Mistaken Malthusianism: Western Warnings May Miss the Mark

One of the most fascinating aspects of Russian reform has always been the number of people advocating Western ideas as the way forward, without evaluating whether these ideas are effective or well-conceived.

Russia’s attempts at pension reform are a prime example. In an article he recently penned for AmCham News, a newsletter published by the American Chamber of Commerce in Russia, Bernard Sucher, chairman of Alfa Capital, rolled out the usual warnings about an impending “pension bomb.” He argued that Russia was facing the same problems as the West as a result of demographic trends and falling birth rates, putting greater burdens on the state pension system and necessitating increased reliance on individual pensions.

This situation means that investment in the stock market will be necessary to generate adequate returns.

But Russia is even worse off than the developed nations because, as Sucher rightly points out, its poor level of public health also means lower longevity, so it is faced with a declining population as well. Economists say a country with a falling population suffers from low growth and a shortfall of labor, meaning Western countries will have to import people from the third world to cover the deficit.

It is remarkable how widespread these views are within the liberal economic camp. Standard & Poor’s recently forecast that the credit ratings of most of the G8 countries will probably be downgraded in coming years due to the pension bomb. “Experts” from the Big Four, countless think tanks, investment banks and publications like The Economist, which believes in the supremacy of the American model in all things, all argue that benefits have to be reduced and people have to provide for themselves.

Such is the poverty of much Western economic thinking. But let’s look a little closer at these assumptions. Take the idea of investing in stocks and bonds. The belief that the overwhelmingly bull markets we have seen in the West since 1982 are typical, or that economies can grow forever and corporations and their dividends will continue to provide the solution reveals a lack of familiarity with history.

In the 1990s, price to earnings ratios lost complete touch with reality and, in the future, returns on equity and debt may simply be insufficient to fund pensions, not the least because any prolonged recession would knock even the best calculations and forecasts completely off the tracks.

Extrapolating from the past and the historically superior returns from the stock market is perhaps the best guide to the future that we have, but it is still a pretty risky business. And this is a particular problem in Russia, which, since the high-water mark of 9 percent of GDP in 2000, has been struggling to manage annual growth figures in the five to seven-percent range, at a time when more appropriate policies might easily propel this number into double figures, with a corresponding growth in company profits.

It is deeply worrying that despite Russia’s huge potential and the high oil prices of recent years, the country has failed significantly to extract maximum benefit from the favorable global economy and has even seen a slight decline in oil production lately.

But there are much deeper flaws in Western thinking on pensions. It is paradoxical that a publication such as The Economist, along with countless other free market institutions that trumpet the benefits of progress, constantly wheel out what are in effect Malthusian arguments in favor of wholesale change to pension systems.

Just to recap, Thomas Malthus, a 19th-century economist, argued that population growth would outstrip agricultural production, and lead to starvation and declining populations?

But, as The Economist and its ilk are fond of noting, Malthus was proven wrong as constant improvements in technology over the past 200 years have led to a steady rise in productivity – and to ever higher standards of living in developed countries. Just look, for example, at the increasing quality and quantities of domestic electronic appliances available to most families now, compared to those of the 1960s – or even the 1980s – or at the vacations to ever more distant and exotic locations.

If productivity keeps rising, do pensions and benefits really have to fall? Maintaining present levels is possible, but this would require a fundamental rethink about the way we live and work.

But there doesn’t seem to be a valid reason, for instance, why the vast knowledge and experience of older people should be lost to society and business as soon as they retire. Many senior citizens do not want to live a life of idleness at all, whether in luxury or not, and would much prefer some kind of employment for the fun of it. My father is just one such 85-year old who would choose making a contribution over enforced retirement.

But, as in many other areas, Russia’s demographic trends differ from those of developed countries, so Western arguments might not apply. Around 300 children are now born in Moscow every day – about twice as many as five years ago. Indeed, experts are forecasting that 2005 will see the highest number of births in 20 years.

So, while foreign and Russian investors have been shocked by the YUKOS affair, ordinary Muscovites are engaged in more fruitful activities – just as was to be expected as the country’s economy recovered and people became more confident. As is often the case, Moscow is the chief beneficiary of the country’s recovery and increased stability. But if the trends in the capital are sustained and spread across the country, Russia will once again buck the forecasts.

Ian Pryde is a Moscow-based consultant and journalist. He contributed this comment to Russia Profile.

Special to Russia Profile, an online and monthly print magazine dedicated to Russia and published jointly by RIA-Novosti and Independent Media, Moscow.

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