Immigration And Economic Growth: Is Keynes Back?

Bo Rothstein

There is something very strange going on in the current debate on refugee immigration. There is a lot of alarmist talk about youth gang criminality, problems related to labor market integration, falling results in school, honor-related violence and oppression, increased social tensions, housing segregation, recruitment to various terrorist groups, ethnic discrimination and lack of respect for liberal norms such as gender equality and secularization. There are certainly many good reasons for focusing on these issues and it is by no means my intention to deny their existence. However, there’s another side of the problem that has not been sufficiently highlighted.

During the huge refugee crisis in 2015, among the OECD countries, Sweden accepted the largest number of refugees in relation to its population size (10m): 163,000 asylum seekers. If the United States had received an equal share compared to its population, it would have been about 5.5 million people but it took in only about 70,000 asylum seekers. For Great Britain, their equivalent would have been about 900,000 people, but only 40,000 were accepted. As for the other Nordic countries – Denmark, Norway and Finland – each accepted to take about 30,000 refugees in 2015, which is less than one fifth of those that went to Sweden.

Many observers inside and outside Sweden predicted that this very large-scale immigration of refugees would become a serious burden on the Swedish economy, not least because it takes a long time for many refugees to get a job in the high wage and largely unionized Swedish labour market. Comparing the economic situation and growth for countries is always difficult because one has to choose a reasonable starting point. In this case, the most reasonable comparison is to look at how the Swedish economy has performed in relation to the other Nordic countries. These countries are relatively similar in that they are all small, highly export-dependent economies that try to compete in the world market with products that have a relatively high knowledge content  requiring a highly skilled labor force. International fluctuations in the global economy should therefore affect the Nordic countries in much the same way.

Since the economic statistics for 2016 are now available, we can answer the question of what, in a comparative and historical perspective, this extraordinary large refugee immigration has implied for the Swedish economy. Here we are in for a real surprise. In 2016, the total Swedish economy grew four! times more than the other Nordic countries. Alas, not double, not triple but quadrupled economic growth! If we instead of total growth consider growth per capita, the figure will be somewhat, but not much, lower (3.5 times). Compared to the other rich industrialized countries in the world, Swedish growth in 2016 was about twice the average. It is thus not surprising that the OECD economic experts in their recent evaluation gave the Swedish economy several gold stars.

How can we explain why the Swedish economy is doing so well even though the country has received such an unprecedented large number of immigrants – of which the majority have not yet found work and thus do not pay taxes but need to be provided for out of public funds. Several economists in Sweden have of course studied this and concluded that refugee immigration entails significant net costs for the Swedish economy. The problem with these analyses is that they mainly rely on an ‘accountant type’ of economic thinking. This type of analysis is based on what each immigrant contributes to taxes and fees in relation to what they cost in terms of social benefits and public services. Viewed from this perspective, the Swedish growth figures are almost incomprehensibly high, especially when compared with the other Nordic countries.

We thus have to find another explanation for why Sweden has succeeded in combining an unusually high growth rate with such an unprecedented influx of refugees. My hypothesis is that the ‘economists-as-accountants-types’ have forgotten to count the extensive investments that the Swedish public sector (mostly cities and municipalities) have had to put into public services because of this large-scale immigration. We are talking about new pre-schools and schools, expansion of the public health care sector, education centers for learning Swedish, housing programs, immigration officers, vocational training and other ‘active’ labor market programs and so on. Much of this spending can be seen as investment in human capital. Increased public spending as an engine for economic growth was also John Maynard Keynes’s recipe for how to deal with economic downturns, ideas that were dismissed by mainstream economics in the 1990s. What has happened to the Swedish economy should perhaps be understood as a great and surprising comeback for Keynes’s ideas. ‘Involuntary Keynesianism’ may thus help explain the current Swedish economic wonder.

Original version in Swedish first published by Svenska Dagbladet