Topic: International Economics and Development

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.

Switzerland Officially Rejects Request from Brussels to Negotiate Surrender of Tax Sovereignty

Politicians from high-tax nations in the European Union are upset that companies - and tax revenues - are escaping to Switzerland to benefit from better tax law. But rather than fix their bad policies, they want the Swiss to raise the tax burden on economic activity in Switzerland. Not Surprisingly, as the Neue Zuricher Zeitung reports, Swiss leaders have said no:

The Swiss government has rejected formal negotiations with the European Union in a bid to resolve a controversy over the country’s corporate tax system. …Finance Minister Hans:Rudolf Merz and Foreign Minister Micheline Calmy:Rey said on Wednesday that Switzerland would not surrender its sovereignty on tax matters. The statement came in the wake of a decision earlier this week by EU ministers to open official negotiations with Switzerland. …Over the past few weeks several ministers have come out against holding formal negotiations with Brussels in the tax row. Merz said the cabinet and the cantons, which have wide:ranging autonomy in fiscal matters, wanted to ensure that Switzerland remains competitive.

That Mobile Line in the Sand

In a recent post and in this Washington Times commentary today, I note that there is less than meets the eye with respect to last week’s “grand deal” to include labor and environmental provisions in trade agreements reached between congressional Democrats and the White House.  (That’s not to say its unimportant — it is significant, and also regrettable).

One of my points (implicit as it may be) is that caving on labor and the environment would not be enough to warm Congress to the benefits of trade liberalization.  What was pitched to the press as the final price to win Congressional support for the administration’s trade agenda was merely the admission fee.  More demands would be forthcoming.

Alas, today members of Congress (22 Ds, including the trade leadership and 20 Rs) petitioned the U.S. Trade Representative to launch a Section 301 investigation into Chinese currency manipulation.  The petition is touted as “one last chance” for the Bush administration to act on the currency manipulation issue before legislation effectively mandating that conclusion, along with sanctions, is moved in Congress.

I can already see the words of Ways and Means trade subcommittee chairman Sander Levin (D-MI) when the USTR turns down today’s 301 petition.  “How can any member of Congress in his right mind vote to support any more trade agreements when this administration is unwilling to stand up for the working men and women of America?”

Of the four pending bilateral trade agreements (Korea, Colombia, Peru, and Panama), I’m betting exactly none will become reality during this presidency and beyond.