Economic Growth

What do nationalism and immigration mean for economics?

Police stands in front of supporters of the anti-immigrant Alternative for Germany (AFD), blocking the entrance to a property which was used by a German political art group to built a pared-down version of Berlin's Holocaust memorial next to the home of AFD senior member Bjoern Hoecke in  the village of Bornhagen, Germany, November 22, 2017. Hoecke in January criticised the memorial in the centre of Berlin and said history should focus on German victims.REUTERS/Kai Pfaffenbach

Image: REUTERS/Kai Pfaffenbach

Jason Furman
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There can be no question that immigration provides a net economic benefit to advanced economies, particularly those experiencing a retirement boom. But as long as anti-immigrant sentiment dictates the political narrative, growth will suffer, and resurgent populist forces will grow stronger.

One of the central challenges facing the world’s advanced economies is slowing growth. Over the last decade, growth rates in the advanced economies have averaged 1.2%, down from an average of 3.1% during the previous 25 years.

History shows that slower economic growth can make societies less generous, less tolerant, and less inclusive. So, it stands to reason that the past decade of sluggish growth has contributed to the surge of a damaging form of populist nationalism that is taking hold in a growing number of countries.

As in the darker decades of the twentieth century, today’s nationalism takes the form of heightened opposition to immigration and – to a lesser degree – free trade. Making matters worse, today’s toxic nationalism will exacerbate the economic slowdown that fueled its emergence.

Turning this vicious circle into a virtuous one – in which increased openness drives faster growth – will depend, at least in part, on making immigration more compatible with inclusionary forms of nationalism.

The economic evidence on this issue is clear: immigration makes a strong contribution to economic growth. Moreover, immigration is more necessary than ever, because population aging and lower birthrates across advanced economies are producing a retirement boom without a commensurate cohort of native prime-age workers to support it.

For example, Japan’s working-age population has been shrinking since 1995. In the European Union, immigrants accounted for 70% of labor-force growth from 2000 to 2010. And in the United States, immigration is the primary reason the workforce will continue to grow; if the US relied only on native-born workers, its labor force would shrink.

Faster growth is beneficial even if it must support a larger population, because working immigrants pay taxes that help support pensioners and retirees. In general, it is much better to be a fast-growing country with a vibrant, expanding population than a country with a dwindling population, like Japan.

Moreover, in addition to expanding the workforce, immigrants actually boost per capita GDP by increasing productivity – that is, the amount that each worker produces. The reason is that immigrants are much more likely to be entrepreneurial and to start new businesses.

In Germany, for example, foreign-passport holders started 44% of new businesses in 2015. In France, the OECD has estimated that immigrants engage in 29% more entrepreneurial activity than native-born workers do, which is similar to the average for the OECD as a whole. And in the US, immigrants take out patents at 2-3 times the rate of native-born citizens, and their innovations benefit non-immigrants as well.

There can be little doubt that immigrants expand the overall pie; but what about their effect on how that pie is shared? Here the evidence is less clear. There are certainly winners and losers. Yet, on balance, the available evidence suggests that immigrants do not reduce wages for native-born workers. In fact, it is more likely that immigrants increase wages overall.

One recent study of France, for example, found that each 1% increase in immigrants’ share of employment within a given département raises its native-born workers’ wages by 0.5%. It would seem that in addition to contributing to the size and productivity of the workforce, immigrants also often complement the skills of native-born workers, helping them earn more.

My professional focus is on economics, so I have emphasized the role of growth. But that clearly is not the only factor behind the rise of populist nationalism. The fact that developed countries are changing culturally also matters, perhaps even more so. In the US, for example, the foreign-born share of the population has risen from 5% in 1960 to around 14% today. As Harvard University’s Yascha Mounk notes in his insightful new book, The People vs. Democracy, that is the highest share since the last major anti-immigrant backlash in the US: the early twentieth-century “yellow peril.”

The trends are similar, and sometimes even more dramatic, in other developed countries. The foreign-born share of the population in Sweden, for example, has gone from 4% in 1960 to 19% today, representing a much larger shift than that in the US.

All countries face a choice when it comes to immigration. They can pay an economic price to follow a more exclusionary course, or they can reap the economic benefits from greater openness. But while public policies can help ensure that the benefits of openness are realized, we should not lose sight of their political and economic limitations.

Looking beyond policy solutions, we also need to establish a cultural expectation that immigrants will not just bring diverse perspectives, but also join their new country as citizens. That means speaking the language, honoring national traditions, and – as I saw first-hand while discussing these issues at Les Rencontres Économiques in Aix-en-Provence, France – cheering for the national soccer team.

In the US, in particular, that is the vision of immigration and inclusive nationalism that we should be working toward – including the better soccer team.

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