Wolf on free migration/free trade

["Ian Murray" <seamus2001@xxxxxxxx>]

[Financial Times]
Fighting for economic equality
By Martin Wolf - Nov 28 2001 00:00:00
<martin.wolf@xxxxxx>

Rich countries are running out of people. Poor countries have a
surplus. The answer seems evident: liberalise movement of people
across the globe. But, for good or ill, this will not happen.

This is not to question the economic benefits of free movement of
people. Samuel Brittan has made this point powerfully ("Let the
huddled masses go free", FT October 25), as has Dani Rodrik of Harvard
University in a response (FT, November 23) to my column of a week ago
on the case for liberalising world trade. Wages of similarly qualified
people vary by 10 to one or more, in real terms, between rich and poor
countries. This wedge is far bigger than for tradable goods and
services, or for returns on capital. So the gains from free trade in
labour must be greater than in anything else.

Adding to the force of this logic is the weakness of other sources of
income equalisation. A well known economic theory suggests that free
trade would equalise returns to labour and capital. Something a little
like this has happened as developing countries have specialised in
exports of labour-intensive manufactures. Nevertheless, so-called
"factor price equalisation" is, on its own, a relatively weak force.
This is partly because world trade is far from free and partly because
the theory's applicability is limited.

Another channel for income equalisation would be movement of capital.
But it is striking how little, not how much, globalisation of capital
there is. On balance, the advanced countries have even been net
importers of capital, not providers, over the past two decades, with
the US the predominant recipient. Because of the absence of
large-scale net capital flows from rich countries to poor ones,
investment per head in advanced countries (at purchasing power parity)
is roughly six times higher than in poor ones.

If trade and capital flows will not do the job, what about migration?

Here the supporting logic seems powerful. The average number of births
per woman in members of the Organisation for Economic Co-operation and
Development is estimated at 1.5, well below the level needed to keep
the population stable. Only in the US is it (slightly) over two.
Meanwhile, life expectancy is high and rising. The combination implies
radically rising dependency ratios. In last June's Economic Outlook,
the OECD forecast that the ratio of the elderly (those over 65) to
those of working age (aged 20-64) would nearly double over the next 50
years. In a number of countries, the ratio is forecast to rise from
about 25 per cent today to approximately 60 per cent.

Immigration would seem to be the answer. Yet what is happening so far
is modest, absolutely and by historical standards. In the 1880s, the
inflow into the US was 10 per cent of its then population; in the
1990s, it was below 4 per cent. According to a recent paper from the
OECD staff, "the stock of the foreign population in the OECD area
(where data are available) rose by over 13m between 1988 and 1998, to
reach nearly 57m persons, equivalent to 7 per cent of the total
population".* In Europe the stock was 5 per cent of the population,
against 10 per cent in the US. Yet the OECD's total stock is only 1
per cent of world population and the flow, over 10 years, is a mere
0.2 per cent.

Moreover, much of this flow has not come from particularly poor
countries. For most OECD member countries, average real incomes in
source countries are 40 per cent, or more, of the recipient's. Only
France and the US have tended to take immigrants from countries with
average incomes per head below 30 per cent of their own. The flow is
also tightly controlled. The OECD paper notes that "in nearly all OECD
countries, [most] new arrivals are linked to family reunification".

With very low net immigration, populations of the European Union and
Japan are expected to fall, by 12 and 17 per cent respectively,
between now and 2050. Happily, a United Nations study concludes that,
in the EU, the immigration required either to sustain population at
present levels or to sustain the population of working age would not
be very different from that of the past decade. The US has no such
challenge, while Japan is determined to avoid the immigration route
out of declining population.

In contrast, the level of immigration needed to stabilise the old-age
dependency ratio is huge.The EU would need inflows of close to 20m a
year by 2030. Astoundingly, EU population would end up at more than
1bn by 2050. One can safely say that this is not going to happen.

Immigration into rich countries is at present both beneficial and
decidedly modest. More would be good. But to make a big difference to
ageing it would have to become enormous. The same is true for its
ability to transform the developing countries. These countries have
populations of 5.1bn today, forecast by the US Census Bureau to be
close to 8bn by 2050. Free migration would involve potentially vast
numbers of people.

The advanced countries will not permit this. It is no accident that
mass democracy, the welfare state and immigration controls came to the
advanced countries at roughly the same time. People in advanced
countries who possess similar skills to those in abundance in
developing ones have privileged access to the advanced countries'
stock of physical, human and social capital. Free immigration is
inconsistent with maintainance of this position. Owners of physical
and human capital would benefit. Everyone else would lose. The result
would be civil war.

Yet this does not end the story. Even if it will be politically
impossible for rich democracies to accept flows on the scale needed to
reduce global wage inequality, the potential migrants will not go
away. On the contrary, the combination of porous borders with vast
differentials in wages is a recipe for persistent pressure - similar
to that of the "barbarians" on the frontiers of the Roman empire.

Free migration is economically logical but politically impossible. The
struggle of advanced countries to balance these conflicting pressures
will be among the most intractable challenges of this century. But it
may also, with luck, encourage a more positive attitude to the
promotion of economic development in potential source countries.

* Jonathan Coppel et al, Trends in Immigration and Economic
Consequences, Economics Department Working Paper 284, June 2001,
www1.oecd.org/eco/wp/ onlinewp