The Productivity Commission looks into immigration

The Australian Productivity Commission that is.

The Australian Productivity Commission has underway an interesting inquiry, initiated by the Federal Treasurer, into immigration to Australia. Here is the scope of the inquiry, taken from the Treasurer’s Terms of Reference.

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It is interesting that the Australian government has chosen to initiate another Productivity Commission inquiry only 9 years after the previous large report into the economic impact of immigration. That bulky report concluded that in Australia, the gains from immigration mostly accrued to the immigrants, with little evidence of any material gains to native Australians. Despite the size of that earlier report, there was some aspects of the economic issues (possible benefits, as well as possible costs) that were not covered at all, and the modelling work that was done looked at the medium-term rather than the long term.

The new inquiry has two areas of focus. The first is helping to answer the questions about the costs and benefits of immigration, both to Australian citizens more generally and to the fiscal position of Australian governments more specifically. The second is around the intriguing idea of charging for entry. The idea of rationing entry by price turns up in immigration debates from time to time. “Intriguing” here is my code word for something like “this idea appeals to the economist in me, but yet there is something about it – which I can’t quite put my finger on – that is distasteful, and it seems unlikely to fly”. I can’t see it happening, and yet I’m not entirely sure why it shouldn’t. If we set aside the refugee quota, countries like New Zealand and Australia allow and promote immigration largely for economic reasons, and a price should tell something useful about who could get most value out of permission to live in our country. Perhaps willingness to pay is not overly well aligned to ability to help generate domestic productivity benefits?   But is there good reason not to use price to ration demand for places among those who meet certain basic criteria (age, English language, lack of criminal history etc)? It will be interesting to see what the Commission comes up with in this area.

To their credit, the team working on this immigration inquiry sent a couple of senior people to Wellington this week. New Zealand has quite similar immigration policies to Australia, and for Australia in particular, the largely-free trans-Tasman immigration area also complicates things (as it does for us, in the possibility of people returning home late in life to claim New Zealand welfare benefits). I was among the various groups of public and private sector people they met while they were here, and we had a good wide-ranging discussion.

I noted that I had increasingly come to think that good immigration policy – in countries like ours, with no treaty obligations to allow open access, and (unlike Israel) no national identity/security reasons to promote immigration – is best thought of as an optional complement to economic success. The alternative, which seems to be at the heart of the arguments of immigration advocates in New Zealand, is to see immigration policy as an engine (perhaps large, perhaps small) helping generate economic success.  I can’t think of a country – going back centuries – where immigration has materially improved the economic fortunes of the recipient country. In the last great age of immigration – the decades prior to World War One – migrants flowed to countries that were already economically successful (be it New Zealand, Australia, Canada, Argentina, the United States or even within Europe itself). Economic success allows a country, if it chooses, to support more people at high incomes. And emigration eases the pressures in the source country, lifting living standards among those who remain.

There is, of course, an exception to my story. Immigration has transformed the economic prospects of some physical territories, but only by totally taking over and largely replacing the indigenous population, and the economic institutions of that culture.   New Zealand – like each of the colonies of settlement – is an example of that. And it is an uncomfortable example. My assessment (backed, for example, by the work of people like Easterly, looking at long-term global economic performance) is that Maori average incomes are higher now than they would have been without extensive European settlement, but was the trade worthwhile – across all its dimensions – for the indigenous population? There are huge discontinuities between 21st century New Zealand and 18th century “New Zealand” that don’t exist for, say, the United Kingdom or France.

By advanced economy standards, New Zealand is a classic example of an underperforming country that people should be leaving. And, of course, for decades New Zealanders have been doing so, mostly to more successful Australia.   Of course, we can always attract plenty of people from other (even poorer) countries if we want to. But why would we?     There is no obvious area of the world where the culture and economic institutions are so obviously superior to our own Northern European-sourced ones that we can get the sort of transformative gains (at whatever costs) that Maori may have achieved by allowing extensive European settlement in the 19th century. There is no sign in the data that slightly larger countries grow faster (per capita) than slightly smaller ones.  And there is no reason to think we can somehow attract the very best of possible migrants to a small, remote, underperforming, but pleasant, country.   And if current migration patterns were repeated at scale, or for long enough, we would face the risk of factor price equalisation occurring, but not in the way we want – the typical migrant to New Zealand comes from countries, and economic cultures, that generate materially lower living standards and levels of productivity than New Zealand (or Australia) does.

The draft report of the Australian inquiry is due out in mid-November. I’ll be keeping an eye out for it. Perhaps it might be time for a similar inquiry in New Zealand. I think I’ve mentioned that when I first started raising my arguments about the possible link between immigration policy and New Zealand economic underperformance, there was a lot of discomfort at Treasury. Senior people then talked of the new Productivity Commission as a good place for such issues to be explored. That remains true today, and Treasury has a key role in advising ministers which inquiries to request from our Productivity Commission.

I have had Official Information Act requests in for some time with Treasury and MBIE for copies of advice to ministers on the economic impacts of immigration, and on the target level of permanent residence approvals. As is customary with government agencies, the responses to the requests have both been extended/delayed.   These aren’t particularly time-sensitive requests, but I will be interested to see what the departments have had to say. MBIE is well-known to be strongly pro-immigration, and I have heard reported that current Secretary to the Treasury (himself a temporary migrant) recently reiterated in private a view that “immigration is good; it is as simple as that” (repeating the tenor of comments in a speech earlier this year). Perhaps, but let’s see the argumentation, in the specific context of New Zealand, and in the light of cross-country economic history and experience.

11 thoughts on “The Productivity Commission looks into immigration

  1. Julie Fry’s Treasury Working Paper (http://www.treasury.govt.nz/publications/research-policy/wp/2014/14-10/) reaches a similar conclusion: at the macroeconomic level immigration produces benefits that are weak at best.

    What some of these high level analyses don’t take into account is the effect of migration volatility. In the absence of controlled immigration NZ would have had population decreases twice in the last ten years. While many industries can sustain large fluctuations in local population some such as residential construction would struggle to maintain capacity and capability in the face of significant fluctuations of demand.

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    • If we erected the Paua Curtain so that the resident population was entirely determined by natural increase plus the net flow of NZ & Aus citizens we would experience some volatility in our population. Not only would we sometimes have a decrease in population but from year to year the rise or fall in population could vary by something like 20,000. In the context of a 5 million population that is probably not so significant but some specific industries like construction could find it challenging to have short term fluctuations like that.

      My question is whether the buffering effect of visa-based immigration is a benefit that we should consider when we have these conversations. It is probably almost unique to NZ so there may not be much discussion of that possible benefit in other countries.

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  2. If you did the numbers I’m pretty sure you’d find that the visa-based flows were pro-cyclical, exacerbating rather than relieving stresses. When our economy is weak, NZers tend to go to Aus, but foreigners are also more hesitant about moving here (may just delay arriving but it has the same effect). So my starting point is that if we went back to targeting about 10000 net foreign arrivals a year (similar to what we had in the 80s) we’d have (slightly) less volatility in the economy than we do now.

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  3. Hi Michael

    You can’t find examples of migrations benefitting the recipient countries/regions. A – perhaps rare – example might be the numerous neighbours of France who benefitted from forced Huguenot migrations of the 17th century. Here’s a paper looking at migrations to Prussia http://eh.net/eha/wp-content/uploads/2013/11/Hornung.pdf. Basel is another example. For reasons unknown, among the Huguenot refugees that came here were silk weavers. Silk weaving involved silk dyeing; Basel was thus quick to take up synthetic dyes when they were developed in the 19th century; helped by the location on the Rhine & benefits for transport, the chemical dye industry flourished & diversified, with companies like Ciba (Chemical Industry of Basel Association) being created; from which emerged the pharmaceutical industry, today’s main income generator.

    These are of course stories of technological diffusion, which need not happen via migration. Just sometimes it seems to.

    Cheers

    David

    PS I enjoyed the latest piece on inflation & RBNZ performance. Hopefully Rod and others are paying attention.

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    • Thanks David. Those sound like interesting case studies. I will have a closer look. Nothing in my NZ argument hangs on a suggestion that recipient countries generally don’t get much benefit from immigration – I keep repeating the line partly to help smoke out interesting examples like the ones you mention, and in case there are the odd large scale example I might have missed. Singapore is a possibility – to the extent that labour and capital are complements, very high savings rates might require more labour to take advantage of in a sensible manner.

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      • Actually, thinking a bit more, I guess the point about the Huguenots is a bit like my point about Northern Europeans coming to NZ, Aus, and the Americas, and bringing a much superior “technology”, some of which is embedded in the people themselves, and isn’t readily transferable without the people. In a sense this is Easterley’s point: incomes in South Africa, for example, are also higher than they’d have been without immigration. But….and this is the point I was making yesterday…there is no obviously superior set of wealth-generating institutions/characteristics anywhere else in the world that we can import now to achieve the sort of transformative change European immigration did for the colonies of settlement in centuries gone by. The best Asian economies are matching productivity performance in the best old-West ones, but we already have those institutional/cultural characteristics in our existing population.

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  4. Michael, I noticed today that the government of NSW is paying for an advertising campaign that says “A Million More People In Ten Years”. When you click through to the link, you see a long list of public investment projects presumably necessitated by all these people. https://www.nsw.gov.au/tomorrows-sydney. Perhaps not coincidentally, the Premier of NSW, Mike Baird, has today gone public with a call to increase the GST from 10% to 15% (in Australia, most of the GST revenue goes to the states).

    Doesn’t sound like a fact set consistent with fast productivity growth now, does it?

    Liked by 1 person

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