In his latest article, Fairfax’s Ross Gittins has done what very few of his MSM colleagues will and acknowledged that Australia’s world-beating immigration program might actually be damaging to the nation’s productivity:
What economists know but try not to think about – and never ever mention in front of the children – is that immigration carries a huge threat to our productivity.
The unthinkable truth is that unless we invest in enough additional housing, business equipment and public infrastructure to accommodate the extra workers and their families, this lack of “capital widening” reduces our physical capital per person and so reduces our productivity.
Think of it: the very [Intergenerational] report announcing that our population is projected to grow by 16 million to 40 million over the next 40 years doesn’t say a word about the huge increase in infrastructure spending this will require if our productivity isn’t to fall, nor discuss how its cost should be shared between present and future taxpayers.
Well done Rosco. As argued many times on this blog, a big negative of high rates of immigration 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, which in turn chokes-off other productive investment.
But don’t just take our word for it.
As explained by Dr Katherine Betts from the Monash University Centre for Population and Urban Research, the broader economy can suffer as investment to support the growing population crowds-out productive investment and capital deepening:
The Productivity Commission report on ageing points out that the infrastructure spending needed to manage population growth over the next 50 years will be five times the total that was needed over the last 50 years. This investment in capital widening must seriously weaken Australia’s capacity to invest in the capital deepening that would boost productivity.
Despite this, Treasury continues to emphasise its ‘three Ps’: population, participation and productivity. While Treasury treats these three variables as if they were independent some commentators argue that population growth has a positive effect on productivity. But there is a contrary argument. Population growth imposes pressures on infrastructure and adds to congestion; in so doing it depresses productivity.
International comparisons show that there is no association between population growth and growth in per capita GDP. This is not surprising as comparative data on 32 OECD countries show no positive association between population growth and growth in labour productivity…
Assertions that immigration-fuelled population growth will boost productivity remain conjectural. There is no empirical evidence that such growth in an advanced economy increases productivity.
The Reserve Bank of New Zealand’s (RBNZ) Michael Reddell also published interesting research last year questioning the merits of New Zealand’s high immigration program, which appears to have crowded-out (through higher interest rates and a high average real exchange rate) other productive investment, lowering living standards in the process:
All else equal – and in particular for an unchanged savings rate – faster population growth (especially relative to that abroad) means that some other investment that would otherwise occur will tend to be crowded out to make way for the infrastructure (private and public) needs of the increased population. This is not some central planner’s response, but how the market respond to the demand created by the additional population – it crowds out spending that is relatively more sensitive to changes in real interest and exchange rates. Typically, that will be business investment, especially that in the tradables sector.
In such a situation, the total capital stock will still be growing, perhaps quite materially, but the capital stock per capita, or per worker, will be growing less rapidly than it would otherwise have done…
Internationally, there is no evidence over the last century that countries with faster population growth, or greater inward migration, have achieved faster income or productivity growth than other countries…
The indications that countries with faster population growth have in recent decades devoted fewer resources to non-housing investment and have seen less growth in multi-factor productivity are sobering. They provide another straw in the wind, suggesting caution about the merits of continuing large inward immigration to New Zealand for the time being…
Reddell’s paper followed analysis published one month prior by the New Zealand Treasury, which questioned the merits of high immigration, and recommended a reduced immigration intake in the event that the economy is unable to adequately cope with population pressures.
It also followed a 2011 report by New Zealand’s Savings Working Group, which also supported the notion that high levels of immigration tend to put upward pressure on inflation and interest rates, which can crowd-out productive sectors of the economy.
It’s about time that economists and policy makers acknowledged that high immigration is not an economic bonanza, and is in fact more likely to damage productivity and living standards.
If all we are doing is growing for growth’s sake, pushing against infrastructure bottlenecks, diluting our fixed endowment of minerals resources, and failing to raise the living standards of the existing population, where is the benefit?
