Wednesday, June 15, 2011

Immigration and Oz: What Gives?

The year is 1988. Declaring himself alarmed by a record immigration intake, then Federal opposition leader, John Howard, released the One Australia policy.

That policy, justified on the need to preserve the ethnic makeup of Australia, called for tougher immigration rules.

As the chart shows, the migratory intake fell dramatically (as did Howard himself in 1989, partly due to opposition within his own Liberal Party of Australia to the One Australia policy).

Population increase: Components. (ABS. 3101.02)

It is debatable the extent this reduced migratory intake was due to the approaching 1991 recession, or to eventual tighter selection criteria voluntarily applied by the Hawke/Keating government, inspired by One Australia. What's indisputable is that the immigration intake rebounded to higher records... during the Howard Government, in spite of its new tough asylum seekers policy.

The contradictions revealed by this episode speak volumes about immigration in Australia, where a populist rhetoric depicts immigration as a risk to some undefined "Australianness", while the Government tries to sell immigration as an unmitigated good and deeper interests, often unmentioned and officially unacknowledged, both oppose and support immigration.

In an attempt to shed some light on these opposed interests, let's consider what facts are clear?

Natural Increase.

An obvious characteristic in the chart above is that natural increase is remarkably constant.

As a consequence, relatively constant increases in absolute numbers result in a decreasing population growth in percentage terms. That is, smaller and smaller proportions of native Australians join the workforce, the internal demand and the taxpaying base.

Consider the children born in Australia in 1982, shortly before Hawke took power. From the first moment, these children have a difficult to assess effect over the Australian economy.

At one hand, they increase demand for private goods and services, which their parents need to provide by themselves or with the help of government transfers.

Increases in aggregate demand are seen as the engine of economic growth, so one could conclude with mainstream economists, that they have a positive effect on the economy.

A more careful consideration, however, reveals that such conclusion is not always granted: it's possible for an increase in demand by the children to be partially offset by their parents' decreased consumption. To what extent one effect prevails over the other is impossible to assess on the data available.

But the 1982 cohort also increases demand for public services (mainly education and health), which require public funding.

And these individuals only start to join the workforce by 1998, into the Howard Government. At this point, they gradually start to earn a living by themselves, freeing their parents' income for their own consumption, increasing their individual consumption, and paying taxes.

For a government as the Australian, that insists on managing its finances by the "spending funded by taxes" logic (logic disputed by the MMT school of economics), this lengthy transition from net recipient of government transfers and user of public services, to taxpayer makes natural increase of the population a relatively unattractive option.

Net Overseas Migration.

From a government's perspective, the option of net overseas migration as population growth driver is easier to assess and much more convenient.

For one, net overseas migration, as shown in the chart, is much more variable and probably easier to control. By itself, that explains that it has recently become a much larger component of population increase.

Are there any other advantages in immigration?

Immigrants do not require public funding to develop their labour skills [#]. If they arrive through the skilled migration stream, they have already completed their professional training. If they arrive through the student stream, and obtain residence while in Australia, they pay for their own training.

In any case, this allows Australia to externalize training costs: either individual migrants or their countries of birth assume these costs and the Australian Government benefits in that measure.

Further, migrant families arriving in Australia need to have at least one breadwinner in working age (i.e. the main applicant in the visa application protocol), and are subject to a two-year waiting period before they can claim social security: they need to provide for themselves from the start, paying taxes in the process.

Notice as well that, as the proportion of older Australians increases, the number of retirees increases and they will all but stop paying taxes. Again, migrants come in handy to fill the void left.

What's more, migrants also contribute to aggregate demand.

The Australian Government Perspective.

From the considerations above it appears that the case is clear: migration is in the interests of the Australian Government, either as a replacement for natural increase or as a boost to it.

In fact, the literature largely follows the logic described above and arrives at similar conclusions, although with some nuances. See for instance the Garnaut, Ganguly and Kang 2003 report (section 2), commissioned by the Department of Immigration, Multicultural and Indigenous Affairs. [*]

But is it legitimate to assume that the interests of the Australian Government coincide with the interests of all Australians? What about the migrants themselves?

Interestingly, the Garnaut, Ganguly and Kang report mentioned above attempted to consider this question explicitly. Reading the report from this perspective, the answer doesn't seem so clear.

This series will continue next week: who benefits from immigration?

[*]  One of the factors the report considers, which I did not include here, is the "scale factor". Essentially, larger populations, regardless of origin, should bring about scale economies. The report does not provide any specific estimates of this effect. Further, the report does not consider the possibility that this effect might suffer from decreasing marginal effects. For those reasons, it seems sensible to omit its consideration here.

[#] Here a note for readers outside Australia is required. Immigration to Australia, perhaps unlike the US, for instance, is largely legal migration. This provides the Commonwealth Government with considerable powers to shape migration. As suggested in the main text, a large contingent of migrants come through the skilled migrants stream. Those who come through other streams often don't require working skills (for instance, relatives of Australian residents, part of the family reunion stream and dependent upon the residents for their support; prospective business owners, who are required to bring in capital, but no specific labour qualifications).

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