Monthly Archives: June 2016

Economics of Brexit

After slowly recovering from the shocking news of Brexit in the morning, I decided to browse the internet to see what the experts are saying. Two interesting articles stood out. Lawrence Summers writes in the Washington Post about implications of Brexit for the US and the global economy. The main concerns are summed up nicely in the following paragraph:

The effects on the rest of the world will depend heavily on psychology. I continue to be alarmed, as I wrote in this space a few days ago, that this unexpected outcome in the U.K. will raise the specter of “Trump risk.” If the U.K. can vote for Brexit perhaps the United States can vote for Donald Trump. I fear this possibility will lead to a freezing up of spending decisions particularly on the part of internationally oriented businesses.  The odds of U.S. recession beginning within the next 12 months are now in the 30 percent range. Also noteworthy is that an environment of increased risk aversion and flight to quality will complicate Japan’s problem of generating inflation and China’s challenge of attaining currency stability.

The rising xenophobia and racism on both sides of the Atlantic are primarily to be blamed on mismanagement of risks of globalization-the main point made by Maitreesh Ghatak of the LSE and summarized below in one of the paragraphs from the article:

Why then is immigration such a hot-button issue, shaping the discussion around the Brexit debate as well as the Trump campaign? The reason is that economic dislocation caused by impersonal market forces inevitably results in a search for visible scapegoats. No doubt xenophobia and racism is at work among some of Trump and Brexit supporters. But these are symptoms of a deeper problem. The economic reason behind the wave of xenophobia, whether it is the anti-immigrant rants of Donald Trump or UKIP (UK Independence Party) leader Nigel Farage, is really a misdirected rage at visible scapegoats of globalisation.

The next thing to see is what is going to happen to EU and the UK itself given that Scotland predominantly voted “remain” in the referendum. Fingers Crossed!

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Filed under current economic issues, European crisis, globalization, immigration

Economics of Immigration

However strong the moral and humanitarian case for immigration is, people across the western world seem to be deeply divided on the issue primarily because of the perceived negative impact of immigration on their current living standards. In the US this is evident from the political rhetoric surrounding current Presidential race and in the UK in relation to the question of staying or exiting from the EU (Brexit). I think a couple of recent papers on these issues could throw some more meat at the debate and strengthen the public discourse.

Linsensova and Sancez-Martinez (2016) talk about the long term impacts of lower migration to UK. Here is a summary of their findings.

This paper looks at the possible scenarios of migration policy should the UK leave the EU. The paper uses an OLG model which brings together labour market, fiscal and other macroeconomic effects in one framework. It also adds a dynamic perspective, differentiates between natives and different categories of immigrants and captures age and qualification compositional effects. The paper compares the two migration scenarios: Leave and Remain. By 2065, in the Leave scenario, aggregate GDP and GDP per person are 9% and 1% respectively lower compared to Remain scenario. Reduced migration after leaving the EU has a negative impact on the public finances, because of higher dependency ratio. This requires an increase in taxation of about £400 per person (2014 pounds) in 2065. The results are sensitive to the assumptions that change productivity of the labour force and dependency ratio.

A paper presented at the 2016 ASSA meetings by Jeffrey Sachs talks about the need for an international migration regime. It has some interesting suggestions for research that would help develop a clearer perspective on what such regime should look like.  Reading this paper also reminded me of an interesting paper by Jess Benhabib titled, “Optimal Migration: A World Perspective“. Here is what the paper has to say about the level of migration that would maximize world welfare.

We ask what level of migration would maximize world welfare. Welfare is assumed to be a weighted average of the utilities of the world’s various citizens, but the weights are also country specific. Using a calibrated one-sector model, we find that unless the weights are heavily biased toward the natives of rich countries, the extent of migration that would be optimal far exceeds the levels observed today. The claim remains true in a two-sector extension of the model. All versions of the model assume that migration is the only redistributive tool.

In general, it looks like if we just think narrowly about the impact of immigration on a particular country or a geographical area, the answer may or may not be convincing. But if we think about the issue in terms of the welfare of the world economy, there seems to be a sufficiently strong argument for moving people from the developing countries to the developed ones. The main problem is that the costs and benefits of migration are not only economic in nature. There are significant non-economic adjustment costs as people belonging to different cultural and social backgrounds come together. Also, there is a significant time dimension to all the costs and benefits with costs somehow perceived to be more pronounced in the short run and benefits spread over the long run. Unfortunately, the political debate on both sides of the Atlantic has been feeding off the fear that is primarily based on short term costs like rising unemployment which is often more localized and sector specific than being pervasive. The rising religious fundamentalism across the globe has only fueled this fear suggesting that the case for making academic discourse more accessible to general public has never been stronger!

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Filed under current economic issues, economics research, immigration

Gender equality and economic growth

Despite the past and current social reform movements across the globe for gender equality, there still seems to be significant resistance to it as suggested by differences in male and female labor force participation rates. So in case you are still a closeted feminist, here is an economic argument to help you come out:

For a sample of Asian countries, Kim, Lee and Shin (2016) find that if gender inequality is completely removed, aggregate income will be about 6.6% and 14.5% higher than the benchmark economy after one and two generations respectively, while corresponding per capita income will be higher by 30.6% and 71.1% in the hypothetical gender-equality economy. This is because fertility and population decrease as women participate more in the labor market.

In addition to the calibration and simulation exercises to estimate the macroeconomic impact of removing gender inequality, the data in the paper highlights some other aspects of the gender inequality puzzle. For example, in almost all the Asian countries studied in the paper, females have higher average years of schooling than men. Yet the male labor force participation rate seems to be way higher than the female labor force participation rate. So why is this the case? What factors shape the distinct incentives that females and males face to participate in the labor market? I think these questions also are good research questions in themselves.

As an aside: Female and male labor force participation rate for China are 75% and 85% respectively while there is hardly any difference between average schooling at 8.1 and 7.3 respectively. As there is a frequent comparison between India and China, it might be worthwhile to see how Indian numbers compare to these. The average years of schooling for females and males in India is 7.59 and 4.81 respectively while the female and male labor force participation rate is 30.3% and 83.1% respectively. So not only that an average Chinese male is twice as educated than an average Indian male but the female labor force participation rate in China is more than double that in India. So any suggestions about India overtaking China anytime soon have to be taken with a fistful of salt!

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Filed under economic growth, gender, labor markets, macroeconomics, social perspectives