Migration’s Economic Positives And Negatives

I have always been a strong believer that geography determines one’s worldview (I think it is de Gaulle who is credited for saying that “history is applied geography”). When you spend one month in Europe traveling to various places, you just cannot avoid the biggest issue in Europe today: migration.

So let me go briefly over some key issues (again). I discuss them at much greater length in the third chapter of my forthcoming book Global inequality: a new approach for the age of globalization.

To an economist, it is clear that most (not all; I will come to that later) economic arguments are strongly in favor of migration. If comparative advantage and division of labor have any meaning they must hold worldwide; they are surely not valid only within the confines of the arbitrarily drawn national borders. It was very well, and presciently, asked by Edwin Cannan a century ago: “if…indeed, it [ìs] true that there is a natural coincidence between self-interest and the general good, why… does not this coincidence extend, as economic processes do, across national borders [?]” (quoted from Frenkel’s 1942 Presidential address to the South African Economic Society; Tony Atkinson brought to my attention this undeservedly obscure reference).

If this were not the case, we could equally plausibly argue that there should be limits to the movement of labor between the regions of a single country. Since almost nobody would argue for that, it logically follows that the same principle of free movement must hold internationally. In other words, free movement of labor leads to the maximization of global output. We also know that migration, by raising incomes of the migrants (who are generally poor), is the most potent force for the reduction of global poverty, as well as for the reduction of global inequality.

So far so good. But, it could be argued, would not migration reduce wages of native workers with whom migrants compete? Although empirical studies find the negative effect on comparable native workers to be small (and we shouldn’t forget that there are also native workers who benefit from migration, if their skills are complementary with those of migrants), the effects may not be zero. But there Lant Pritchett’s point comes to the rescue: to migration, Pritchett argues, we should apply the same principles as we apply to trade. We are not against free trade even if it has negative effects on some domestic producers. The first-order effects of free trade are positive, and we deal with the second-order negative effects by compensating the losers (paying unemployment benefits or retraining workers). The same principles should apply to migration.

Thus we have seemingly solved, from an economic point of view, the problem of migration. It must be a force for the good and if there are problems or objections to it, they must stem from extra-economic reasons like social cohesion, preference for a given cultural homogeneity, xenophobia and the like. However, I think that this is not so simple. There may also be some negative economic effects to consider. I see three of them.

First, the effect of cultural or religion heterogeneity on economic policy formulation. In the 1990s, Bill Easterly started a veritable cottage industry of studies arguing that religious or ethnic heterogeneity makes economic policy less efficient, subject to constant conflict and horse-trading: I let you devalue if you let me impose price controls. The literature was concerned mostly with Africa (trying to explain its dismal growth performance), but there is no reason not to apply it to Europe too. The rationale of Easterly’s effect is that groups jockey for the projects or policies that benefit their members, in conditions where trust between the groups, because of religious or ethnic differences, is low. Thus, one group would like currency devaluation if its members are engaged in export activities or import substitution, and another would prefer protection for the goods their members are mostly producing. It is true that the minorities’ economic roles in Europe are not as clear-cut as they are in Africa: Muslims in the UK do not have a preference for low or high exchange rates of the Sterling since they are not concentrated in specific industries in the same way that the ethnic groups in Nigeria who live in the Delta have an incentive to ask for a high share of oil revenues. Nevertheless, this problem of difficulty of policy coordination in the presence of religious or ethnic diversity should be kept in mind. It may become more important in the future as Europe becomes more diverse.

Second, cultural differences may lead to the erosion of the welfare state. This was the point brought up twenty years ago by Assar Lindbeck. The roots of the European welfare state (most clearly seen in the Swedish “Our Home” beginnings in the 1930s) were always strongly nationalistic, based on a homogeneous community and mutual help between its members. It relied on commonality of norms or affinities between the members. But if that commonality no longer exists, the observance of certain norms upon which the welfare state is built (e.g. not to call in sick when one is not, or not to drink at work) is shaken, and the welfare state begins to be eroded. If you do not observe the same norms as I, and benefit at my expense, I lose interest in funding such an arrangement. Migration thus poses an important threat to the integrity of the welfare state in Europe. It is not by accident that the current moves in the Nordic countries can be, without giving it a pejorative meaning, described as a welfare state for the native-born population, or differently as national socialism.

Third, migration might have important negative effects on the emitting countries. The point was made a couple years ago by Paul Collier in his book Exodus: How Migration is Changing our World. I was inclined to dismiss it as veiled xenophobia which does not dare express its opinions openly, until I read several articles on the effects of large emigration from smaller East European countries last summer. These countries have been losing a significant number of their doctors, nurses or engineers to the richer countries in the West and the North of Europe. Now, one could say that eventually higher salaries for doctors in the East will be sufficient to keep them at home or perhaps bring doctors from elsewhere, say from Nigeria to Hungary. But that approach ignores the length of time that it takes not only to train doctors but for the markets to send the correct signals and for the people to act upon them.

As Paul Krugman nicely said “If history did not matter, adjustment would be instantaneous”. But while economic models might assume such an instantaneous adjustment, in real life it does not happen. In-between thousands of people may die because of poor health care. Similarly, the loss of some specialists may be, especially in small countries, very hard to compensate. If your country trains ten water sanitation engineers annually and if they all move to richer counties you will soon find yourself without anybody being able to control water quality.

We have to take these negative economic effects of migration also into account. I do not think that the three effects I listed here (and perhaps there could be others) are sufficiently strong to negate the positive economic effects. But they cannot be entirely disregarded or ignored either.

This post was first published on Branko Milanovic’ Blog