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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












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.


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.








Postscript From Edward

I have established a dedicated Facebook page to campaign for the EU to take the issue of  emigration from countries on Europe’s periphery more seriously, in particular by insisting member states measure the problem more adequately and having Eurostat incorporate population migrations as an indicator in the Macroeconomic Imbalance Procedure Scoreboard in just the same way current account balances are. If you agree with me that this is a significant problem that needs to be given more importance then please take the time to click “like” on the page. I realize it is a tiny initiative in the face of what could become a huge problem, but sometime great things from little seeds to grow.

9 Responses to “Does Portugal Have Its Own “Shortage Of Japanese” Problem?”

RikMay 13th, 2013 at 5:37 am

You have to add the quality aspect of emigration and immigration as well.
Likely mainly well educated with proper languageskills move out. While at the other end largely semi- or uneducated come in. Another no go for getting your productivity up (or closing the gap with Germany and Co).

Probably worse for Portugal as it effectively is still more a EM than worldclass and with competition in that part of the spectrum rising with enormous speeds.

Edward Hugh Edward_HughMay 13th, 2013 at 6:53 am

Definitely Rik, the human capital exchange is highly negative. This has also been the picture in Italy during the first decade, and goes a long way to explaining why even with a million extra people working the increase in economic growth was minimal – they were trading downwards in skills.

I disagree about these countries in Southern Europe being EMs though, since EMs are still developing, and their future is generally more positive than their past. These EU periphery countries have now passed their peak. the labour force has entered long term decline. That is the whole point of this post.

A decade from now population and workforce decline will characterise most developed world economies ex-US. It seems to be inevitable that economies will eventually shrink. The debate in Japan is about how we manage this process.

But, in the case of relatively poor countries, like those in Eastern Europe, we may have to face issues of the very viability of countries, which is the point I tried to raise in my recent "suitcase mood" post.

TomMay 13th, 2013 at 10:35 am

What the GDP/WAP chart actually shows is a collapse of productivity growth since the late '90s. It looks like collapsing productivity growth caused the reversal of population growth, not the other way around.

So what caused the collapse of productivity growth? Was it the "brain drain" to rest of the EU? Sure, in part. Weren't there other growth-stifling policies, which perhaps also motivated the "brain drain"? This is where I think you should be focusing your attention.

Population can't grow forever. Personally I welcome the global population growth slowdown and hope for zero global population growth ASAP. It's true as Keynes wrote that slower population growth demands less total savings. To boost standards of living in a static population, savings must be directed into advancing technology (but not necessarily into longer production cycles, as Keynes argues). My feeling is that market processes will make those adjustments. I strongly disagree with Keynes, Krugman and Abe that manipulating interest rates or applying fiscal stimulus will help when the reasons for slow growth are structural. Looking at Portugal's GDP/WAP chart, I can't see how it can be argued that Portugal's growth collapse since the '90s is anything but structural. Population decline appears to be a secondary, exacerbating problem, not a root cause.

Edward Hugh Edward_HughMay 13th, 2013 at 11:06 am

Hi Tom,

"It looks like collapsing productivity growth caused the reversal of population growth, not the other way around."

Well, population growth (as opposed to working age population growth) came stopped due to the collapse in fertility. Full stop. I don't think there is more to that story.

The growth in working age population came to an end due to the recession, that is also clear, when the delicate balance between new immigrants and new emigrants was decisively broken. Getting into why the recession is so serious on Europe's periphery would take us beyond the bounds of the arguments in this post, which are about long term growth potential.

"Weren't there other growth-stifling policies, which perhaps also motivated the "brain drain"? "

Of course. I don't think anywhere in this analysis Valter argues otherwise, or speaks out against policies which help improve productivity and growth. He is just pointing out two things:

a) that the decline in WAP may now be irreversible,

and b) this decline will affect Portugal's possibility of growing in the longer term, since even more productivity will be needed from an even older and more conservative population. That's where the numbers start not to add up.

Take pension issues. Really the best structural reform available would be to write down the expectations of pensioners about how much they will receive. But that is politically impossible (same case Spain). A majority of voters are over 50, and the proportions of those who vote in the 60 to 70 age range is higher than it is in the 20 to 30 one. So some changes become virtually impossible.

Result, instead of lowering pensions or increasing pension contributions the working life is extended. This might make sense in a society with only 5% unemployment, but it makes no sense at all in a society like Portugal with unemployment approaching 20%, and youth unemployment over 50%. More young people simply leave due to the lack of career openings. You are cutting your leg off to save a toe. In addition extending the working life is productivity negative, even if I am certainly not against it as a long term measure. First Portugal needs to generate work for the children it has, and attract immigrants to sustain the workforce in the future. So short term I would simply reduce pensions to balance the fund and not delay the entry of young people into work.

I don't agree with you that these issues are irrelevant. And there are plenty more I could mention.

"Population can't grow forever". I absolutely agree. Neither can GDP, anywhere. It is only a matter of time. The big issue is inter-generational debt. You can keep passing higher and higher debt on to smaller and smaller numbers of working people, especially as GDP shrinks. It is only a matter of time. We can be happy with less.

But as Keynes foresaw, we have to attempt to avoid dramatic declines. This is what is happening in Portugal, and the outcome is in part being precipitated by EU approved policies. Some countries will end up dying (see my suitcase mood post on Ukraine) we would like to hope that Portugal will not be one of them.

Edward Hugh Edward_HughMay 13th, 2013 at 11:28 am

Incidentally, here's an extract from a speech by the former Bank of Japan governor, Masaaki Shirakawa, which makes essentially the same point Valter does.


TomMay 14th, 2013 at 2:41 am

Hi, Hugh, thanks. I understood all that you've added here. I also understand that Portugal's long-term growth rate wasn't the intended topic. What I'm saying is that it is anyway the unspoken topic, like it or not. All of the problems discussed here including emigration are flowing from Portugal's low long-term growth rate. Reduced fertility is a global phenomenon and in my view not a problem.

I understand that :Portugal's reversal of immigration appeared with the recession, but it looks to me like the problem was actually a collapse of productivity growth in the early 2000s. The lower your long-term growth rate, the worse things happen during recessions.

Generally I think everybody should be focused more on the productivity angle and somewhat less on the population angle. GDP growth does not have to end, so long as technology keeps advancing. Even if the global population someday shrinks, GDP can grow if productivity growth exceeds the reduction of population. Likewise it's actually possible for GDP to grow despite dwindling resources. Real GDP growth sums quantity and quality changes, involving a lot of subjectivity (eg how much better or worse is this year's Corolla than last year's?). Anyway, it's our standards of living that we really care about, of which GDP is only a rough reflection.

Shrinking population due to low fertility does pose special problems for economics and finance, which are worthy of attention. Less savings and investment are needed and investment needs to be more targeted. I think markets can solve that. I don't see why shrinking population due to low fertility is by itself a reason for standards of living to deteriorate or for their rate of improvement to slow.

People fleeing a country due to lack of opportunities is an entirely different matter. Then the topic is the lack of opportunities. Portugal is a slightly more complex story because it was seeing emigration of the skilled and immigration of the unskilled at the same time, and now the latter has disappeared or reversed resulting in net emigration. That just goes to show that Portugal focused on the wrong things, which produced low, fragile growth.

Edward Hugh Edward_HughMay 14th, 2013 at 10:46 am

Hi again,

And just briefly because you have your view, and I have mine.

"Reduced fertility is a global phenomenon and in my view not a problem"

Maybe not. Probably it is inevitable, but it is a problem for our current economic system due to the issue of generation shrinkage and legacy debt coupled with underfunded pension and health systems. This is the challenge facing us.

"Even if the global population someday shrinks, GDP can grow if productivity growth exceeds the reduction of population".

This is a big if. Productivity would have to do a lot better than it has done over the last half century in mature economies. Catch up economies obviously have high levels of productivity growth.

The thing is, with structural "under-demand", technology is as likely to accelerate deflation as anything else. Japan is a world leader in robotics, and hardly backward when it comes to innovation. I'm not convinced at all of the "prductivity can solve everything argument". I'd like to see it in operation in at least one rapidly shrinking workforce society first.

"Less savings and investment are needed and investment needs to be more targeted. I think markets can solve that".

I'd be interested for some pointers as to how. The excess savings and lack of investment we see seem to be directly related to population ageing, following the simple version of the Modigliani Life Cycle model.

TomMay 14th, 2013 at 1:42 pm

Thanks. I agree with a lot of this, especially the problem of underfunded pensions and in some places health systems, although that's caused more by living longer than by having less kids.

I'm not worried by technology-driven deflation. It doesn't discourage consumption. Even mild general consumer price deflation doesn't much discourage consumption, so long as real interest rates are not unreasonably high. A 1% deflation rate and zero demand deposit interest rate is no more discouraging of consumption than a 2% inflation rate and 3% demand deposit interest rate.

I think productivity in theory can solve everything, but in practice can only solve some things. Nobody's perfect.

By "excess savings and lack of investment" I assume you mean Japan, since that implies a current account surplus and no one's much worried about northern Europe (maybe because it's had decent productivity growth?). It's true that Japan has traditionally been a high savings country and for decades it has largely exported that savings. Japan Inc's actually a very successful foreign investor and its foreign earnings are a large part of what has kept the yen so strong till recently.

My understanding of Modigliani's theory as it relates to Japan is that it so far has correctly predicted a declining savings rate as the population ages. This works fine with population shrinking but not so well with the need to support larger ratios of retired to working. The only solutions to the latter problem are more savings and investment, or later retirement.

The market mechanisms that adjust savings and investment to the needed level are returns on investment and interest rates. The more S&I needed, the higher ROI and IR. The less needed, the lower.

Best regards.

BWildsMay 25th, 2013 at 11:47 am

The GDP of a country is only one way to measure it's ability to produce wealth. A work force can shrink and still have only a small or no effect on the ability to produce that wealth. The problem is that it often results in less demand from money moving about and thus the appearance of a decline.

A better way to view a nations debt would be to look at it divided by the population realizing many of these men, women, or children can not or do not and thus will be unable to pay their share. If the number produced is massive, unsustainable, and on the increase in relation to incomes and private wealth, it is safe to assume a problem exist.

I did this on the deficit in America in a post on my blog site. The post shows that these numbers can be very ugly. Other countries that have encountered this problem will agree when the issue has to be addressed. The result is that the government must break promised made. For more on the ugly math see below,