Topic: International Economics and Development

Bravo, Sarko

Some more disappointing rhetoric from the mouth of Nicolas Sarkozy, the new French president. Once lauded as the great hope for a new France, he has revealed his protectionist instincts in Brussels.

In an article today in the Financial Times, Sarkozy mounts what the FT calls a “passionate defence of French farmers,” apparently calling for the EU to be even tougher in its defense of European agriculture in world trade talks and to “protect” its citizens from globalization. I wonder how Europe’s citizens feel about being protected from lower prices for food?

In a stunning display of perverse priorities, Sarkozy was quoted as saying, “I’m not going to sell agriculture to get a better opening for services.” But a quick glance in my Economist Pocket World in Figures 2006 suggests that Sarkozy has it all wrong: the contribution to services in the French economy in 2003 was 71.4 percent of GDP, and 74 percent of employment. Agriculture’s contribution? Just 2.8 percent (and 2 percent of employment).

Certainly many services are by definition non-tradeable (ever flown to Paris to catch a taxi?), but according to the World Trade Organization, France was the world’s fourth largest exporter of commercial services in 2004. You’d think Mr Sarkozy would want to do everything in his power to promote their growth, non?

Senate Amendment Guts Immigration Reform

The Senate’s vote yesterday to cut the number of temporary worker visas in half knocks a big hole in the comprehensive immigration reform proposal now being debated in Congress. As I’ve written in a recent Free Trade Bulletin, allowing a sufficient number of foreign-born workers to enter the country legally to meet the obvious demand of our labor market is absolutely necessary if we want to reduce illegal immigration.

Ignoring our policy advice, the Senate voted 74-24 to adopt an amendment by Sen. Jeff Bingaman (D-N.M.) that would cut the number of annual temporary “Y visas” from 400,000 to 200,000. That number is almost certainly too low to provide the workers that our growing economy needs to fill jobs at the lower end the skill ladder for which there simply are not enough Americans available to fill them. The result, if the lower cap stands, will be continued illegal immigration.

The irony is that many of the senators voting to drastically reduce temporary visas are the same senators who warn that we should not repeat the mistake of the 1986 Immigration Reform and Control Act. That bill legalized 2.7 million illegal immigrants but was unable to stop more immigrants from entering the country illegally despite beefed-up enforcement. The real flaw of the 1986 law, however, was its complete lack of any temporary worker program to provide for future, legal workers.

By adopting the Bingaman amendment, a majority of senators have turned the current reform effort into something much more like the failed 1986 law. They have kicked the illegal immigration can down the road, leaving it to a future Congress to find a lasting solution.

Smoke on Your Pipe and Put That In!

Harvard economist George Borjas, perhaps the leading academic skeptic of increased immigration, has started a blog. In a West Side Story-themed post this morning, Borjas argues that the failure of Puerto Rico’s per capita GDP to converge fully with the United States’, despite the fact that the flow of people and capital between the two countries is completely unrestricted, challenges the idea that a liberal migration policy can make people in the developing world better off.

There are also no restrictions that hamper the flow of capital between the two places. Yet despite all these unrestricted labor and capital flows, there is still a sizable income differential between the United States and Puerto Rico. By 2003, price-adjusted per-capita GDP in Puerto Rico was still only two-thirds that of the United States (according to the Penn World Table). Whatever happened to the factor price equalization theorem? If 60 years is not the “long run,” maybe Keynes was right after all.

The fact that migration entails very high costs if an important–and often ignored–part of the economics of migration. The fact that wages don’t equalize even when a “country” loses a large chunk of its population and there are unrestricted capital flows is both interesting and important. It should give some food for thought to those who view migration as a policy tool that can help alleviate many of the developing world’s problems.

I think this is misleading. Mississippi, the U.S.’s poorest state, has a per capita gross state product of about $28,000 per person, which is not quite 2/3 of the overall U.S. per capita GDP, $43,500. The relevant comparison would seem to be the per capita GDP of Puerto Rico next to that of other Caribbean islands. Puerto Rico’s PPP-adjusted GDP per capita for 2006 was about $19,000.

First, it should be pointed out that the U.S. Virgin Islands, whose inhabitants have been U.S. citizens since 1927, does even less well, at about $14,500 per capita. (That’s a 2004 number, so it’s probably a bit higher than that.) But this isn’t a very good comparison, either; the Virgin Islands has a population slightly bigger than Davenport, Iowa, the economy basically runs on tourism, and the people who own the resorts don’t live there. Cuba, with a population about three times Puerto Rico’s, comes in with a GDP per capita of around $3900, less than a quarter of Puerto Rico’s. But we already knew that communism is terrible. The best comparison is probably the nearby Dominican Republic, which is neither a socialist dystopia nor a U.S. territory. GDP per capita in the Dominican Republic is $8000, less than half Puerto Rico’s.

But who cares about Puerto Rico, the territorial jurisidiction? How are Puerto Ricans doing? According to Wikipedia’s entry on Puerto Ricans in the United States, slightly more Puerto Ricans now live Stateside than on the island, and, “in 2002, the average individual income for Stateside Puerto Ricans was $33,927.”

I find it pretty hard to see this as anything less than a slam dunk for the humanitarian benefit of the freedom of movement.

On a more technical note, why would one really expect wages to fully equalize in the absence of the idealized conditions of the economic model? First, there’s the obvious fact that an island in the Caribbean is “off the grid” of the main U.S. trade infrastructure. Second, as Borjas points out, there is a high cost to immigration. Those able to foot the bill are likely the most productive workers with the greatest capacity to save. And those with higher levels of skill are likely to see a bigger relative returns from participation with U.S. labor markets, reinforcing the incentive for the more skilled to move. If that’s true, and Puerto Rico has lost disproportionately many higher-skilled workers to the U.S., then the fact that GDP per capita is still so high compared to neighboring democracies is really a slam dunk.

To drive the point home, a fun quotation from the the CIA World Factbook entry on the Dominican Republic:

Haitian migrants cross the porous border into the Dominican Republic to find work; illegal migrants from the Dominican Republic cross the Mona Passage each year to Puerto Rico to find better work.

And Puerto Ricans who can afford it “like to be in America.”

[Lyrics to Bernstein and Sondheim’s “America” here.]

European Unions Want to Impoverish Workers

Even socialist and Marxist economists acknowledge that capital formation is the key to long-run growth and higher living standards. To be sure, they mistakenly think government should do the saving and investing, but at least they understand one of the prerequisites for future growth. Unfortunately, the same can be said for today’s European unions. According to a story in the EU Observer, trade unions are trying to discourage hedge funds and private equity from investing in Europe. This self-destructive effort – presumably motivated by a desire to prop up industries with inefficient union workforces – ensures that Europe will become even less competitive. In the long run, this means lower pay for workers:

Trade unions across the EU are preparing themselves to go on the offensive against the “big beasts” of private equity and hedge funds, believing their profit-oriented drive is undermining the bloc’s social fabric. “No one wants just a single market, they want something else out of Europe – some security against the big beasts that are in the single market like private equity and hedge funds,” the head of the European Trade Union Confederation John Monks (ETUC) told EU Observer.…Referring to “casino capitalism,” he said venture capitalists were only interested in buying a company, boosting the share price and selling, “leaving companies weakened by big debt.” …Critics say they often operate beyond normal regulations and are not transparent. The issue first generally entered the public consciousness in 2005 when Franz Muntefering, now German vice-chancellor, referred to hedge funds - which borrow large sums to bet in financial markets – as “locusts” waiting to swoop in and strip German companies of their assets, causing major job losses.

A Good Start on Immigration Reform

Today, the Senate begins debating a comprehensive immigration reform bill. The compromise bill announced last week is not perfect, but it offers a reasonable opportunity to reduce illegal immigration, secure our borders, and keep our economy growing.

The key to successful immigration reform, as I argued just last week in a new Free Trade Bulletin, is a workable temporary worker program. The compromise would allow 400,000 temporary workers to enter the country each year on “Y visas” to fill a multitude of jobs for which there simply are not enough native-born Americans available. We know from experience with the Bracero program in the 1950s that if we expand the legal opportunities for foreign-born workers to come to the United States, illegal immigration will drop.

The bill also legalizes most of the 12 million people currently in the country illegally by granting them temporary, renewable “Z visas.” Opponents will call any legalization an amnesty, but the compromise provisions would exact a $5,000 fine―not chump change for a low skilled worker―while requiring them to return to their home country before applying for permanent legal status. Permanent status would only be granted after the government clears the backlog of immigration petitions already outstanding, a process that will take about eight years. This is a far less generous legalization than what was offered in the 1986 Immigration Reform and Control Act, which handed immediate green cards to about 2.7 million previously illegal immigrants.

The bill would also shift the emphasis on immigration from family relationships to a broader list of factors, including education, English proficiency, and work experience. The bill would still allow family visas for spouses and minor children, but being the parent, sibling and grown child of a naturalized U.S. citizen would not longer be sufficient qualification.

This provision is drawing flak from a number of immigration supporters, but the shift away from a family-dominated immigration system makes sense. It is easier today than it was a century ago to maintain ties to extended family because of international travel and international telecommunications. Although I believe fears of “chain migration” are over-blown, this compromise would help to alleviate some of those fears among people who would otherwise support immigration reform.

Any legalization would be put on hold until certain quantifiable “triggers” are met. The requirements include beefing up the border patrol to 18,000 agents, erecting a 370-mile fence along the U.S.-Mexican border, and expanding detention facilities to hold up to 27,500 illegal aliens per day.

My concern with the triggers is that they will needlessly delay the single most important remedy for illegal immigration―a temporary visa program for new workers. The problem of illegal immigration exists because our immigration system is out of step with the realities of the American labor market. As Homeland Security Secretary Michael Chertoff testified before Congress in February, a legalization program would significantly reduce illegal traffic across the border, enhancing the ability of U.S. agents to capture people who would still be sneaking in to commit criminal or terrorist acts.

The bill also requires a nationwide employment verification program covering every U.S. worker, whether native or foreign-born. This is also troubling. An existing pilot program has exposed a disturbingly high error rate. U.S. citizens have been rejected by the system, requiring them to visit with immigration officials to prove their legal status. I doubt many native-born Americans will want to entrust their ability to earn a living to the reliability of a centrally controlled government data base.

These are kinks that can and should be worked out in the legislative process unfolding as we speak. Despite its shortcomings, the immigration reform plan unveiled last week and now before the Senate contains all the essential elements to finally address the growing problem of illegal immigration.

Europe’s Best and Brightest Flee the Welfare State

A Washington Post column on relations between Europe and the United States explains that ambitious and entrepreneurial Europeans are “voting with their feet” and moving to America:

Young Europeans are more eager than ever to work and study in the United States. A brain drain from France and Germany has sent some of their best and brightest to the United States. A top destination is Silicon Valley; an estimated 80,000 young French people, known for their math skills, have migrated there in pursuit of jobs with high-tech firms. When I spoke last year with about 50 Germans studying at MIT and Harvard, not one of them expressed a desire to return home. They all wanted to live and work in the United States, where, they said, opportunities are far more abundant. Many complained that the sclerotic welfare states in Europe punish those who work and reward those who don’t. So they’re fleeing the crushing tax burden at home for more lucrative challenges in the United States. Europe’s leaders are slowly waking up to the fact that, with shrinking birth rates and a diminished work force, the continent may no longer be able to afford lavish social benefits, such as universal health care, retirement on full pensions as early as age 50 and up to nine weeks of paid vacation per year. They are exploring best practices in the United States to see how to rekindle entrepreneurial spirit and push people off welfare rolls.

Germany Attacks Ireland

This is a bad news/good news story. The bad news is that Germany is attacking Ireland. The good news is that the Germans now attack with words and bureaucratic schemes rather than Panzers and Stukas. But the attack - based on German complaints that Ireland’s low tax rates are “unfair” - is nonetheless despicable. Instead of attacking Ireland, the Germans should learn from the Irish Miracle and cut tax rates and reduce the burden of government. Fortunately, as noted by an article in the Irish Examiner, the Irish are resisting Germany’s fiscal aggression:

The German finance minister has threatened to go after Ireland’s low corporation tax system that he says leads to unfair competition with Germany and other EU countries. …Ireland has the second-lowest corporation tax rate in the EU at 12.5%, which is credited for creating the celtic tiger, attracting massive foreign investment and jobs. Germany has the highest at 38.6%. In 2004 over €33 billion flooded into the country, almost the same as went to Germany. German minister Peer Steinbruck warned that Ireland and other low tax countries in Eastern Europe were involved in what he called cutthroat competition that was not sustainable in the long run. …The German government is adopting a two pronged attack — first in pushing the European Commission to develop an EU-wide harmonised tax base and secondly by reopening the EU’s Code of Conduct on unfair tax competition. …Politicians from all parties, Internal Markets Commissioner Charlie McCreevy and business interests have all warned that the plan to harmonise the corporate tax base must be killed. Taoiseach Bertie Ahern has said that harmonizing the tax base across the EU could seriously affect the country’s ability to compete for investment and jobs in the global economy. …Mr McCreevy has said that those pushing for the Common Consolidated Corporation Tax Base (CCCTB) see this as the first step in having a single uniform corporate tax rate across the union.