What would happen if foreign direct investment (FDI) simply disappeared? Or, more specifically, what would “a hypothetical world without outward and inward FDI from and to low- and lower-middle-income countries” look like? A brand new study tries to quantify this hypothetical. They find,
On average, the gains from FDI in the poorer countries in the world amount to 7% of world’s trade in 2011, the year of our counterfactual analysis. Second, all countries lose from the counterfactual elimination of FDI in the poorer countries. Third, the impact is heterogeneous. Poorer countries lose the most, but the impact varies widely even within this group – some lose over 50% and some very little. The impact on countries in the rest of the world is significant as well. Some countries lose a lot (e.g. Luxembourg, Singapore, and Ireland) while others (such as India, Ecuador, and Dominican Republic) lose less. Pakistan and Sri Lanka actually see an increase in their total exports due to the elimination of FDI.
Figure 1 Percentage change in total exports from eliminating outward and inward FDI to and from low- and lower-middle-income countries
On average, the gains from FDI amount to 6% of world’s welfare in 2011. Further, all countries in the world have benefited from FDI, but the effects are very heterogeneous. The directly affected low- and lower-middle-income countries see welfare changes up to over 50% (Morocco and Nigeria), while some of the remaining 68 countries, such as Ecuador, Turkmenistan, and Dominican Republic are hardly affected. A higher country-specific production share of FDI leads to larger welfare losses, all else equal. Intuitively, a larger importance of FDI in production leads to larger welfare losses when restricting FDI. A larger net log FDI position leads to larger welfare losses. Intuitively, if a country has more inward than outward FDI, restricting FDI will lead to larger welfare losses, as FDI is complementary to other production factors and therefore overall income increases more than FDI payments.
Figure 2 Welfare effects of eliminating outward and inward FDI to and from low- and lower-middle-income countries (%)
The authors conclude, “Overall, the analysis reveals that FDI is indeed an important component of the modern world economic system. The results suggest positive payoffs to policies designed to facilitate FDI, particularly those concerning protection of intellectual property.”
We use two sources of data—the Current Population Survey (CPS) and the Survey of Income and Program Participation (SIPP)—to explore the differences in occupational licensing between natives and immigrants. Each dataset provides unique advantages, allowing us to paint a clearer picture of how occupational licensing differs between natives and immigrants than would be possible by using either dataset alone.
Though the CPS and SIPP differ in some key ways, where comparable our results are quite similar between the two datasets. We find that immigrants are significantly less likely to have an occupational license than natives; this gap is larger for men than for women and is especially large for the highest education level. The wage premium from having a license may not differ between natives and immigrants when controlling for English language ability, suggesting that though immigrants are less likely to have a license, they seem to benefit at least as much as natives from having one. Licensed workers tend to work more hours per week than otherwise similar unlicensed workers, so the wage premium understates the earnings premium.
Using the CPS, we find that the native/immigrant licensing gap declines with years since migration, consistent with immigrants assimilating toward natives. We also find large differences in licensing rates by region of origin; in particular, women from the Caribbean, Southeast Asia, and Africa have a higher probability of having a license than otherwise similar natives.
Using the SIPP, we find that a lack of English language proficiency lowers the probability that an immigrant has a license, even when controlling for other individual characteristics such as education level. Utilizing the richer set of occupational licensing questions available in the SIPP, we find no evidence to suggest that license characteristics differ between natives and immigrants, and thus we find no evidence that natives and immigrants are acquiring different types of licenses.
Our results suggest that occupational licensing disproportionately affects immigrants, especially male immigrants, those lacking English proficiency, and the most educated group. Indeed, insofar as occupational licensing helps to protect incumbent (largely native) workers in an occupation from competition, it is unsurprising that immigrants are particularly impacted (pg. 18-19).
They also find, “Skill-based immigration would favor immigrants with high levels of education. Our results indicate that it is precisely this group that exhibits the largest licensing attainment gap with natives. Increasing the flow of immigrants from this education level may lead to substantial occupational mismatch for this group of immigrants if they face difficulty in acquiring licenses needed to work in their pre-migration occupations” (pg. 20).
Regressive regulations like this are low-hanging fruit that can easily be changed.
King’s College political theorist Adam Tebble was recently interviewed about his latest paper on epistemic liberalism and open borders. Explaining epistemic liberalism, he says,
Epistemic liberalism is a tradition of thought that places questions about knowledge, complexity and social learning at the heart of debates in political philosophy, initially with regard to debates about economic organisation and distributive justice. Key thinkers in this tradition are Karl Popper, Michael Polanyi and of course Austrian School economists such as Friedrich Hayek, although there is also something to be said for including David Hume and John Stuart Mill on the list, given what they have to say about justice in extended or ‘large’ societies and about our liberty to engage in ‘experiments of living’ respectively.
I pick up where these authors, and particularly Hayek, leave off by claiming that epistemic considerations are not just crucial to debates about distributive justice, but also to more fundamental questions about the status of the background norms and conceptions of the good that inform the economic choices that we, either as self-interested individuals or as other-regarding pursuers of collective projects, may make. Thus, in Epistemic liberalism: a defence I seek to build upon Hayek’s claim about the existence of an economic knowledge problem – where the knowledge relevant to our deciding what to do with resources is for a variety of reasons uncentralisable – to claim that there also exists a more profound cultural knowledge problem.
How does this relate to open borders?
In contrast to much of the literature on migration and justice, and especially in contrast to that which defends a more liberal position, the argument I make in favour of more open borders focuses not upon the interests of immigrants or of the already-resident, but upon those whom migrants leave behind in their countries of origin. In this sense my argument represents something of a breakthrough, for it seeks to claim the interests of those left behind for those arguing in favour of the more liberal approach, rather than leaving them to be appealed to in arguments against it, most notably by writers on brain-drain. My argument, then, can be read as a response to brain-drain critiques of more open borders and to scepticism about freedom of movement in general.
There is some very interesting work in this area, particularly on social remittances and their effects by authors such as Kathleen Newland and Peggy Levitt. Both their work and studies by others in development economics do show how, through visits home, via regular communication, or both, immigrants also remit the values of their adopted nations to those they have left behind. Indeed, there is evidence to suggest that not only the relatives of immigrants, but those who live near to them, are also impacted by this phenomenon.
What’s more, “open borders not only enable migrants to assist those left behind in ways that alternative cross border resource transfer mechanisms cannot, but also assist governments to do the same, via a process of what I call ‘state signalling’.”
A new paper forthcoming in the journal American Economic Review: Insights estimates the effect of trade with China on American consumers and shows us what we stand to lose if we don’t end the trade war.
In “Estimating US Consumer Gains from Chinese Imports,” economists Liang Bai of the University of Edinburgh and Sebastian Stumpner of the University of Montreal and the Bank of France study price data from the Nielsen Homescan panel to find that trade with China reduced the prices Americans paid for consumer tradables by 0.19 percentage points per year. You can download a draft of the paper here.
Bai and Stumpner argue that about a third of the consumers’ gain from trade with China comes from greater product variety while the other two-thirds come from lower prices for the goods people were already buying.
Another way to put it is that inflation was lower–prices didn’t rise as rapidly–because of trade with China…The direction of the result won’t surprise economists, who have argued for centuries that international trade helps a country’s citizens by making it possible for them to get more with every hour of their hard-earned labor.
Trade and globalization have provided undeniable economic benefits for the vast majority of American families, businesses, and workers. Most obvious are the consumer gains. Several recent studies have found that freer trade with China, for example, has generated, through increased competition and lower prices, hundreds of billions of dollars in U.S. consumer benefits — benefits that, according to economists Xavier Jaravel and Erick Sager, are the equivalent of giving every American “$260 of extra spending per year for the rest of their lives.” Consumer gains from imports, in general tilted toward the poor and the middle class, are especially tilted toward them when it comes to goods that are made in China and sold at stores like Walmart. The magnitude of such benefits also debunks the well-worn myth that free trade is mainly about cheap T-shirts. Indeed, trade’s consumer surplus is a big reason that Americans today work far fewer hours to own far better essentials than at any prior time in U.S. history.
Then there are trade’s overall benefits for the economy. A 2017 Peterson Institute paper calculated the payoff to the United States from expanded trade between 1950 and 2016 to be $2.1 trillion, increasing U.S. GDP per capita and per household by around $7,000 and $18,000 — with benefits, again, disproportionately accruing to households in the bottom income decile. The U.S. International Trade Commission, moreover, found in 2016 that U.S. bilateral and regional trade agreements such as NAFTA generated small but significant annual increases in GDP, as well as in employment and real wages among highly skilled and less skilled American workers. As the American Enterprise Institute’s Michael Strain has noted, trade-skeptical populists who downplay this impressive macroeconomic boost ignore that, as our current economic moment attests, a small bit of extra GDP growth can mean big things for lower-wage, lower-skill workers in terms of employment and possible government assistance.
Trade and globalization also support American companies and workers, even in manufacturing. The Commerce Department, for example, has estimated that almost 11 million jobs depended on exports of U.S. goods and services in 2016, and foreign direct investment in the United States — the necessary flip side of our oft-maligned trade deficit — supported millions more. Meanwhile, American companies that adapt and thrive in today’s economy most often do so by making use of imports and global supply chains. The San Francisco Fed, for instance, recently estimated that almost half of U.S. imports are intermediate products purchased by American manufacturers to make globally competitive finished goods; the country’s biggest exporters, therefore, are also its biggest importers. Numerous other studies have found that the vast majority of the value of an American company’s assembled-abroad product (such as an iPhone, assembled in China) accrues to the U.S. company, including its workers and shareholders — not to the place of final assembly (despite what a gross bilateral trade balance, which attributes an import’s full cost to its final export source, might say).
…My 2017 survey of the academic literature on over a century of U.S. protectionism pre-Trump showed that, with very few exceptions, it imposed immense economic costs on American consumers, workers, and companies (more than $600,000 per year for every U.S. job created) while also failing to open foreign markets or resuscitate protected American firms and workers over the longer term. In case after case, the jobs still disappeared, and the companies either went bankrupt or came back to the government for more help. And it’s happening again: Though American steel consumers are paying much higher prices than their global competitors, U.S. steel-industry stocks lag far behind the S&P 500 index. For these and related reasons, economists of the Left, Right, and center continue to oppose tariffs overwhelmingly (93 percent of a recent IGM Economic Experts Panel of dozens of top economists, to be exact), and they support freer trade and globalization.
I’ve written a lot of about political knowledge (or the lack of). A recent Pew study tests Americans’ religious knowledge and the results aren’t exactly inspiring. When it comes to Christian or biblical basics, the majority of the population answers correctly. Less so when it comes to Islam, but still a majority.
When you start to move beyond these religions, however, the knowledge drops drastically.
The next bit reminded me of an incident at church a few years back. During a lesson, the teacher made a comment about how he “never asks about other people’s religion, but they always ask me about mine.” He took this as evidence of the “truthfulness” of Mormonism. I did not hesitate to point out that their curiosity likely had less to do with the Church’s “truthfulness” and more to do with us being a supposedly weird, polygamous cult with a different book. I then noted that learning about other religions improves interfaith dialogue by allowing us to better communicate with those of different faith backgrounds.
As the data below demonstrate, that teacher was not alone: Mormons are some of the most well-versed when it comes to the Bible and Christianity, but some of the least knowledgeable regarding other religions.
Relying on a global dataset from the European Patent Office (PATSTAT), researchers were recently able “to trace knowledge flows using cross-patent citations, that is, the extent to which countries cite patents from other innovators as prior knowledge in their own patent applications. A first look at the data (Figure 3) suggests knowledge flows have increased significantly over the last two decades, and China and South Korea (depicted in Figure 3 as ‘other Asia’) have become substantially more integrated in global citations, both as citing and as cited innovators.”
They also find that “the share of technology leaders’ knowledge that diffuses to emerging market economies has increased steadily and significantly over time – and this finding is robust to excluding China from the ‘recipient’ economies (Figure 4). In contrast, the diffusion of knowledge from the G5 to (non-G5) advanced economies has remained flat or even moderated somewhat – albeit from a higher level – since the global financial crisis.”
It turns out
that both emerging market and other advanced economies have been able to capitalise on knowledge flows from the G5 to increase domestic innovation (measured by patenting) – with foreign knowledge playing a relatively larger role than domestic R&D in emerging market economies. These results also apply to productivity, suggesting that knowledge from the G5 has contributed to boosting income levels in other countries. The impact on productivity is economically meaningful, especially for emerging market economies. For instance, between 2004 and 2014, knowledge flows from the technology leaders may have generated, for an average country-sector, about 0.7 percentage point of labour productivity growth per year (Figure 5). This amounts to about 40% of the observed average sectoral productivity growth in this period.
Finally, the researchers’ “results point to a positive empirical relation internationally” between competition and innovation. They conclude,
Globalisation has intensified the international diffusion of technology, which is crucial to share growth potential across countries and boost global growth. The positive impact has been particularly large for emerging market economies, helping increase productivity for them, and supporting income convergence. Our results also suggest that the growing competition from emerging market economies may lead to more innovation, even in advanced economies.
So remember that wall Trump keeps promising? Seventy percent of it was completed by previous administrations. Which is to say that immigration idiocy didn’t suddenly begin in 2016.
When it comes to deportations, the Trump administration hasn’t reached the heights of the Obama administration. According to Axios, “Immigration and Customs Enforcement has deported more immigrants this fiscal year than any full fiscal year of Donald Trump’s presidency, but it has yet to reach Barack Obama’s early deportation levels, according to new internal Department of Homeland Security figures obtained by Axios.”
According to the Marshall Project, the current detention system has been continually expanding over the last 25 years:
Under President Bill Clinton the daily population in detention tripled from what it had been in 1994 to nearly 20,000 at the end of his second term. A pair of laws passed in 1996 and signed by Clinton resulted in a vast expansion of the system, introducing mandatory detentions for asylum seekers and legal immigrants who had committed crimes, indefinite detention and additional spending on enforcement. In the aftermath of the terrorist attacks of 9/11, President George W. Bush also cracked down on immigration, ending a policy in 2005 that permitted those being caught crossing the border to be released until their court dates. By the time Barack Obama took office, the average daily population had ballooned to more than 30,000.
Though detention numbers dipped briefly under Obama, by the time of the 2016 election the daily average had reached just over 34,000 after an influx of Central American migrants at the southern U.S. border. In each administration, the growth of the detention system was used to broker political compromises in lieu of dealing with an overburdened immigration system.
This is why claims that “children in cages” began under previous administrations are actually true (though the Trump administration has taken it to 11). And at least some criticisms began under the Obama administration. For example, National Review pointed to a 2011 PBS Frontline special that shined a critical light on the administration’s immigration enforcement:
The yearlong investigation did an extensive and deep dive into the U.S. immigration enforcement system and stories of hidden abuse in detention centers. The nearly hourlong report makes for harrowing viewers: Women who have been detained complaining about being harassed by guards for sexual favors, sexually assaulted by guards, and guards threatening to kill the women they are harassing if they talk. A single mom with two daughters who overstayed a visa gets deported back to Mexico just because she changed lanes without signaling. Cops describe patrolling neighborhoods with significant number of illegal immigrants, where people instinctively run from the sight of a police car. A mother of five American-born children being deported over a speeding ticket.
The report describes, “a vast network of 250 detention centers, from county jails to large centers run by private prison companies, where immigrants facing deportation are held until they can be removed from the country. In the past decade, three million immigrants have been detained in the system.” The report shows white-domed tents surrounded by barbed wire, and are described as overcrowded warehouses of people. Those who have been through the detention centers describe beatings, racial slurs, official coverups, and threats to deport anyone who complains. The problem is described as more than a few “bad apples,” but more of “barrels of bad apples.”
…In the Frontline report, the administration insists the current enforcement policies are necessary to protect the American people. The report shows the president traveling to El Paso and boasting, “We have strengthened border security beyond what many believed was possible. We now have more boots on the ground and we are deporting those who are here illegally.” The deputy director of ICE boasts of “record-breaking numbers in terms of criminal alien removals” that include “1,000 murderers, 6,000 sex offenders, 45,000 serious drug violators. As we expand the deployment of Secure Communities, focus on criminal aliens, you’ll see that number continue to go up and up.” Officials from the administration boast that they’re finally taking enforcement seriously, a contrast with their lax predecessors.
One of the president’s immigration advisors callously declares, “At the end of the day, when you have a community of 10 million, 11 million people living and working in the United States illegally, some of these things are going to happen. Even if the law is executed with perfection, there will be parents separated from their children. They don’t have to like it, but it is a result of having a broken system of laws.”
Critics complain that the administration’s policy is just “enforcement on steroids.” The report warily details how ICE has extended its reach by enlisting the help of local law enforcement to better identify illegal immigrants who have committed crimes — turning local cops into a de facto enforcement branch of federal immigration law.
All of this really should teach us to not deify political administrations. What’s more, it should break the brain of every rabid anti/pro-immigration, pro/anti-Trump Republican/Democrat.
Over at the Peterson Institute, there is a rundown of Elizabeth Warren’s “A Plan for Economic Patriotism.” You can read the analysis for yourself here, but I wanted to point out three things that jumped out at me:
The comparison to Trump (see the photo above).
The number of “Good idea, but…”
Almost every potentially positive policy devolves into protectionist nonsense.
Let me first start with the exception: her training programs. As America becomes more globalized–both through trade and immigration–more training for American workers displaced by global competition might be necessary.
Now, let’s take a look at her proposed Department of Economic Development:
See what happened there? A potentially good idea turned into a protectionist dumpster fire. How about her R&D policies?
Yet another potentially good idea likely squandered by the protectionist slant. And then there are her straight-up awful ideas:
I’ve pointed out the similarities between the economics of Trump and Sanders before. It appears the populist impulse is even more widespread among American politicians.
China increased its retaliatory tariffs hitting US exports on June 1 in response to President Donald Trump’s latest escalation of his trade war. Yet, this action is only half of the bad news for US exporters. The other half is that China has begun rolling out the red carpet for the rest of the world. Everyone else is enjoying much improved access to China’s 1.4 billion consumers, a fact that has been little noticed or reported in accounts of the US-China economic confrontation.
…Trump’s provocations and China’s two-pronged response mean American companies and workers now are at a considerable cost disadvantage relative to both Chinese firms and firms in third countries. The result is one more eerie parallel to the conditions US exporters faced in the 1930s.
Another important implication of China’s action is that Americans are likely suffering more than President Trump thinks due to his trade war. Inflicting such punishment on Americans may be one factor motivating China. A separate motivation may be that it is trying to minimize the harm to its own economy by importing vital goods at better prices from other parts of the world.