Despite increasing developed-to-developing country migration, further increases in such flows account for by far the largest part of the estimated gains from liberalizing cross-border movements of people. And the estimated gains are themselves very large: as noted in chapter 4, the gains from completely opening up immigration have been estimated to be so large as to exceed current world GDP; and even more conservative estimates of partial moves to increase immigration imply gains that dwarf those from liberalization of trade and capital flows.26 Workers, particularly those who move freely from a poor country to a rich one with proper documents, gain tremendously. Most of us are excited about a salary raise of a few percentage points. Compare that to a World Bank estimate that the real income of workers moving from developing to developed countries triples!27 Immigrants and their children often enjoy other benefits such as improved education and health care. And migrants from the world's poorest countries benefit even more, on average enjoying “a 15-fold increase in income, a doubling in education enrolment rate, and a 16-fold reduction in child mortality.” Yet, despite these gains, the poorest are also the least mobile. The “median emigration rate in countries with low levels of human development is only about one third the rate out of countries with high levels of human development.”28
While the discussion of immigration in chapter 4 mostly focused on economic benefits, the cultural, administrative, and geographic advantages of migration are also worth mentioning. Cultural benefits, such as access to diverse cuisines, are plain. Administratively, migrants themselves often enjoy political benefits such as greater freedom and more effective governance in their destination countries. And to cite a geographic example, newcomers from a country such as Bangladesh (with a population density of 1,125 people per square kilometer) appreciate the amount of space available in countries like Australia and Canada (with 3 people per square kilometer).
To summarize this section, the wide gaps in living standards between rich countries and poor ones and the low levels of migration relative to other kinds of cross-border flows make large potential gains from migration plausible. The more controversial question relates to negative impacts and whether they are sufficient to justify giving up the gains. We turn next to fears about migration in receiving countries and then finally to fears in sending countries.
Resistance Among Receivers
The most prevalent fears about inflows of migrants relate to their impacts on labor markets. Natives fear that an influx of foreigners will mean more competition for jobs, lower wages, and potentially more unemployment. If all workers were identical and the demand for labor were fixed, such fears would make more sense, for then an influx of immigrants would indeed increase the supply of labor, reducing natives' wages or employment. Instead, the reality is that immigrants' labor substitutes for some natives' labor, potentially harming them, but at the same time it complements other natives' labor, helping to improve their employment and wage prospects. One notable complementarity is how immigrant child care workers help native women in developed countries stay in the workforce. And immigrants also demand goods and services in the economies they move to, creating additional work for natives. Weighing these factors, economists have largely concluded that the aggregate impact of immigration for developed countries is positive. One study estimates that destination countries “would capture about one-fifth of the gains from a 5 percent increase in the number of migrants in developed countries.”29
It is also worth addressing the concern about migration's impact on unskilled or low-skilled native workers in developed countries, since a large proportion of immigrants from developing countries—especially the undocumented—have only limited education. Two-thirds of illegal immigrants entering the United States since 1980 never completed high school.30 Most solid research, however, indicates that the impact of immigration on low-skilled native workers is quite small. One study that stirred up a lot of fear was George Borjas's 2003 simulation that estimated that immigration into the United States depressed average wages by 3.2 percent and wages of high school dropouts by 8.9 percent.31 However, that study assumed that native workers and immigrants were perfect substitutes and that capital stocks don't adjust to changes in the labor supply.32 Allowing for capital stocks to adjust, more recent research by Borjas and Lawrence Katz indicates that illegal immigration had a negligible or even positive impact on Americans' average wages and that the wages of high school dropouts were reduced by only 3.6 percent.33 Even more recent research by Gianmarco Ottaviano and Giovanni Peri concludes that “immigration (1990–2006) had small negative effects in the short run on native workers with no high school degree (-0.7%) and on average wages (-0.4%) while it had small positive effects on native workers with no high school degree (+0.3%) and on average native wages (+0.6%) in the long run.”34
Research on the impact of immigration on natives' employment levels showed a similar pattern: “One European study found that a 10 percent increase in the share of migrants in total employment would lower the employment of residents by between 0.2 and 0.7%,” but research also indicated that “the massive inflows associated with European Union accession led neither to displacement of local workers nor to unemployment in Ireland and the U.K.”35
If big econometric studies don't convince you that immigration doesn't decimate natives' employment and wage prospects, consider a concrete historical example. Look at what happened when Britain opened up to migration from eastern Europe: “Growth soared. Unemployment fell. Wages continued to rise. Newcomers paid much more in taxes than they took out in benefits and public services. After the global financial crisis plunged the economy into recession, many Poles went home rather than remain unemployed in Britain.”36
Freer immigration is necessary, too, from the point of view of labor quality. At present, developing countries have twice the number of university-educated professionals as developed countries. And immigrants tend to be big contributors to entrepreneurship. According to Legrain, “Nearly half of Silicon Valley's venture capital-funded startups were cofounded by immigrants,” who are “30 percent more likely than native-born Americans to start their own business.”37
Immigration can also help address demographic imbalances, staving off shrinking populations and workforce sizes in developed countries.38 But before we get too excited (or fearful) about youths from Niger heading en masse to Japan to staff factories and care for the elderly, we should apply some foresight and recognize that migrants too eventually grow old, tempering the impact of migration on dependency ratios. Thus, we get calculations like the UN's estimate that Japan would have to take on 550 million migrants (more than five times its present population) to match its 1995 dependency ratio in 2050.39 Migration indeed can help address the problem of old-age dependency, but it's not a silver bullet. Temporary migration is particularly helpful in this context, but also raises difficult questions about how to manage transitions and enforce return requirements, while respecting the rights and interests of all parties involved.40 So, immigration should be part of a policy mix that also involves boosting productivity, increasing labor force participation, and in many cases facilitating higher fertility and raising retirement ages.
Let's turn briefly to cultural and administrative fears about migration into developed countries. From a cultural standpoint, it's true that some natives prefer to avoid inward migration in order to preserve the historic cultural and ethnic flavor of their communities. That's a legitimate interest that should be weighed against the benefits of immigration. It's important, however, not to let small numbers of impassioned opponents spoil the debate. Many communities value diversity and welcome the cultural richness that immigrants can contribute.
Regarding administrative fears, there are concerns that immigration leads to higher levels of crime. Data on incarceration rates in the United States should provide some comfort. According to a UN report, “On average, among men aged 18 to 39 (who comprise the vast majority of the prison population), the incarceration rate
of the locally born was 3.5 percent, five times higher than the 0.7 percent rate of the foreign-born.” European data do show higher incarceration rates for migrants in many countries and serve as one reminder of multidimensional integration challenges.41
Another “administrative” fear about immigrants is that they will use up proportionately more welfare and other benefits than natives and therefore represent a net drain on receiving countries. But despite its administrative accents, this is really an argument about one of the cost elements that cost-benefit analyses of immigration of the sort undertaken by economists and cited in the second half of this chapter do try to account for.
Persistence with such arguments reflects the zero-sum conviction that there is a fixed amount of prosperity to go around and if immigrants tap into it, there will be less left for natives. The best counter begins with the reminder that differences in labor productivity have a lot to do with the context in which someone works, rather than just his or her own characteristics. So, the impact of people moving from poor countries to rich ones isn't usually to export poverty. Successful migration from developing to developed countries takes people who are producing relatively little due to underdevelopment at home and supercharges their productivity by connecting them with more advanced institutions, technology, management practices, and so on. If their gains come mainly from increased productivity, no one has to lose at their expense.
Suspicion Among Senders
The big fear about migration in most poor countries is that brain drain of skilled professionals departing to earn higher wages in rich countries deprives the local economy of talent and steals away the expected returns on the country's scarce education investment. The evidence here is also surprisingly reassuring. While the number of skilled migrants out of poor countries has risen, the proportion of skilled workers leaving has not, due to rising education levels.42 And there are intriguing findings indicating that the possibility of emigration actually contributes to more human capital formation in poor countries, at least in part offsetting the loss of skills when educated workers emigrate. The basic idea is that if educational attainment is a “ticket” to emigration, more young people may work toward that possibility, even though only some of them will actually leave the country.43
Set against concerns about brain drain are huge gains that those who stay behind in developing countries reap when their conationals—especially family members—go abroad. The most obvious gain is money that migrants send back to their home countries, transfers known as remittances. Remittance flows, which exceed foreign aid, have been linked to higher educational enrollment of children who remain at home as well as “household welfare, nutrition, food, health, and living conditions in places of origin.”44
Migrants also bring skills back to developing countries, contribute to innovation, provide access to international networks, and so on. These effects are better appreciated when one considers that skilled migration isn't just a one-way flow. One recent estimate indicates that about half of skilled emigrants return to their home countries, typically after about five years.45 Another study suggests that far lower return rates suffice to ensure positive social gains for some of the world's smallest, most vulnerable countries, the Pacific Islands, from the migration of skilled labor to Australia and New Zealand.46 So, mobility of skilled workers is far from a pure loss or brain drain for developing countries. Rather, diasporas are a resource that countries such as India are increasingly trying to tap for developmental purposes—as I can testify from personal experience.
Toward a More Balanced World
Flows of capital and of migrants can, if unbalanced, cumulate into substantial stocks. Both suggest a need for policy intervention because of the long lags to which purely private, market-based processes for adjusting those stocks are likely to be subject. Regarding capital imbalances, the big surprise about the global financial crisis to many economists (or at least to many of those who were surprised) was not that capital markets could get out of line with fundamentals but how far out of line they could get and for how long. As far as human imbalances are concerned, governments already intervene heavily, mostly to restrict cross-border flows, and decentralized, domestic responses to demographic forecasts—what one might call the “laissez-faire l'amour” approach to population policy—would presumably take a generation to kick in, if at all.
That said, the risks and rewards involved in “holding” stocks of foreign capital and of migrants couldn't be more different. Capital even- tually has to be paid back, and the only ways to get out of that obligation—default or devaluation—are highly damaging. Furthermore, big debts can turn moderate financial problems into crises. Migration, in contrast, tends to be a moderating force, with flows following a more countercyclical pattern—and ADDING value to sending and receiving countries as well as personally to the migrants in multiple ways. Furthermore, migrant stocks don't have to be returned. Naturalization is a far more benign unwinding process than default or devaluation. It is unsurprising, then, that this chapter suggested rather different approaches to dealing with imbalances in cross-border capital and labor flows.
The simple models described in the first half of this chapter indicate that while capital imbalances are not one of the standard forms of market failure recognized by economists, they can create significant problems. The previous chapter described how rapid unexpected outflows of capital can suck the air out of an economy. This chapter focused on how chronic capital imbalances can, even in simple models that exclude standard sources of market failure, bleed a country of its productive capacity, putting downward pressure on consumption and living standards over time.
Since most of us have grown up expecting to enjoy higher living standards than our parents (refer back to figure 1-1 for some of the reasons why), and since it is hard to ratchet down firmly held expectations, these are fearsome prospects. The good news is that they need not come to pass. Coordinated policy action can bring about a more gradual unwinding of capital imbalances, perhaps through a binding agreement on current account limits. But as we have seen, there are fundamental drivers such as demography involved as well as many other interlocking factors, so the process of any such unwinding is likely to be somewhat tumultuous, with particular tensions to be expected between the United States and China. Chapter 13 provides a broader perspective on the U.S.-China relationship and how it might be managed in the decades to come.
The policy recommendations regarding unbalanced cross-border flows of people are very different and far more positive: facilitate more migration, especially from developing to developed countries. But they must reckon with limits to the stock of immigrants most societies feel they can handle. Folk wisdom suggests that there is a significant increase in the salience and stickiness of immigration-related issues when the percentage of the population born overseas hits the low teens, although this estimate probably also depends on whether one is talking about a neighborhood or a large nation-state, how recently immigrant intensity has built up, and the state of the general economy (anti-immigrant sentiment tends to be countercyclical). In any case, the task of an enlightened government in this context is to make its country more receptive to the level of immigration required—and ensure that some integration as well as immigration takes place—rather than just to cave in to political pressures. Part III of this book provides additional discussion about how to pull this off.
If one still can't abide the idea of many more permanent immigrants, guest worker programs provide an alternative. Thus, Qatar and the UAE, where migrants greatly outnumber natives, essentially segregate labor markets for the two groups—although it is hard to call them models given how badly many of the migrant workers are treated. Of course, even more humane guest worker programs might offend sensibilities that see all men and women as created equal, but are such programs really much worse than restrictive visa policies?
To conclude, immigration serves as a counterpoint to financial imbalances in reminding us that manag
ing imbalances doesn't always mean restricting flows. In that sense, the examples parallel the pairing in the previous chapter, which explained how placing some limitations on capital flows might makes us safer—but also why the reverse would be true for trade in food. This chapter has emphasized the need for governments to take coordinated action to control capital imbalances but also the huge losses imposed by preventing people from crossing borders to reach places where they can be more productive. These contrasts foreshadow the policy recommendations for World 3.0 that are developed further in chapter 12 and that call for government to serve dual functions, of integrator and regulator.
The next chapter continues where this one leaves off in considering the impact of globalization on labor. In a sense, it touches on another potential kind of imbalance that has been discussed most explicitly in the context of technological progress rather than globalization. Nearly eighty years ago, in the throes of the last really big global financial and economic crisis, Nobel Prize winner John Hicks pointed out that there was no economic reason to expect labor's share of GDP to stay constant over time. Hicks explained that labor-saving technological change could actually reduce labor's share of GDP over time, and Pigou added the even gloomier possibility of absolute labor-saving change reducing the absolute wage level.47 Many fear that globalization may exert similar pressure on workers' earnings and job security. It is to such worries that we turn next.
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