Does Australia's prosperity depend on immigration?

The Age has published a long-winded article arguing that Australia should maintain its current high rate of immigration, which is running at roughly double historical norms (see next chart).

From the Age:

BRW’s Rich 200 list is full of migrants who have risen to the top of Australian business. Many of these wealthy refugees fear that Australia’s politically driven focus on asylum seekers is obstructing a mature discussion about the sort of immigration regime the country needs to maintain growth and overcome the risks of an ageing workforce…

Immigration matters, and doing it properly matters. For a big island with a small population, a considered immigration regime – of the type successive Australian governments have refined – is as crucial a resource as capital, oil and trade.

But the topic has been reduced to politicised soundbites…

The benefits of migration are clear. In 2011, for example, it accounted for over half of Australia’s population gain. That same year, almost 37 per cent of people who counted as migrants were of prime working age – between 25 and 44 – and less than 1 per cent was older than 64. In contrast, a smaller 27 per cent of the Australian-born population was of prime working age and almost 12 per cent over 64…

Between 2000 and 2010, Australia’s labour force participation rate – the proportion of working-age people able to or looking for work – rose to 65.9 per cent from 63.1 per cent, almost solely due to migrants, and skilled migrants in particular…

The article goes on to highlight a number of case studies of successful immigration, both from asylum seekers and through official channels.

While I wholeheartedly agree with the article’s premise that the current approach to asylum seekers is cruel, and that past immigration programs have been beneficial to the country as a whole, I take issue with the notion that the current high rate of immigration is unambiguously good for the economy and living standards.

Below are my thoughts on whether continued high population growth (based primarily on immigration) is unambiguously beneficial for Australia. Most of these arguments have been articulated previously, so apologies if you have read them before.

Population growth and the economy:

Advocates of population growth argue that it is required in order to grow the economy and that, without it, growth would suffer, lowering overall living standards.

However, from a narrow economic perspective, population growth (immigration) is good only if it raises the real incomes of the pre-existing population (e.g. GDP per capita). While it is true that Australia’s high population growth over the second half of the 2000s boosted Australia’s real GDP (more labour inputs, other things equal, means more outputs), evidence is sketchy as to whether GDP per capita increased due to population growth. In fact, as the below chart shows, real GDP per capita has remained lacklustre since 2007, suggesting that while the overall economic pie has increased in size because of high population growth, everyone’s share of that pie has barely grown.

Of course, we don’t know the counter-factual. Growth in per capita GDP might have been worse (or better) without such strong immigration. But the arguments for (or against) high rates of immigration purely on narrow economic grounds appears inconclusive.

We need immigration to ameliorate the affects of an ageing population:

Another common argument from proponents of high immigration is that it is required in order to mitigate the ageing of Australia’s population.

The United Nations forecasts that the ratio of workers to dependents in Australia is projected to fall significantly over coming decades as the Baby Boomer generation retires en masse (see next chart).

However, the argument that Australia can avoid (rather than delay) population ageing is spurious. The issue of an ageing population will need to be addressed at some point irrespective of the level of immigration. Simply importing more workers to cover the retirement of the Baby Boomers only delays the ageing problem, pushing the problem onto future generations. Further, what will be the solution in 30 years time when current migrants grow old, retire and need taxpayer support? More immigration and an even larger Australia?

While the current population growth rate of 1.8% seems fairly benign, due to the powers of compounding, such a rate of growth is clearly unsustainable over a long time frame (see next chart).

While you might think that the above chart is facetious, as population growth could easily be curtailed at some point in the future, the fact remains that there will always be vested interests pressuring governments to expand population growth in the face of an ever-ageing population. Hence, boosting immigration to overcome an ageing population is no solution at all.

Population growth, infrastructure and productivity:

A big negative of high rates of population growth is that it places increasing pressure on the pre-existing (already strained) stock of infrastructure and housing, reducing productivity and living standards unless costly new investments are made. Indeed, controversial investments like desalination plants would arguably not have been required absent population growth.

Further, when infrastructure and housing investment fails to keep up, it places upward pressure on inflation, requiring higher interest rates, which can then damage productive sectors of the economy. These dynamics were explained in detail in a 2011 speech by the Reserve Bank of Australia’s Phil Lowe (my emphasis):

Currently, housing-related costs – including rents, utilities and the cost of building new dwellings – account for around 20 per cent of the CPI, the largest share of any single group. Broadly speaking, the housing component of the CPI shows the same general pattern as that in underlying inflation, although the recent moderation is less pronounced (Graph 6).

A couple of factors are important in explaining this general pattern.

The first is that the large run-up in Australian house prices that was driven by the adjustment to low inflation ended in late 2003. When the housing boom came to an end, building cost inflation came down and growth in rents was subdued for a few years. These outcomes helped hold down overall inflation rates during this period. But by 2007, the cycle had again turned, with building costs rising more quickly and growth in rents accelerating. This faster growth in rents reflected the changing balance of demand and supply in the rental market, with strong population growth coinciding with relatively slow expansion of supply.

The second factor has been utilities prices. During the middle years of the 2000s utilities prices were increasing at an average rate of 4 per cent, which was slightly lower than that in the previous few years. Then from 2007, utilities price inflation accelerated sharply. The proximate cause was the regulatory decisions allowing double-digit price increases, partly to help fund infrastructure investment, particularly for the distribution of electricity. But a deeper cause was the low levels of investment in previous years, which meant that the capacity of the system to distribute electricity had not kept pace with the growth in demand, particularly during hot weather.

While these developments in rents and utilities do help explain the particular dynamics of inflation over the recent cycle, they also demonstrate that when the economy is operating up against supply constraints, all sorts of prices – and not just the price of labour – start rising more quickly.

A 2011 report by New Zealand’s Savings Working Group also supported the notion that high levels of immigration tends to put upward pressure on inflation and interest rates:

A country with a rapidly growing population needs to devote resources to building more roads, schools, shops, houses, factories and so on than a country with a low rate of population growth. In a country with a relatively low national savings rate, rapid population growth will put sustained upward pressure on real interest rates and, in turn, the real exchange rate, making it harder to achieve the per capita income gains that people (and the government) aspire to…

Further, given the tight constraints applied to the supply of land for housing, less immigration might also have left New Zealand less exposed to the damaging house price booms experienced in the 1990s and the last decade.

Population growth, natural resources and the environment:

Ongoing high population growth places additional strain on the natural environment, causing greater environmental degredation, increasing water scarcity and pollution, and making it more difficult for Australia to reduce its carbon footprint and meet international pollution reduction targets.

A related concern is that Australia earns its way in the world mainly by selling its fixed mineral resources (e.g. iron ore, coal, natural gas, and gold). More people means less resources per capita. A growing population also means that we must deplete our mineral resources faster, just to maintain a constant standard of living.

Conclusion:

The Age article presumes that ongoing high population growth is beneficial to both the economy and living standards, and cleverly uses a bunch of case studies to stir-up the reader’s emotions, rather than objectively examining the facts.

As argued previously, while I believe that Australia could probably support a substantially larger population with improved policy settings and investment, like many Australians, I don’t hold much faith in our political class or policy making processes, which have time and again proven to be deficient in providing adequately for the pre-existing population (let also tens of millions more people), or that a substantially larger population would improve living standards anyway.

Supporters of a “Big Australia” need to put forward a better argued case if they are to gain widespread support amongst Australians.

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Does Australia’s prosperity depend on immigration?