Thursday, January 28, 2016

Migration’s economic positives and negatives

I was always 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 migrations, 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 be also some negative economic effects to consider. I see three of them.

First, the effect of cultural or religious heterogeneity on economic policy formulation. In the 1990s, Bill Easterly has 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 have it apply 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 rate 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, the 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 year 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 policy 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 a veiled xenophobia which does not dare express its opinions openly, until I read last Summer several articles on the effects of large emigration from smaller East European countries. 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 has nicely said “If history did not matter, adjustment would be instantaneous”. But while economic model might assume such an instantaneous adjustment, the real life does not. In-between thousands of people may die because of poor health care. Similarly, 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, soon you will find yourself without anybody being able to control water quality.

We have, I think, to take into account also the negative economic effects of migration. 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.

Sunday, January 10, 2016

Schadenfreude squared: why I am against economic sanctions

I am traveling to Moscow tomorrow so appropriately enough on my today’s walk I thought of economic sanctions and tried to summarize why I oppose them.

Let’s start with elementary economics. You impose sanctions on somebody in order to reduce their welfare despite the fact that it reduces yours as well. This is a deeply irrational move since nobody can rationally wish to be worse-off. Compare sanctions with what happens in Schadenfreude. Leaving aside Schadenfreude’s ethical aspects, it can be, for a homo economicus, explained solely by recourse to our valuing of relative positions (societal rankings). We enjoy misfortunate that befalls others (even if it brings us nothing), simply because the relative distance between us and them is now less. (I assume that the other person was better-off than us before). But sanctions go further. It is Schadenfreude squared: we accept or rather impose on oneself a deterioration of own position, in the expectation that the other side will suffer even more. To be understood within the rational behavior paradigm, we have to assume that our pleasure from reduced rank distance (“the other guy suffers more than I”) is so overwhelming that we are willing to accept an absolute deterioration of our own position.

But sanctions have another effect which in my view renders them particularly repugnant. They impose a collective punishment, over people who have no influence on the policies for which they are  sanctioned. This is true whether the country being punished is a democracy or not because sanctions  cannot be so calibrated to fall only on the people who have supported the supposedly guilty government. (I will come to the targeted sanctions below.) In addition, sanctions have a long-run devastating  effect on the societal fabric. I became aware of that when comprehensive UN sanctions (total ban of imports and exports) were imposed on Serbia and Montenegro for their role in the Bosnian war. The sanctions immediately led to the veritable explosion of smuggling and crime. Obviously, whatever government were in power had to engage in sanction-busting because the country would be asphyxiated otherwise. Illegality became a matter of survival. But in order to do sanction-busting, government had to work hand-in-glove with organized  crime. (I am not suggesting that the Milosevic and Djukanovic governments in respectively Serbia and Montenegro were not anyway inclined to work with the organized crime. But I am arguing that whatever government, even if composed of saints and angels, had been in power, it would have had, for the sake of maintenance of ordinary life, to rely on organized crime.)

Once the links between government, its police and military and the organized crime became quasi-official, and people seamlessly started moving  from being heads of the police in the morning to being leaders of extortionary gangs  in the evening, the entire fabric of society crumbled. It is no longer mere corruption: it is a direct destruction of a society. These are long-term effects which are not easily reversible. In other words, it is naïve to think that once sanctions lifted, things will go back to their original position: they will not, and did not.

Now, it could be argued that the UN sanctions are often calibrated in such a way that the essential  goods (food and drugs) are not banned. This is however not knowing how  in practice UN sanctions work. Each shipment of food and drugs has to be individually, item-by-item, authorized by a UN commission. What happened doing the UN sanctions against Serbia and Montenegro (1992-95) was that the representatives of the main governments that argued for sanctions (in this case, US, UK and France) would just not show up at UN commission’s meetings. The authorization, which had to be unanimous,  would then be postponed until the next meeting and thus months would pass until a shipment would finally be authorized. At times, drugs would be shipped after their expiration date. I have no reason to believe that the UN trade sanctions imposed on Iraq (between 1990 and 2003) were not even tougher, worse and more inequitous. It has been argued that almost half-a-million people died because of the sanctions, including kids and babies. Madeleine Albright infamously said that she did not care. So is the UN in the business of killing children?

How far the irrationality of sanctions goes can be seen recently when Russia imposed its  “retortive sanctions” on EU food products. Now we do not have Schadenfreude squared as in the case of unilateral sanctions, but a Schadenfreude squared one more time, when the sanctioned side becomes a sanctioner in the hope that such ratcheted-up sanctions will end up by inflicting  more damage to the original sanctioner than to the sanctionee. But the costs to own population from such self-inflicted sanctions (as reflected in wanton destruction of foreign foodstuff in Russia) must be high. I have hard time believing that the welfare of an ordinary Russian has not been reduced by the absence of many better and cheaper European food products.

How about very narrowly, individually-targeted sanctions? That approach seems more defensible because it does not imply a collective punishment. It may be also more efficient in making the people who have taken certain decision feel first hand their consequences.  

Let me end with another type of sanctions which are not directly economic. These are sanctions on academic exchanges which have recently been popularized as a way to express disapproval of Israel’s policies with respect to Palestine (or occupied territories). These strike me as particularly ill-thought. If one wants to convince another side of its wrongs, the best, or the only, way to do that is to open a dialogue and to try to persuade that country’s political and academic community. How can that be done by cutting off contact with that community is really difficult to explain. So, in this case, as in the case of economic sanctions, we can rationally understand them only if we explain them as an extreme form of Schadenfreude.

Any rational actor interested in own welfare or welfare of its population would therefore shun economic sanctions with a possible exception  of the very narrowly targeted sanctions against the people who have directly made decisions with which the sanctioner disagrees.  For the rest, we are really in a world of slanted rationality.