite clear from the history that both italy and especially japan ran up high debts as a consequence of their growth slowdowns not the other way around paul krugman reinhart rogoff continued despite so much intense debate about the ailment from which portugal suffers and the mountain of sacrifices currently being borne by the portuguese people one fact has gone virtually unnoticed in amongst all the noise for the first time at least in the modern era portugal s working age population has started to shrink demography and its possible impact on economic growth is a topic which has been largely ignored by practitioners of economic science in recent decades as population growth has by and large been on an upward trend however as we enter a new period in human history one in which the upward trend has shifted towards stagnation or even in some cases towards long run decline the economic and financial implications of this transformation can no longer be ignored as nobel economist paul krugman indicates in the above quote some countries have large debt simply because they have low growth so what is the common thread that runs through these low growth high debt countries could it be decelerating labour force growth and eventual labour force contraction the cases of italy and japan are well known in the case of portugal it will be argued here demographic trends can not only explain a significant part of the slow economic growth the country experienced during the first decade of this century they can also help us understand the depth of the current recession more important still we need to think about the consequences of this continuing lose lose dynamic for the country s future in both the short and much longer term economists didn t always take the view that population dynamics were irrelevant to economic performance the 1930s gave birth to a serious debate about the possible problem that would arise if many decades of strong population growth were followed by population stagnation and then decline a debate which was provoked by the fact that birthrates in a number of countries fell below replacement level for the first time in human history during the economic depression and among the names of those economists who took the problem seriously enough to think and write about it was none other than john maynard keynes there are indeed several important social consequences already predictable as a result of a rise in population being changed into a decline but my object this evening is to deal in particular with one outstanding economic consequence of this impending change if that is to say i can for a moment persuade you sufficiently to depart from the established conventions of your mind as to accept the idea that the future will differ from the past j m keynes eugen rev 1937 april 29 1 13 17 while the phenomenon has arrived largely unnoticed portugal s total population has long been near to stationary as can be seen in the above chart portugal s population has been struggling to find growth momentum since the mid 1980 s the first time numbers actually dipped downwards but the years 2010 2011 seem to mark a more fundamental turning point since it was in that time interval that portugal s population started on a long and possibly irreversible path of decline having long had a total fertility rate of below 1 5 this was a more than predictable outcome and one that should have been expected ever since the total fertility rate fell and stayed below the 2 1 replacement level in 1982 as is well known population change is comprised of two major components natural growth and net migration natural growth births minus deaths became negative in 2007 and thereafter population growth has become exclusively dependent on having sufficient positive net migration up to 2010 this condition was satisfied given the continuing influx of immigrants into the country as can be seen in the chart below however since the onset of the 2008 recession not only have the immigration flows reversed completely but emigration has started to increase again thus reanimating a trend that has been constantly present in portuguese history over decades even centuries this is perhaps the most critical factor driving the recent population decline in fact the decline would have occurred much earlier had it not been for the return of thousands of refugees from the portuguese colonies in the 1974 1981 period according to the european commission s 2012 ageing report projections for the portuguese population during the period 2010 2060 anticipated that population would peak in 2034 but as we have seen the latest data show the population unexpectedly reached its peak in 2010 total population previous chart the year in which the population began to decrease a similar phenomenon seems to have occurred in spain in 2012 with again a reversal in migrant flows in an otherwise stagnant population being the trigger this fact that this turnaround comes as a surprise is clearly the result over optimistic assumptions on the net migration front since the numbers for natural growth are well known and change little although birth numbers are now dropping in many eu countries under the impact of the long recession clearly the unexpected factor here is the severity of the recession from which the country is suffering and the size of the exodus of young people who are leaving just to highlight even more the speed with which all this is happening in japan the interval between the beginning of the decline of the working age population and the beginning of total population decline was a full decade in portugal this interval was only two years even more relevant than the decline in total population for the purpose of the present discussion is the decline in the working age population while the former gives us a good proxy for domestic consumption it is the later which is important in terms of potential national output all other things being equal a reduction in the working age population means a reduction in output therefore the most important detail to catch from the chart above is that the working age population defined as the population with ages ranging from 15 64 declined for the first time in portugal between 2008 and 2009 as highlighted by both daniel gros and paul krugman if you want to compare economic growth performance as between countries with growing populations and those with declining ones the best indicator to use is undoubtedly gdp per working age person gdp wap in the portuguese case if we take this ratio and compare it with both real gdp growth and working age population change my calculations vm we can get an impression of how variations in the working age population affect the economic growth of a country surprisingly or otherwise the data for portugal viewed graphically not only confirms the existence of the workforce effect the relationship seen between real gdp and gdp wap but also suggests that portugal has already passed the point where this effect is beginning to have a negative impact on gdp growth as can be seen in the above chart until 2008 the growth rate of real gdp was always higher than the rate for gdp wap offering a strong suggestion that labour force growth was having a positive impact on gdp growth it is noteworthy however that both in the period 1986 1991 and in the period 2003 2008 the growth rates of real gdp and gdp wap almost overlapped this phenomenon coincided with very low or zero rates of working age population growth and as such the workforce effect was mostly neutral the first of these periods 1986 1991 the stagnation in the workforce was the direct result of the increase in emigration that followed the entry of portugal in the european union the second one coincides with the arrival of the turning point in long term wap growth as the size of the working age population irrevocably turns negative indeed during this early period of emigration towards the eu portugal s total population decreased as shown in the chart population by age group above blue line but at the time since the population in general was much younger and many more new labour force entrants were arriving at working age the growth rate of the workforce remained slightly positive in other words there were still enough portuguese entering the labour market to replace those who were leaving it either to retire or to seek a future abroad in the second period 2003 2008 the large exit of portuguese nationals about 700 000 between 1998 and 2008 according to research by the now economy and employment minister álvaro santos pereira was to some extent offset by an inflow of immigrants but these were only sufficient in number to maintain the workforce at a stationary level all this calm and stability disappeared however after 2008 when the growth rate of working age population turned negative i e the labour force began to decline see graph below where the growth rates of real gdp and gdp wap overlap we can surmise that working age population change is having no effect on real gdp growth subsequently however the growth rate of gdp wap becomes higher than the growth rate of real gdp and thus the workforce effect starts to act as a drag on the economy steadily bringing the potential overall growth rate down in other words portugal is now suffering from a shortage of japanese as edward hugh has called the phenomenon after paul krugman originally coined the term to describe the underlying problem which has been afflicting the japanese economy since the mid 1990s the fact that the three lines in the above chart happen to intersect at zero is perhaps just an unfortunate coincidence but is consequences are disastrous since the downward trend that was already evident accelerated greatly after the onset of the...