Monday, September 18, 2006

Immigration, Demographics, and Economics

Firstly, I would like to thank Edward for inviting me to post on DM. We have been having an ongoing discussion on the Indian Economy blog over the past two weeks and he thought this might be a good forum for me to expound on some of my views. Some of what I write might repeat previous posts and threads, and I would ask regular DM readers to forgive me for this until I am better acquainted with the blog.

Over the past few years, I have studied demographics and the economics of globalization and practiced to what extent I could through my jobs. What interests me most about the current state of demographic change throughout the world – is the fact that because of globalization, for the first time international migration has become a significant variable in how these changes translate into economic growth. To put it another way, the graying of parts of the world and population explosions in others can both be mitigated by net positive or net negative international migration, respectively. Edward’s recent post on Ireland only serves to highlight this.

The larger concern, in my view, is whether these dynamics will last. After all, doesn’t logic dictate that international immigration will flow to where there is more economic opportunity? In that case, the current net positive immigration rates of the slow-growing EU and US, and the net negative rates of fast-growing places like India and China (along with other developing nations) will tend towards a reversal – which would only exacerbate the demographic crisis. This is certainly reflected in some recent anecdotal experiences: my best friend and my brother both recently left lucrative Wall Street jobs for investment banking jobs in Mumbai (admittedly, a very small sub-section of society!). They took big pay cuts, but the promise of income growth was far bigger there – banking compensation (salary + bonus) has been doubling every year there, compared to ~10-15% increases in New York.

The more balanced view is probably that decisions to immigrate are based not just on opportunity which exists on the margin, but also on the absolute standard of living in the receiving country. This would of course imply an immigration advantage to the developed regions for quite some time to come. However, another interesting dynamic then comes into play. Presumably, for younger workers (for clarity sake, say ages 25-40) the difference in growth rates is what is more important, whereas for older workers (40-65), the standard of living is the more important concern. This would then imply a shifting structure—whereby near-retirees are moving to the US and EU, and young workers are moving to India and China (I am using regional oversimplifications of course – in reality, the demographic dynamics within and amongst nations/regions are far more complex). This would, of course, compound the problems and benefits of the regional age distributions.

A final, more imponderable, question also comes to mind: what level of international immigration can countries tolerate socially and politically? A growing American chorus of concern over (illegal) Mexican immigrants, and vague European gripes about Polish plumbers come to mind as I wonder whether nations can retain their national fiber if they become “polyglot boarding houses for the rest of the world” (to quote Teddy Roosevelt). Even having grown up on three different continents, it is still difficult for me to imagine a world where ethnic/racial/religious backgrounds of immigrants cease to polarize the judgments of the local populations.

Rather than feigning a conclusion, perhaps it is best to end with a question I should have asked at the beginning of the post: What effect will international immigration have on the different demographic and economic dynamics of the major regions of the world?

Here is a link from the IMF report which discusses some of this.

16 comments:

Edward Hugh said...

"The larger concern, in my view, is whether these dynamics will last. After all, doesn’t logic dictate that international immigration will flow to where there is more economic opportunity?"

This, I think Nandan, is the heart of the matter. In the EU we can already see this process at work especially in the relative situation between countries - the UK, Ireland, Greece, Spain have all been able to leverage their extra growth to attract more migrants. Sweden has increased to some extent at the expense of Denmark, this may also be happening between countries in the old Eastern Europe, the Baltic States are definitely loosing population, etc etc.

In the rapidly developing world this process is still to make itself felt, we have Indians returning, retired Japanese managers working in China, Turkey is now attracting migrants from the middle east etc.

But at some stage there will be a 'tipping point', and the rapidly growing economies will become a pole of attraction. It is very hard right now to see how all this will pan out, but we definitely have it earmarked here at DM as something to follow.

"decisions to immigrate are based not just on opportunity which exists on the margin, but also on the absolute standard of living in the receiving country."

I would say that the key factor is the functioning of the labour market and the availabilty of work.

"A final, more imponderable, question also comes to mind: what level of international immigration can countries tolerate socially and politically?"

This would be the other point.The indications seem to be that where there is growth and widespread employment opportunity this is an easier process.

Sweden currently has about 10% of the population born outside Sweden, Spain in six years has achieved the same level. This may be near the short term carrying-capacity.

Basically it is important here to distinguish between migrants and their children who are born in, or grow up in, the receiving country. The expectations situation is different, and this is where most of the problems arise.

The second generation is a 'difficult' generation. By the third generation this issue seems to have resolved itself since both parties have normally come to terms with each other to a far greater degree.

CV said...

Hi Nandan,

First of all I should say that it is very nice to have you aboard with us. I will begin with the end so to speak ...

'What effect will international immigration have on the different demographic and economic dynamics of the major regions of the world?'

No one can obviously answer this but it seems clear to me that many developed countries will enter a stage where international immigration becomes zero-sum game in the sense that developed countries will have to fight with each other in order to attract the sufficient amount of human captial to sustain a growth rate which is politically acceptable. In many ways we are seeing the initial manoevres to this and countries which today have strict immigration laws will be relatively worse off ... Denmark I am sad to say falls in this category.

On the flipside developing economies will also have to fight to actually keep their skilled labour because of the dynamics of outflowing migration away from their countries ... Germany provides an interesting case here.

In essence my view of internatioal immigration is like a dark horse in the whole demographic projection scenario. The point is that we know the demographic transition (DT) is not over yet and we know therefore that fertility levels do not stabilize at 2.1. Following this we also know, or at least we can assume, that the demographic dividend (DD) is not a free lunch. As this reality becomes more clear for policy makers we will see some dramatic changes in the way immigration laws in the developed world are seen ... that, at least, is my prediction.

Basically right now OECD countries are looking at dependancy ratios as a result of ageing populations. All the recent pension reforms represent a case in point here and they are effectively a function of rising life expectancy. But the implications of lowest-low fertility and migration flows are not yet really on the political agenda.

"A final, more imponderable, question also comes to mind: what level of international immigration can countries tolerate socially and politically?"

Oh yes ... this is actually the important point here and there definitely a boundary here. The cynical point here is that those with the best capabilities to assimilate/integrate will win.

"The larger concern, in my view, is whether these dynamics will last. After all, doesn’t logic dictate that international immigration will flow to where there is more economic opportunity?"

and ...

'But at some stage there will be a 'tipping point', and the rapidly growing economies will become a pole of attraction. It is very hard right now to see how all this will pan out, but we definitely have it earmarked here at DM as something to follow'

Well I am not sure what my position is here. There is no doubt that this is a real risk; once again Germany might end up proving to be a scary example here.

S.M. Stirling said...

Quick note: US economic growth rates have been at or above the world average for the past 30 years and distinctly above the developed-world average.

This (together with flexible regulation) has meant a very large demand for new workers.

S.M. Stirling said...

Note, people often misinterpret the "10% born outside Sweden" statistic, which actually includes the children of immigrants.

That's about 1,000,000 people. Of those 450,000 are Finns and their children, and about 300,000 are Danes and Norwegians and their children.

Another 150,000 are people from other European countries; the Baltic states and Poland being the largest sources, followed by the Balkans.

The total from what one might call "nontraditional sources" is about 100,000. Not negligible, but not all that large, either.

Robert said...

Nandan, welcome to DM.

I'm a little bit confused as to why you think young would-be migrants will be especially interested in the economic growth rate of destination countries, and not so much in the present-day wages paid.

If I am migrating in order to make some investment that I must be present to properly oversee, then of course I will be concerned in the prospects for growth in the value of the asset I am investing in. A prominent example in the past has been undeveloped land, and agricultural development of this kind was behind the settlement of the U.S. interior. There aren't many open frontiers left today, although it seems that Canada and Brazil are both actively encouraging immigration of skilled agriculturists. In today's more urban environs, India's prospects for future growth would be attractive, if the career I had in mind was as a real estate developer.

But if, like the majority of the world's population, and especially of its young population, my income is mostly derived from wages, then I think my chief concern will be the present level of wages and availability of work in the destination country. If a destination country has low wages, but has strong prospects for higher future wages, it seems to me that a wage-earner does best by waiting to migrate until wages in the destination country do in fact rise.

Nandan Desai said...

Thanks to all for your notes. Since I am primarily an economist, it is extremely helpful for me to view this problem through the demographic prism.

I was reading Milton Friedman's Capitalism and Freedom last night (yes, I'm from THAT school of thought!) and, in it, he discusses at length the gigantic lag between political opinion and economic reality.

The point in this context would be that even though developed countries SHOULD be competing for foreign educated workers, they are in fact trending towards becoming more insular. Yes, the US is a little better than Europe in this regard and it's higher level of growth does attract more people -- but I can't help but believe that, as the pension crisis grows over here, and as protectionist sentiment increases as both manufacturing and service jobs migrate abroad; that this will get even worse.

Pat Buchanan (admittedly not representative of the American mainstream) has published a book calling for a moratorium on immigration until the illegal workers can all be caught and expelled. A few years back, this would have been dismissed as nonsense - but now it is receiving airplay, copies of the books are selling out, and large chunks of the house of representatives endorse some of its reccomendations.

Some parts of Europe also have latent (and in some places, not so latent) anti-immgirant views. Terror attacks and events like the French riots will only make this worse -- and, though deteriorating public finances ought to convince the public about the need for more immigration, it might very well end up only making the problem worse.

Nandan Desai said...

Robert,

My reasoning was essentially that, earlier in their careers, people are more entrepreneurial -- and, as they grow older, they grow more risk-averse. Migrating, in my view, is not a simple formulaic decision, but one driven by the person's appetite for risk.

Edward Hugh said...

"Note, people often misinterpret the "10% born outside Sweden" statistic, which actually includes the children of immigrants."

On the Sweden front I checked things out with David Weman at Afoe (who comes from Sweden). The breakdown he gave me was as follows:

As of 2004, 13.3% of the population was foreign-born.

Rest of Scandinavia 277,100
Western Europe 106,400
Eastern Europe 326,100
Former Soviet Union 37,800
Middle East 223,700
Rest of Asia 91,700
Sub-Saharan Africa 51,000
North America 26,500
South America 55,500
Oceania 3,500
Total Foreign-Born 1,199,300
Data as of December 2004

Edward Hugh said...

"but I can't help but believe that, as the pension crisis grows over here, and as protectionist sentiment increases as both manufacturing and service jobs migrate abroad; that this will get even worse."

But why should that be exactly, since if people are really worried about their pensions and, are therefore worried about dependency ratios, shouldn't they favour migrants? It is certainly working like this in Spain.

"Some parts of Europe also have latent (and in some places, not so latent) anti-immgirant views."

My feeling is that this has got more to do with how well labour markets function than with anything else. Were unemployment is *perceived* to be a problem, then there is considerable negative feeling towards immigrants (France and Germany are the big examples in the EU) whereas where unemployment isn't perceived to be an issue, migrants tend to be favoured, eg in the UK, Ireland, Spain, Greece and (increasingly) Italy. Italy is going to be an interesting case since they are now getting the 'labour force pinch' that Japan has had for a bit, and the only way they can really hope to grow is by taking on immigrants. Japan is, of course, the great exception here.

My feeling is also that if it becomes clear that the immigrant favourable economies are better able to handle things than the immigrant unfriendly ones the we could see some big changes of attitudes here.

The change of government in Sweden will be interesting to watch in this sense, since the new government seems to be quite friendly to the idea of economic migrants. We will see.

Edward Hugh said...

"but I can't help but believe that, as the pension crisis grows over here, and as protectionist sentiment increases as both manufacturing and service jobs migrate abroad; that this will get even worse."

But why should that be exactly, since if people are really worried about their pensions and, are therefore worried about dependency ratios, shouldn't they favour migrants? It is certainly working like this in Spain.

"Some parts of Europe also have latent (and in some places, not so latent) anti-immgirant views."

My feeling is that this has got more to do with how well labour markets function than with anything else. Were unemployment is *perceived* to be a problem, then there is considerable negative feeling towards immigrants (France and Germany are the big examples in the EU) whereas where unemployment isn't perceived to be an issue, migrants tend to be favoured, eg in the UK, Ireland, Spain, Greece and (increasingly) Italy. Italy is going to be an interesting case since they are now getting the 'labour force pinch' that Japan has had for a bit, and the only way they can really hope to grow is by taking on immigrants. Japan is, of course, the great exception here.

My feeling is also that if it becomes clear that the immigrant favourable economies are better able to handle things than the immigrant unfriendly ones the we could see some big changes of attitudes here.

The change of government in Sweden will be interesting to watch in this sense, since the new government seems to be quite friendly to the idea of economic migrants. We will see.

Nandan Desai said...

I agree that a pension crisis in the US ought to make people want more migrant labor (to help the dependency ratio), but in practice, I don't think that's how it will end up being perceived.

The fact of the matter is that your average American does not think about dependency ratios -- he thinks about whether his pension is at risk. and if foreign workers are coming here, they will perceive that as a threat to their pension. All of us on this blog know that this doesn't make any sense, but I don't think it's outlandish to believe that this might end up happening.

One of the reasons behind this might be the emergence of a potent form of xenophobia which has emerged in pockets of the US (though, fortunately for me, not on the coastal cities) over the last several years. It has partly been stoked by conservative republicans for their electoral benefit -- but I think it is at least partly due to globalization.

Edward said...

"One of the reasons behind this might be the emergence of a potent form of xenophobia which has emerged in pockets of the US (though, fortunately for me, not on the coastal cities) over the last several years."

One of the important factors here may be the recent 'inward' migration of the Latino population.

See this post (and especially comments) for some thoughts on this.

ramki830 said...

As a amateur, but with great interest in this topic of demographics, economics and immigration, I thought i can add some thoughts/questions here:

1. Currently Immigration and its impact on demographics is primarily studied with the impact of 3rd world immigration into US/Europe (i.e South- North Immigration) in mind. But i feel that in comming years, South-South Immigration would also become a major issue and subject of concern and analysis.

For instance, if China continues to grow at this spectacular phase, it is very much possible that despite its huge population, they would actually have some labor shortage in specific skillsets and would need to institute a policy to bring guest workers of required skillsets from outside China. Same could become the case with India too.

Likewise, as the competition for natural resources hots up, more and more of resource rich Southern nations from S.Africa to Myanmar to Namibia would need unskilled guest workers from other Southern Nations (maybe from India/China !!!) to develop those resources quickly.

So some nations, esp China/India could see both happening same time - sending unskilled Workers to other 3rd world nations, taking in skilled workers from other 3rd world nations... Why not?

2. Can we say that in the long term, those nations with large population (like China,US, India, Indonesia) will be able to have a greater intake of migrants than ther rest ?(without significantly altering the ethnic composition of the host nation) . So, maybe with greater flexibility in both sending and receiving migrants, a few nations with big populations like China/USA/India/Brazil/Indonesia could be long term winners in this game?

Edward said...

Ramki,

"So, maybe with greater flexibility in both sending and receiving migrants, a few nations with big populations like China/USA/India/Brazil/Indonesia could be long term winners in this game?"

I'm not sure it is as simple as this. A lot of factors come into play, especially being 'migrant friendly' and rates of economic growth and availabilty of jobs.

At some point migrants, like children, will become a scarce resource, which people will compete for. I think here you are right.

But will it all be about size?

Some small countries can also become good at attractng migrants. We have often thought about this here at DM.

Sweden, the Czech Republic and Singapore might be examples of countries which could use 'open-ness' to win out to some extent at the expebse of some of their immediate rivals.

There has been much comment around the blogs on the new Swedish government, but the migration point hasn't attracted a lot of attention. It seems to me that the new Swedish government will make an effort to be more attractive to economic migrants, and, as Claus often laments, they may do this at the expense of comparable countries like Denmark, Finland or the Netherlands, which seem to be much less migrant friendly.

Ditto Czech Republic vis-a-vis the others in the lynx group, especially the Baltic States and Hungary, which are already losing population.

Ditto Spore, which already has a 'population plan'.

So it is, in part, a game about who wakes up first.

Germany and Japan are large, and rich, countries, but they simply seem to be losers here.

Edward Hugh said...

Nandan,

One of the points I would strongly make in the debate about the likelihood of protectionism becoming a serious issue is the we need to look beyond the rhetoric circus and see what actually happens. Today we have another piece of relevant news:

US senators drop China imports tariff bill

Two US senators on Thursday abandoned their legislation to impose 27.5 per cent tariffs on Chinese imports, but promised a broader-based attempt next year to encourage China to revalue its currency.

Charles Schumer, a New York Democrat, and Lindsey Graham, a South Carolina Republican, had threatened to move forward this week with a vote on their measure. But their decision to drop the bill was seen as an early show of confidence in Hank Paulson, the new US Treasury secretary, who met the senators on Tuesday.

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