Friday, 2 February 2018

Reframing the debate on ageing and immigration

Research shows immigration boosts growth
By Vikram Khanna, Associate Editor, The Straits Times, 31 Jan 2018

Earlier this month, Monetary Authority of Singapore managing director Ravi Menon made an insightful presentation on the links between three critical issues facing Singapore: ageing, immigration and productivity.

Speaking at the Institute of Policy Studies' Singapore Perspectives conference, he noted that Singapore's working age population - residents aged 15-64 - will start to decline from 2020. Since economic growth is the sum of the growth of the labour force and productivity, if Singapore freezes immigration and is not able to increase fertility beyond the replacement rate, productivity will be the only source of growth.

So if productivity grows at 1.5 per cent - the average of the last seven years -the economy will also grow at 1.5 per cent. That would be a problem; it would seriously limit increases in wages and improvements in living standards.

If we don't want immigration, we can, in theory, mitigate the problem by raising the total fertility rate and the labour force participation rate - the percentage of workers in the workforce.

But even if we succeed in raising the fertility rate from the current level of 1.2 (children per woman, on average) to the replacement rate of 2.1 over the next 15 years - a challenging target - it won't have much of an impact on the growth of the workforce or gross domestic product (GDP) until 2040 because, as Mr Menon noted, "it will take time for the extra babies born in the next 15 years to start entering the labour force".

The key to raising the labour force participation rate is to encourage more women to work. World Bank data shows that while Singapore's overall labour force participation rate, at 68 per cent, is higher than the average for high-income countries (60 per cent), there is a 17 percentage point gap between the participation rates of men (77 per cent) and women (60 per cent). In most other high-income countries, the gap ranges from 9 to 12 percentage points. If Singapore can narrow the gap to 11 percentage points by 2035, it will help, but not by much. The labour force would expand by only 2 per cent by 2035.

Given these constraints to expanding our workforce, Mr Menon pointed out that Singapore must "allow a certain rate of net immigration". It must also be flexible in its immigration policies, responding to economic cycles, changing circumstances and opportunities.

He concluded that Singapore needs to reframe the question on foreign workers. "It is not about how many foreign workers industry wants or society can afford to have," he said, "but what number and kind of foreign workers we need to maximise the job and wage opportunities for Singaporeans. Foreign workers must be a complement to the local workforce."

Many of the issues raised by Mr Menon are worth exploring further. Here are some interesting findings from economic research.


A 2016 International Monetary Fund (IMF) study on the link between ageing and productivity in Europe found that the ageing of the workforce "is likely to be a significant drag" on productivity growth.

Several studies note that skills are likely to become increasingly dated as ageing proceeds. As job requirements change, older workers find it more difficult to adapt. The result is lower levels of innovation, technology adoption and dissemination across the economy. But the impact of ageing on productivity can differ across different occupations. While productivity will be negatively affected in many occupations, there are some where productivity can, in fact, increase with age, such as lawyers, professors and doctors.

The IMF study estimates that overall, the ageing of the workforce in the euro area could lower productivity growth by about 0.2 percentage point each year between 2014 and 2035.

If a similar trend were to hold for Singapore, which is plausible, productivity growth 20 years from now will not be 1.5 per cent, but close to zero. Thus, in the absence of workforce growth, economic growth would also be close to zero. But this also means that policies which counteract the negative impact of ageing can result in significant increases in the growth of productivity and GDP.


A few countries such as France, Finland, Norway and Sweden have managed to raise fertility rates through generous, family-friendly policies as well as liberal social norms, which include greater acceptance of single parenthood and births outside marriage.

But most countries in Europe, as well as East Asia (where social norms are more conservative), have found it difficult to boost fertility rates, which also entails high fiscal costs. In any event, as Mr Menon noted, even if Singapore succeeds in raising its birth rate to the replacement rate of 2.1 over the next 15 years, it would have no perceptible increase in the workforce until 2040.


There is evidence that certain types of low-skilled immigration (or non-immigrant foreign workers) can improve female labour force participation rates. Researchers Patricia Cortes of the Boston School of Management and Jose Tessada of the Catholic University of Chile found that higher numbers of low-skilled immigrants into the United States during the 1980s and 1990s led to cheaper prices for labour-intensive services related to home management, such as housekeeping, childcare and gardening.

As a result, there was an increase in the participation of educated women in the workforce. The most significant impact was felt in cities which had the largest influx of immigrants.

This may well hold for Singapore too. While much emphasis has been placed on the importance of high-skilled foreign workers as complements to the domestic workforce, increasing quotas for certain categories of low-skilled foreign workers - such as domestic maids, healthcare and childcare workers - could help raise female labour force participation rates, especially for high-skilled jobs.


According to research from the IMF and others, the commonly expressed view that immigrants take over jobs of domestic workers, depress their wages and negatively affect the domestic economy is closer to the opposite of the truth, provided immigration policies are properly designed.

The common view is based on the assumption that the skill sets of immigrants and local workers are identical and that the economy does not adjust to immigration flows.

Well-designed policies can ensure that this is not the case: Immigrants and native workers can also complement and benefit each other. In Singapore's case, there are several areas where there is limited overlap between the skill sets of immigrants and local workers, including artificial intelligence and data scientists, cyber-security experts, fintech and software engineers, R&D scientists and speciality chefs - and at lower-skilled levels, domestic workers, construction workers, health-and childcare workers.

Several studies also show that companies do not lay off domestic workers because of the increased supply of cheaper foreign workers - in fact, quite the reverse.

The greater availability of workers enables companies to earn higher returns on capital and increase investments. Thus, existing companies expand and new ones emerge, contributing to higher economic growth and more job creation. Younger immigrants also broaden the tax base and add dynamism to entrepreneurship. The IMF study concludes that "all in all, the overall effect of immigrant workers on the domestic economy is likely to be positive".

These findings are consistent with Singapore's experience.

Singapore's economic growth during the years of surging immigration (2004-2010) - which included the low-growth years of the global financial crisis of 2008/09 - averaged 7.3 per cent. The increased flow of foreign workers was not accompanied by higher layoffs of domestic workers. Immigrants have also played an important part in Singapore's entrepreneurial renaissance.


Several studies - for example, by Professor Gordon Hanson of the University of California at San Diego - show that immigrants to the US brought with them knowledge about market conditions and opportunities in foreign countries, which helped reduce the costs of US companies doing business abroad.

Immigrants also helped to boost trade and investment flows between the US and their countries of origin. In particular, many immigrants helped US companies invest in countries like China, India and Taiwan.

Singapore can also tap into the knowledge and connections of its pool of immigrants to increase trade and investment overseas, especially with large Asian markets.

Since 2011, and particularly after the publication of the much-maligned White Paper on Population in 2013, Singapore's immigration policies - at least as articulated - have remained largely tight almost across the board, prompting complaints from business groups, which have still not abated.

Such policies may also have contributed to lower economic growth as well as low productivity. The debate on immigration has also stalled, which makes Mr Menon's fresh perspective on the issue especially welcome.

With the tipping point when ageing starts leading to a decline in the working population just two years away, it is time to revisit policies on the interrelated issues of ageing, productivity and immigration and reframe the debate. Hopefully, some of the research cited in this article will help in this process.


Now, even France suffers 'baby blues'
Europe's fertility rates are declining, threatening economic dynamism and keeping politics conservative as older voters block any attempt at pension reform.
By Jonathan Eyal, Europe Correspondent, The Straits Times, 5 Feb 2018

PARIS • Just a blip, or the end of an era?

France used to be one of the few European countries where birth rates were positive, approaching an almost exact replacement level, and thereby promising that France's overall population could continue renewing itself in almost exactly the same numbers from one generation to the next.

No longer, however, for the 2017 population statistics, just released in Paris, make for sober reading. Instead of the average of two children per woman recorded until recently, French women now give birth to an average of only 1.88 children each.

The "natural balance" - that is, the difference between births and deaths - is "historically low", warns France's National Institute of Statistics and Economic Studies; in fact, it is at its lowest since the end of World War II. The exceptional demographic dynamism that characterised France until a few years ago seems to be on the decline.

Elsewhere in Europe, the situation is grimmer still. The average fertility rate across the European Union is a dismal 1.59, with so-called "Catholic" nations where contraceptives were once either frowned upon or banned now recording some of the biggest drops; Italy's birth rate is only 1.34 per woman, and falling. And although in Germany, Europe's biggest nation, birth rates are now slightly edging up, the fertility rate is still only 1.5, and the country is projected to lose anything up to 13 million residents by the middle of this century. The share of working-age Germans is projected to shrink from around 60 per cent of the population today to only 50 per cent.

France's population dip is particularly worrying for other European governments, largely because the French pioneered efforts to boost birth rates, and therefore appear to have provided the model to follow. Unlike other European countries which offered young families cash, longer maternity leave or specific tax credits as incentives for having more children, France went down a different route: it created an extensive network of almost-free kindergarten and infant schools.

That meant that working women could have more children and still return to the labour force and safeguard their career promotions. But if the French with their innovative methods could not arrest their population decline, then the rest of Europe has no hope of doing this either.

The economic impact of such seemingly inexorable population declines is well-documented. These include unsustainable pension provisions, growing budget deficits as the tax base diminishes but government expenditure does not, and declining consumer spending; Japan today already faces such a quagmire. But the political implications of such a population trend are just as important, although they are less well-documented.

The quickest way of redressing imbalances created by population declines is, of course, immigration. Importing labour from another country not only ensures adequate supply levels but also - at least in Europe's case - higher birth rates; the families of immigrants tend to have more babies, and in countries such as Britain, first-generation Britons may account for most of the net population growth.


Yet there are problems with relying on higher immigration to compensate for an ageing population.

The first is the inevitable political backlash. Back in 2015, German Chancellor Angela Merkel earned praise for throwing open her country's borders to all asylum-seekers.

But instead of promoting the cause of immigration, Dr Merkel's gesture is now almost universally regarded as a reckless move which did immigration a great disservice; an anti-immigrant party came out of nowhere to become Germany's third-largest political movement, and the chancellor is still struggling to form a new coalition government precisely because German politicians cannot agree on how to restrict immigration. No other European government is likely to copy Dr Merkel's example.

Furthermore, the numbers of immigrants required to arrest Europe's population declines are very big; even the one million immigrants who were admitted to Germany during the chaotic few months of 2015 will do nothing to address Germany's population shortfall.

And although immigrant families do initially boast of higher birth rates, within one generation they settle down to the population pattern in their new country of residence: migrant women in Italy, for example, are already down to 1.89 children per person, much better than the "locals", but still not sufficient.

To make matters worse, Europe is undergoing not one but two demographic crises at the same time.

In Western Europe, the problem is one of low birth rates. But in the former communist part of Eastern Europe, the challenge is wholesale depopulation, as literally millions leave to seek better-paid jobs elsewhere. Up to 17 per cent of the population of Poland and Romania - Eastern Europe's biggest nations - have already left and, if the trend continues, these countries' populations may be reduced within a few decades to the size they recorded back in the 19th century.

As a result, the wealth disparities and political differences between the Eastern and Western half of Europe will grow wider; this split is already imposing a severe strain on the European Union, with potentially serious consequences for the future. As both East and West in Europe grow old, the West may remain wealthy and in gentle decline, while the East is prevented from acquiring wealth, but experiences the decline in double-fast time.


Throughout Europe, older people tend to vote in large numbers, while young people usually don't vote at all. The outcome is skewed electoral results, pushing Europe further to a more conservative segment of the political spectrum.

It is noticeable that socialist parties are in steep decline in most EU countries. Even in Britain, where the opposition Labour Party seems to have bucked the trend by attracting a bigger following, this was achieved by appealing to middle-aged people who never directly experienced the old decrepit socialist Britain of the past, but can be persuaded to have a certain nostalgia for that period when every economic decision seemed so simple and self-evident.

The referendum decision to leave the EU was also the product of this older generation of British voters, who were keen to return to the supposed certainty of the past rather than be challenged by the unpredictability of the future and who turned up at the ballot boxes on referendum day in much larger numbers than Britain's youngsters, for whom the EU is simply a way of life.

Older electorates often also preclude broader economic reform. One key reason why British Prime Minister Theresa May started last year's general election campaign enjoying a huge lead over her opponents but ended the elections by losing her overall majority is that Mrs May raised during the campaign the possibility that the British may have to sell most of their assets in order to help pay for their long-term medical care, should they be afflicted by acute illnesses in old age.

Mrs May's approach to funding the growing costs of old age care may have made some logical sense, but her electorate won't wear it. And that's a lesson which other European countries are now drawing.

In Italy, where a general election campaign is now in full swing, Mr Silvio Berlusconi, the 81-year-old media billionaire, is riding high in the popularity stakes precisely because he promised to ditch plans to reform Italy's pension system. Everyone knows that this pension system is unaffordable. But many Italian voters want the reform to take place after they are gone.

Is it still possible that Europe may be able to avoid its current predicament? Theoretically, yes. The dip in birth rates in France may be due to temporary cuts in the country's welfare spending; fewer than 50,000 new infant care spaces were created over the past five years, instead of the 275,000 initially planned.

Reverse these cuts, planners in Paris argue, and France's population could perhaps approach replacement levels again.

Besides, governments have been notoriously bad at predicting population figures, and may be equally bad today; if the "baby boom" of two generations ago took all planners by surprise, there is no reason why a similar boom may not do the same, undermining gloomy predictions.


But unless this population miracle happens soon, Europe's fate as an inherently conservative, risk-averse continent, still keen to vote into power young politicians such as Mr Emmanuel Macron in France but also determined to prevent them from changing Europe's current welfare arrangements, seems virtually guaranteed.

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