Europe’s Depopulation Time Bomb Is Ticking in the Baltics

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(Bloomberg) -- With much of Eastern Europe already in the European Union or looking to join, living standards have been rising in the cities that dot these former Soviet satellites. More storefronts beckon to western tourists, who have grown more eager to wander among the cobblestones of historic capitals that were once less than hospitable. 

But a closer look outside the central squares reveals a different reality. According to the UN’s Department of Economic and Social Affairs, nine of the world’s countries most at risk of losing citizens over the next few decades are former East bloc nations. Porous borders and greater opportunity in the west have lured people away. Meanwhile, the populist wave sweeping the continent has made it next-to-impossible for African or Middle Eastern refugees to take their place.

Former Latvian economic minister Vjaceslavs Dombrovskis, now head of the Certus think tank, compared the westward migration of young eastern Europeans to the industrial revolution, when peasants rushed to large urban centers. He said these countries risk turning into what ancestral villages are for city dwellers: “a lovely place where you might spend an odd weekend with your folks.”

The trend is hitting especially hard in the Baltics. Latvia, with a current population of 1.96 million, has lost about 25 percent of its residents since throwing off Soviet control in 1991. The UN predicts that by 2050, it will have lost an additional 22 percent of its current population—second only to Bulgaria—and by 2100, 41 percent.

In Estonia, with a population of 1.32 million, the UN foresees a 13 percent decline by 2050, growing to 32 percent by 2100. And in Lithuania, the current population of 2.87 million is expected to drop by 17 percent in 2050. By 2100, it will have lost 34 percent.

Read More: Bulgaria’s Population May Shrink to World War II Levels

As bad as those numbers look, the trend looks even worse for Ukraine and Moldova. The UN predicts 36 percent and 51 percent declines in those nations by the end of the century, respectively. Russia, meanwhile, is expected to lose 13 percent by 2100.

Several factors are contributing to the depopulation of Eastern Europe, and Latvia has all of them: low income, compared with more developed EU nations; insufficient growth; and strong anti-immigrant sentiment. The average annual take-home pay among all EU nations was 24,183 euros ($29,834) in 2015, according to Eurostat, while in Latvia it was only 6,814 euros ($8,406). 

The young and educated are disappearing in the greatest numbers, shrinking the amount of working adults who can fund benefits for pensioners. Latvian demographer Mihails Hazans said that, as of 2014, one in three Latvians aged 25 to 34—and a quarter of all Latvians with higher education—lived abroad. In Moldova, that figure is more than 20 percent. In Ukraine—which other Eastern European nations look to for migrant labor—the state employment service said 11 percent of the population lives abroad.

A decade ago, when Austris Lakse was a sixth-grader in the Latvian village of Staburags, his school was converted into a retirement home, a transformation he said would become commonplace. Now a law student, he said roughly half of his classmates have gone abroad, leaving behind the small village on the Daugava River, some 67 miles (109 kilometers) southeast of the capital, Riga.

They left for menial jobs in the U.K., Ireland, France and the Netherlands, he said. Lauris Urtans, another law student, said that most of his classmates from secondary school have either left for Riga or Western Europe. With fewer young Latvians staying and getting married, buying houses or starting families, the school system is slowly shrinking. The population is skewing older. Classrooms give way to day rooms. 

But Lakse stayed. He went on to college and is now pursuing a legal degree at the University of Daugavpils, Latvia’s second-largest city, which has a population of 86,000. Even for those who stay, though, the pull of the west remains. When students in his class were asked recently whether they were going to stay in Latvia after graduation, almost half said no.

“If Latvians keep leaving, [those who remain] risk being assimilated by those who’ll come in their place—from the Middle East, South Asia or wherever,” Lakse said. That Eastern Europe’s demographic trends could be so altered via immigration, however, seems unlikely given the current political climate.

Nine out of 10 countries with the lowest acceptance rate of immigrants are former members of the Eastern bloc. Of these, the three Baltic nations had been previously forced to accept Russian-speaking migrants. In Latvia, the issue is so controversial that in 2015, when the EU insisted it accept just a few hundred Syrian refugees, nationalists initially threatened to withdraw from the government. That same year, Latvia came in second to last in the Migrant Integration Policy Index, which ranks 38 democracies according to the quality of immigration policies. Only Turkey did worse. Latvia was fourth from the bottom in Gallup’s 2017 Migrant Acceptance Score list, which ranks countries in order of their populations’ attitudes to immigrants

Anti-immigrant sentiment in Latvia is driven, in part, by the National Alliance party, one of three in Latvia’s governing coalition. Speaking in Parliament earlier this year, party official Janis Dombrava quoted polling agency Eurobarometer as showing that 86 percent of Latvians believe immigrants make no contribution to the state. 

“Latvia must either completely abandon or minimize the number of migrants who come from third-world countries,” Dombrava said. In October, Prime Minister Maris Kucinskis rejected an EU plan to accommodate an additional 50,000 refugees from the Middle East and Africa. He also defended Poland, which refused to meet the EU-imposed minimum number of refugees it was obliged to accept.

Hazans, the Latvian demographer, has been researching the nation’s slow-motion implosion. Low wages, poor career prospects and poorer working conditions, he said, are the top reasons. He also warned of a parallel political cycle to match the economic one: Since the young leave and the old stay, the electorate gets more conservative, he said, further exacerbating anti-immigrant leanings.

Daugavpils, home to a major university of the same name, is known for having been the home of acclaimed painter Mark Rothko—who emigrated to America. It was here that Arturs Fisers, 28, thought he could attain his dream of a college degree.

But first he had to pay off his parents’ debt. He went to live with a friend in the U.K. who had already left Latvia and got a job at a chicken factory in Lincolnshire. He said factory work was monotonous, but he was paid 820 pounds ($1,159) a month—an unthinkable amount for the same work in Latvia. 

After four years, he returned to Daugavpils and school. But two years later, the money ran out and he was forced to leave again, this time for work at a roadside restaurant in Switzerland. Fisers is hoping to become a teacher after graduation, which could pay as much as 700 euros ($862) per month, he said. Urtans, the law student, isn’t quite so optimistic. He sees no future in Latvia—even in Daugavpils. “Just walk the main street; everyone you’ll see is old and sad,” he said. “Some people say this city will completely vanish in 40 years.”

Hazans said emigration is now firmly embedded in Latvian culture. “It’s a new normal. Ten years ago, it was still an exotic decision, but now 90 percent of Latvians have friends or relatives abroad.”

While the UN and demographers paint a bleak picture of Latvia’s future, the government remains upbeat. “By 2022, emigration flows will significantly slow down, as an average wage of Latvia will reach the levels of minimum wage in emigration target countries like Ireland, Germany and the U.K.,” Dace Zile, the head of analytics for Latvia’s ministry of economics, said in an email. 

The average monthly wage in Latvia last year was 1,013 euros, while pay in the countries Zile mentioned is more than double that. Dombrovskis, the former economic minister, estimated that by 2030, there will be roughly one taxpaying private sector employee for each pensioner. But Dombrovskis said that if gross domestic product could grow just a a little faster, at a 5 percent rate for three consecutive years, it could turn the tide. The Latvian economy grew at around 4.5 percent in 2017. 

“To stop emigration, you need economic growth, but to achieve economic growth, you need to explain to foreign investors what you’re going to do about declining population,” he said. The best role-model is Ireland, Dombrovskis said. “Latvia is like Ireland in the 1980s—a rural country with around the same level unemployment and suffering from sluggish growth,” he said, adding that the Irish “economic miracle” happened because of highly attractive tax incentives that brought in future digital economy giants. 

With a scenic coastline and a vibrant capital city, Latvia—or at the very least Riga—could be seen as a candidate for becoming such a hipster-filled tech hub. Ernests Stals, an IT entrepreneur, said the business environment is already ideal.

“It’s cheaper and easier to do business here than elsewhere in the EU—there is less bureaucracy and taxes are lower,” Stals said. But TechHub Riga, which Stals helped found, is still a tiny affair. The main obstacle besides a lack of investment is the acute shortage of young tech experts.

“The threshold for entry for technology companies is 3,000 IT graduates a year. Latvia has around 600,” Dombrovskis said. Latvia should welcome students from such neighboring non-EU countries as Ukraine and Russia, who will happily stay behind after graduation, he said.

Perhaps the more realistic model for Dombrovskis’s Latvia is neighboring Estonia. Though its economy is growing a bit slower than Latvia’s, it has managed a slight rise in immigration. The birthplace of Skype, Estonia has been actively touting itself as a digital paradise, a branding effort that may be resonating with foreign investors.

Estonian demographer Allan Puur said his country is already benefiting from higher income levels, with average monthly salary exceeding 1,200 euros. The discrepancy with its neighbors, he said, is explained in part by the success of Estonia’s economic reforms and its close geographic connection with Helsinki, which sits across the Gulf of Finland from Estonia’s capital, Talinn. Many Estonians work in Helsinki during the day and commute home at night, he said.

Estonia touts itself as a digital economy leader in the EU and an ideal place to launch a high-tech startup or a set up a research and development facility. The government is seeking to attract foreign investors with offers of residence permits and no tax on retained or reinvested profit.

A flagship investor is ABB Ltd., a Swiss company specializing in robotics which landed in Estonia as the USSR collapsed. It now employs around 1,000 people. Other major investors include banks such as Swedbank, SEB and Nordea Bank. Telefonaktiebolaget L. M. Ericsson, the Swedish telecom giant which produces mobile base stations at its plant in Tallinn, employs 1,200 people.

Meanwhile, membership in the North Atlantic Treaty Organization has created jobs (along with more defense expenditures). The organization’s main cyber-defense center, built a decade ago in Talinn, is emblematic of the investment that comes with NATO troops and equipment spread across member states.

While joining the EU has had the unforeseen consequence of causing young people to head west, joining NATO has managed to confer some economic benefits—as the three small Baltic nations look warily to the east.

©2018 Bloomberg L.P.

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