Immigration has positive role to play in development

COMMENT: By expanding the economy and raising the incomes of both immigrants and residents, immigration is a key factor supporting growth, argues Steven Bell.

This year, elections throughout Europe have highlighted a marked increase in anti-immigration sentiment. It has even cropped up in the debate over whether the Republic should vote in favour of the Nice Treaty, allowing enlargement of the European Union and change in the way it operates at the second time of asking.

However, when examined from a rational, macroeconomic viewpoint, the question of immigration starts to look rather different.

Immigration, by expanding the economy and raising the incomes of both immigrants and residents, has served to improve consumer spending - a key factor supporting the economy.

Countries with lower rates of immigration - notably Japan and some countries in continental Europe - have seen their economic problems get worse.

This argument highlights the importance of demographics to fund management - after all, a good fund manager will pay close attention to long-term structural issues when looking at equity markets.

Economic forecasters spend a lot of time trying to predict changes in economic conditions, but they often fail to remember the key fundamentals - such as demographics.

One example is the clear relationship between consumer spending and the youth-dependency ratio - the proportion of children to those of working age. Here, the correlation is surprisingly close: as the youth-dependency ratio rises, so does real consumption growth.

Consumer spending is low in countries with adverse demographics - Germany, Japan and Italy - while it is strong in Britain, South Korea and the United States - countries with favourable demographics.

Many economists have explained the British consumer boom over the past five years in terms of low interest rates. This has obviously been a factor. But demographics has had a vital role to play.

The link with a country's economy and its levels of immigration cuts both ways - a buoyant economy is more likely to attract immigrants, and high migration can lead to a buoyant economy.

The Republic provides a good illustration of this: a century of net emigration was reversed in the 1990s as the Irish economy boomed.

On top of this, the flexibility of the labour market is a key component of this process. An inflexible labour market will make life tough for immigrants and it leads to high unemployment - one of the principal causes of anti-immigration sentiment.

A flexible labour market means that immigrants have more impact on wages than on unemployment.

Traditional economic analysis suggests that immigration lowers wages. In fact, the position is more complicated.

Each worker is both a consumer of services provided by immigrant workers and a competitor to them in the labour market - benefiting from reduced costs but being disadvantaged by lower wages.

However, if immigrants come into the country and remain unemployed, no one gains.

The British labour market has been extraordinarily flexible in recent years. Unemployment has fallen substantially over the past 10 years, even though the size of the employed population has risen.

Britain's ability to absorb large numbers of migrants has been an important aspect of this. Since 1995, the number of foreign workers in Britain has risen by 370,000 - more than 40 per cent. Immigration has been a useful safety valve for fluctuations in labour demand in Britain, but it has also allowed growth to proceed at a higher rate.

The British Treasury recently raised its estimate for the rate of growth by a remarkable 0.6 per cent a year entirely on the basis of immigration.

The more the economic impact of migration is examined, the clearer the benefits appear to be. The fact that an inflexible labour market can turn the advantages generated by immigration into disadvantages is crucial.

It may explain why the gains made by the extreme right in the rest of Europe have not been seen recently in Britain.

Steven Bell is global chief economist for Deutsche Asset Management.