COMMENT: Ukraine – the incredible shrinking country

COMMENT: Ukraine – the incredible shrinking country
One of Ukraine's growing elderly population.
By Mark Adomanis in Philadelphia April 7, 2016

After spending the better part of two years cheerleading for Ukraine's "European path", many in the West are starting to notice that, despite quite a lot of excited rhetoric, not very much has actually changed.

Whether it is President Petro Poroshenko’s inclusion in the Panama Papers, or the New York Times’ belated recognition of the country’s “unyielding corruption”, or the Dutch rejecting the EU-Ukraine free trade and association deal in a referendum, the mainstream consensus on Ukraine is rapidly turning sour.

There’s an increased understanding that talking about fighting corruption is a very poor substitute for actually instituting the policies and procedures that can reduce or eliminate it. Ukraine has been very good at the former, but exceedingly poor at the latter, as evidenced by the miniscule improvements in its Transparency International Corruptions Perceptions Index and the EU’s continued reluctance to extend visa-free travel.

Corruption in Ukraine is, quite obviously, a huge problem. When a country’s president can use a reference he obtained from a bank that he also owns, to open an overseas shell corporation that (according to the Kiev Post at least) saved him millions of dollars in taxes, it is clear that corruption has gone far beyond the street level and up into the highest corridors of power.

But while corruption is a threat to Ukraine’s future as an independent state, it arguably pales in importance to another crisis that is raging out of control: demographic decline.

First, some perspective. While Russia has been loudly criticized in the West as a pitiful “dying nation”, in reality Ukraine’s demographic situation has been consistently worse than Russia’s over virtually the entire post-Soviet timeframe. Without much exaggeration, Ukraine’s population started to shrink earlier than Russia’s, shrank more quickly than Russia’s, and, while Russia has recently experienced a modest rebound, has continued to shrink without interruption.

By 2016, Ukraine (including the territory of Crimea) had lost nearly 15% of its 1992 population – a cumulative loss of slightly more than 7mn people. Russia, with a population roughly three times the size of Ukraine’s, had a cumulative loss of roughly 4.3mn (that is, about 3% of its population in 1992). Ukraine’s population collapse has thus been considerably more severe than Russia’s not just in relative but even in absolute terms. 

Why does any of this matter? Well, demography is of huge relevance to the future of Ukraine’s economy: the kind of industry-driven economic development which other Eastern European countries like Poland and Slovakia have successfully pulled off is basically impossible without workers. When Poland and Slovakia first started down the path of EU membership, their demographic indicators were far better than Ukraine’s: they had stable populations and workforces that were actually growing both in relative (as a share of the population) and absolute terms.

However, according to data from Ukraine’s state statistical agency, the country’s workforce is already in long-term secular decline. Even more worrisome is the fact that this decline has accelerated rapidly over just the past few years:

Think about what the above chart suggests for the already shaky finances of Ukraine’s system of state pensions. A growing pension burden (an inevitability in a rapidly aging society like Ukraine’s) will have to be serviced by an already shrinking group of workers. That’s problematic not for what it means today – at the moment Ukraine can more or less comfortably meet its pension obligations – but for what it says about the next five, 10, 15 years.

Unlike Russia, which has both attracted a massive number of “guest workers” from Central Asia and which also has a massive cash-generating energy sector – two factors which help to cushion if not eliminate the economic blow from a shrinking workforce – Ukraine will be left to deal with the financial consequences of aging more or less on its own.

Maybe Ukraine will find a way to square the circle outlined above: perhaps its politicians will institute liberalizing economic reforms that will enable the country to generate enough economic growth to overcome the “headwinds” from its horrible demographics. But given the country’s performance to date and unwillingness of its political elite to change the rules of the game, it’s far easier to imagine a situation in which Ukraine’s demographics, which as I hope the above has made clear are among the very worst in the entire world, gradually push it into perpetual economic stagnation.

There is, unfortunately, no quick or easy fix for the problems outlined above, no single “lever” that the government can pull in order to significantly boost fertility and reduce mortality. Government policy can help on the margins, but to a large extent family planning decisions are made based upon a country’s prevailing economic and political environment, and the Ukrainian government cannot magically improve this overnight. What’s far more important is that the problems above are at least acknowledged as challenges, something which has manifestly not happened.

As things stand, Ukraine’s experiment in European integration unfortunately looks like it is going to crash on the rocks of demographic reality.

Mark Adomanis is a Wharton MBA by day, Russia analyst by night. Follow him on @MarkAdomanis