<p><em><strong>At the 2</strong><sup><strong>nd</strong></sup><strong> International Monetary Fund, IMF and Croatian National Bank,CNB Dubrovnik Conference titled “Navigating the Future in Central, Eastern, and Southeastern Europe, Tao Zhang, Deputy Managing Director, International Monetary Fund, reflects on the significance of the demographic transition by the countries of Central, Eastern, and Southeastern Europe </strong></em></p>



<p>Good morning!</p>



<p>Dobro jutro!</p>



<p>Thank you, your excellency, ;Andrej Plenković, Prime Minister for the kind invitation to come to
Croatia. Also, I am grateful toGovernor Vujčić for the kind introduction and to all
colleagues from the Central Bank of Croatia for organizing with us this second
conference in Dubrovnik. ;</p>



<p>I am delighted to have the opportunity to visit this unique
city. Given the title of this conference: “Navigating the Future in Central,
Eastern, and Southeastern Europe,” it is appropriate that we have a seaport as
a backdrop for our discussions.</p>



<p>Today, I would like to talk about potentially one of the most
significant challenges for the region in sustaining strong economic growth:
that is, a shrinking and aging population.</p>



<p>I would like to start by outlining the demographic trends facing
Central, Eastern, and Southeastern Europe, CESEE, drawing on new IMF research
being released today.</p>



<p>Then, I would like to suggest some policy options to counter these
adverse demographic trends.</p>



<p>And finally, I will focus on the critical role that technology
might play as part of a wider response to these demographic
changes. ; ; ; ;</p>



<p>1. Demographic trends and challenges</p>



<p>The countries of Central, Eastern, and Southeastern Europe are
facing a significant demographic transition: the population is rapidly
shrinking and becoming older. ;</p>



<p>From one view point, this changing profile is, literally, living
proof of the region’s recent economic progress. ; ;It is to be
celebrated.</p>



<p>Over the past three decades, living standards in the region have
risen rapidly. ; ;GDP per capita has more than doubled, and per capita
incomes now approach those of Western Europe in some of the countries.
Longevity has also risen, with life expectancy increasing from 67 to almost 74
years since 1995. ;</p>



<p>On the other hand, increased longevity, together with declining
fertility rates and emigration have had less positive effects. ; ;The
region is now facing severe pressures. ; ;Pressures that will
increasingly strain the labor market, government resources, and economic
growth.</p>



<p>New IMF research—which we are releasing today—suggests that
the ;population of the region, excluding Turkey, will decline by 12 percent
by 2050 due to aging and migration. The reduction in the labor force is likely
to be even larger: down 25 percent over the next three decades.</p>



<p>This means that the working population will have to support more
than twice the number of elderly people that it currently does.<a>[1]</a></p>



<p>These demographic challenges could significantly slow economic
growth. ; ;Shrinking labor supply and lower productivity of older
workers, together with greater pressure on public finances, could cost
countries about 1 percent of GDP per year.</p>



<p>This will also slow income convergence. Our paper estimates
that, in the absence of demographic pressures, per capita GDP in the region
could have reached 74 percent of Western European levels in 2050, up from 52
percent in 2020. With the demographic headwinds, CESEE’s per capita GDP is
projected to reach only 60 percent of Western European levels in the same time
frame.</p>



<p>This picture resembles the demographic transition in Japan that
began a ;decade ago. But CESEE is facing demographic pressures at an
earlier stage of development ;than many advanced ;economies.</p>



<p>At a similar demographic point, per capita incomes in Sweden,
Norway, or Germany were close to US levels. In contrast, CESEE economies are
hitting this critical juncture with per capita income at ;<em>half ;</em>that ;level.</p>



<p>Countries in the region are at risk of getting old before
becoming rich. ; ;How then can policymakers be good sailors and tackle
these demographic headwinds?</p>



<p>2. How to address the demographic
transition?</p>



<p>Of course, priorities and solutions will differ across
countries, but today, I would like to propose three responses to mitigate the
effects of the demographic transition.</p>



<p>The first would be to expand the size
and effectiveness of the labor force.</p>



<p>In CESEE, adverse demographic trends are exacerbated by an exodus
of mostly young and educated workers.</p>



<p>Between 1995 and 2017, CESEE countries, excluding Russia and
Turkey, lost around 7 percent of their workforce.<a>[2]</a></p>



<p>Policies that stem emigration and create incentives for the return
of those who left—some of which I will mention later—can help boost labor
supply.</p>



<p>Some countries in the region have chosen to respond to the
shortage of workers by supporting the hiring of more foreign workers. ;</p>



<p>Immigration is a political choice but ruling it out puts a greater
burden on other policies. I will not elaborate on this further since you will
hear more about this from Prof. Dustmann during his keynote speech.</p>



<p>Other ways to increase the size of the
workforce ;could include encouraging more women and older workers into
work. ;</p>



<p>More working women could significantly boost labor supply. At 60
percent, female labor force participation in the region is almost 10 percentage
points lower than the average in Western Europe.<a>[3]</a>Attracting
more women into the labor force ;would require more investment in childcare
facilities, part-time contracts, and flexible work arrangements. ;</p>



<p>Policymakers could also consider raising the retirement
age ;and ensure pensions are compatible with work. Nevertheless, for older
workers to remain in the labor force, health outcomes would need to improve.</p>



<p>But, implementing these two set measures may still not be
enough. ; ;Our research finds that, ;alone, they cannot compensate
for the dramatic demographic transition to come.</p>



<p>3. Can technological advances help
address the demographic challenge?</p>



<p>Let me focus then on a third policy area that could help counter
the demographic challenge we face. ; ;That is, technology.</p>



<p>The effective use of technology is already a reality in the region
where many firms have embraced automation.</p>



<p>Robot penetration rates in Hungary, Poland, Slovenia, and the Slovak Republic are well above those of other middle-income economies and this trend is set to continue. Slovakia already has 2.5 robots per 1000 workers, half the ratio of Germany.</p>



<p>And the International Federation of Robotics projects a 21 percent
annual growth rate in robot shipments to the region by the end of this decade,
implying that soon the region would have double the robots of the average
European economy.</p>



<p>This intense process of automation is happening not only in the
automotive industry, but also in the food and beverages industry and in the
life science sector.</p>



<p>Against a background of increasing automation, many employees
worry that robots will displace human workers. ; ;But in CESEE,
increasing automation has coincided with rising employment.</p>



<p>CESEE is leading the way in automation among middle-income
countries. But to ensure that this potentially disruptive force continues to
benefit workers, technology also needs to be accompanied by appropriate
policies. Two set of measures are crucial for technology to be part of the
solution to the demographic woes of the region.</p>



<p>Policies which invest in human capital
and enhance welfare. ;</p>



<p>A comprehensive reform of education systems and substantial
investment in lifelong learning and retraining schemes are a must. These
measures should be combined with policies that prevent a permanent brain drain
from the region. Safety nets will also need to be enhanced to ensure the
benefits of technology are widely shared.</p>



<p>Policies that enhance governance,
upgrade infrastructure, and modernize regulation.</p>



<p>Better institutions can reattract some of the most educated
people who left. Together with modern regulations and better infrastructure,
stronger governance can also help the business environment, promote innovation
and greater sharing of the benefits of technology.</p>



<p>Conclusion</p>



<p>So, let me conclude. ; ;There is no question that the
countries of Central, Eastern, and Southeastern Europe face a daunting
demographic challenge. However, this challenge differs appreciably across
countries.</p>



<p>It is a challenge that will require robust and imaginative
responses and those will differ across countries. ; ;As we have seen,
many in the region are rising to the challenge and are already at work on
effective solutions.</p>



<p>I look forward to a mutual exchange of ideas at this
conference ;to see how we, ;policymakers, ;can boost the labor
force and ensure new technologies help address the demographic challenges!</p>



<p>Thank you very much.</p>

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