The Box of Economic Growth Theory

Authors preaching creativity often use the nine-dots puzzle to encourage the reader to think, well, wider.

So, I did the experiment on the favorite topic. In economic growth, the box is a country. And researchers try to get most out of its economy, either by flattening the economic cycle or changing the long-term growth rates. While macroeconomists learned powerful tools for managing the cycles, the long-term rates remain untamed. Several competing frameworks describe the determinants of the rates, but not the determinants of the determinants. Which leaves you confused.

But you can think outside the box! Outside the box, you have other countries. A few of them have higher GDP per capita, so instead of thinking how to make people inside Country A richer, you can think how to relocate people from poor countries to the rich ones. The trick is, productivity grows when a person moves to a more industrious place, and so does output.

Urbanization is an old example of relocation at work, still relevant for many developing countries. But urbanization makes a small fraction of global income differences, which generally look like this:

Milanovic - 2011 - Global Inequality
Milanovic – 2011 – Global Inequality

Growth theory is figuring out how to change the shape and placements of these curves. This is difficult. But a single person can move along his country’s plot, or he can jump into another country’s plot. While jumping, the person boosts his productivity and the world GDP increases, despite both countries retain their GDP per capita levels.

As Branko Milanovic says in the paper where this chart comes from, migration is “probably the most powerful tool for reducing global poverty.” It’s not only powerful, it’s simple, compared to other solutions.

Now, what’s wrong with it. Like any solution, migration needs devoted advocates. It’s easy to find advocates for sound macro policies. Citizens don’t want to spend years in recession, so they wage research and lobbying. But advocating immigration reforms is like a part-time job, because citizens don’t care about the foreigner’s income. For example, some think tanks like the idea of letting foreign doctors and lawyers in the US, since that would reduce domestic inequality created by premium wages in these sectors. (No other country has 14 healthcare professionals in the top 20 of highest paying occupations.)

There’re, of course, bargains with undocumented immigrants in exchange for political support, like the great pardon proposed by Obama. This is a poor replacement for a legal-immigration reform, which would be more beneficial for the US at large.

What works? Developed countries invite immigrants to fill the gaps in the shrinking population. The current generation seek someone who will support them in the future. This looks like a perpetual immigration engine: when you have no children and retire, you just “adopt” an immigrant in his 20s who’ll pay the taxes that fund public spending. Then this immigrant gets older and lets a younger one to come in, and so on. Since the real birthrates are never zero, few workers change countries this way.

Business lobby promotes another channel, the expansionary one. When Bill Gates writes that the US needs immigrants to remain competitive, he means that Indian software firms are threatening Microsoft. Giving Indian software engineers US visas deprives Indian firms of skilled labor, so both India and Indian firms no longer compete with American software developers. That works well for both US business and citizens and, therefore, is a viable solution.

However, these channels create opportunities for a small fraction of internationally attractive professionals. The others remain dependent on domestic growth. The international response? Investments, not visas. That’s getting us back into the box, because investments depend on the country’s growth rates. The investor won’t come for the same reasons why the country doesn’t manage its currently available resources well. And despite the problem of growth has reasonable outside-the-box solutions, domestic politics accepts only inside-the-box options.

Maybe that’s why thinking in the box is still very useful in economics.