In Focus

Immigration: building a wall will not help, but a population policy might

Monday September 05, 2016 Dr Ganesh Nana

Okay, let’s nail this immigration issue once and for all.

 

Firstly, a declaration of a conflict of interest.  I am a first generation New Zealander born to immigrant parents who arrived in New Zealand in the early 1950s and have lived here since.

 

So, yes, I’m likely to be biased. But, remember, most New Zealanders will have an immigrant somewhere in their back history.  However, I will leave you to judge whether my thoughts are suitably robust for grown up debate.

 

 

The context

Now, let’s be clear that the immigration surge we have been experiencing is a relatively short-term phenomenon.  And the consequential population growth, in the context of the long-term experience, has been little short of ordinary.  The 3-year immigration surge has lifted population growth over the last 10 years to a yawn-inspiring annual average of 1.2%, identical to that for the previous 10 years, and only slightly higher than for the 1986-96 period.

 

NZ population growth

 

So if your time horizon is supremely short and you are after knee-jerk responses to latest data (e.g. finance markets) then it will be no surprise that you blame the nation’s ills on the recent immigration shock.  However, it would be more appropriate (and honest) to argue for or against immigration using a much longer-term time horizon.

 

Why? Well that is because there are many influences arising from immigration that are inherently long term in nature.

 

So, what is an appropriate framework to assess the impacts of immigration from an economist’s perspective?  I suggest there are 4 ways that economists look at immigration.

  • demand side influences
  • supply side influences
  • both demand and supply side influences
  • a component of a population policy

 

 

Demand side influences

Immigration adds to economic activity by increasing total demand from households, as a result of the extra people now resident here.  In essence, this provides a larger domestic market for firms within which to ply their trade.  Consequently, potentially higher profits and profitability for firms could also be in store.

 

However, this perspective also acknowledges the downside of potentially adding to inflationary pressures as demand grows too fast.  The prime example is the current imbalance in house prices, which is being blamed on immigration-fuelled demand outstripping current supply.

 

Taken to its logical extreme, this perspective will likely point out other costs in the form of over-crowded school rooms, lengthy hospital waiting lists, congested roads and slow internet connections as the burgeoning demand side strains existing network infrastructure and service capacities.

 

 

Supply side influences

Another perspective focuses on the influence of immigration on the supply side – primarily through adding to the size of the labour market.  That is, immigration is a way to increase the quantity of workers available to firms.

 

This perspective has been, arguably, the primary rationale underpinning NZ’s immigration policy stance (and has been the case virtually from the year dot).  Although the New Zealand context is more in the vein of, replacing lost workers (through emigration) and then, secondly, adding to the size of the workforce.  As is illustrated, there has been a regular net outflow of NZ citizens every year.

 

NZ population change

 

Further, if policy settings are clever they will aim to replace the quantity of workers lost with those of a higher quality (or skills) for the replenished workforce.  However, the cleverness of NZ policy in this regard is arguable.  This arises from short term measures and lobbying that place occupations on the skill shortage list.  Such a list should more correctly arise from robust analysis and longer-term workforce considerations.

 

Consequently, this supply-side perspective provides a foundation for the “foreigners taking our jobs and also depressing wages” argument.

 

However, from the supply-side perspective, immigration should not be criticised for the numbers (or quantity) entering New Zealand.  But the mix of quality arising from the implementation of the policy may well be called into question.

 

More broadly, immigration adds to capacity of the economy and so, potentially reduces inflationary pressures.

 

 

Both supply and demand influences

The previous two perspectives can be rightly dismissed as superficial.  As all economists (should) know, immigration influences both the demand and the supply sides together.  Thus any robust perspective must assess the aspects noted in both of the two sub-sections above.

 

The main addition is to note that the demand-side influences are pretty close to immediate, while the supply-side (or capacity enhancing) influences take (much) longer.

 

Thus, the trick to policy implementation is to strive for some balance between these two influences.   And that is why sudden surges, and slumps, in immigration are not helpful when you are looking to maximise the benefits (extra demand, profitability, workforce, skills, capacity) and minimise the costs (congestion, competing against home-grown workers, depressing wages, property price bubbles).

 

And, of course, the last three years have seen a sudden surge in immigration, which has contributed to much knee-jerk commentary.

 

 

A component of a population policy

There is a fourth perspective within which we can view immigration.  And that is as part of a coherent population policy.

 

Immigration can be used to replace holes in the demographic structure (e.g. the youth/young that leave), which is closely allied to supply-side labour market perspective.

 

More broadly though, we could venture into questions like what is the target population of the country at some future date?  Underpinned by an economies of scale argument, this suggests that a population that is too small leads to an inability to fund large-scale infrastructure and other ‘nice to haves’.  Or, alternatively, too small a population means such infrastructure are more costly or less efficient.  For example

  • air, sea, road and rail transport connections, routes, ports, and networks
  • environmental protection, maintenance, and enhancement
  • sewerage, drainage, and reticulation systems
  • hospitals and  specialist treatment centres (and related clinical trials)
  • specialist universities and research institutions

An explicit population target (with its concomitant immigration policy) would assist decisions as to infrastructure projects and developments.  In its absence, any large infrastructure proposal always (it seems to me) begs the question: for what population is this being built?  If the answer is yesterday’s or today’s population then the proposal is almost certainly too late.  If the answer is tomorrow’s population, then there is the obvious question: how big is that population?

 

 

A thought experiment

There are, of course, several elements to population growth, with only some within our ambit of control.  The surge, if that’s the right word, of the past 3 years has been driven as much by the changes in the movement of New Zealand citizens as in the migration of foreigners.

 

But, a population policy is properly focussed on the long run.

 

So I ask what if, in response to the 2-year surge in immigration and population growth experienced in the early-1980s, an immigration review decided to then close the doors.  That is, all immigration of non-NZ citizens was halted from 1984.

 

NZ population

 

From a population of a shave over 3.2 million in 1984 we would have just over 3.1 million people residing here in 2016; compared to the actual 4.7 million.  The fall in population arises from a combination of a lower natural increase, as well as the ongoing exodus of NZ citizens and the emigration of some of the non-NZ citizens that had arrived earlier.

 

I suggest a 2016 population of 3.1 million would have considerable difficulty funding that list of ‘nice to haves’.  Many regional polytechnics would be a shell; the rural broadband network would likely be languishing on someone’s wish list; there would almost certainly be way less than 8 universities; high-performance sports centres may also be standing in the funding queue; and more (many) would be looking offshore for specialist medical treatments.

 

Consumer services from abroad reliant on a large(ish) market (e.g. Netflix), or connections that rely on at least one sizable international city may also be vulnerable.  Imagine having to fly to Sydney in order to be able to access overseas holiday options?

 

As for the compulsory schooling system, on-line learning may be the answer to get past the economies of scale argument, but then there’s that broadband issue again?

 

So, here’s hoping any review of immigration policy sees past the short-term hand-wringing and desire to find a scapegoat for the nation’s ills.  Yes, the implementation of immigration policy – e.g. the composition of the skill shortages list – may have a lot to answer for.  But let’s not use that as an excuse to hide ourselves behind a wall.