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.

Cameron, Ferguson, and Immigration

David Cameron came up with new ideas about immigration. It’s mainly about cutting EU immigrants off the British welfare system. That includes things like denying child allowances to immigrants whose children live in other EU countries. The reason? Cameron wants these allowances to be spent in Britain, or otherwise they spur demand in the countries of destination. Meanwhile, the UK does welcome people who got good free public education in these countries. Who would compensate them for providing education the British economy benefits from?

But apart from fairness, anti-immigrant ideas have to face economic objections, too. Emerging policies toward immigrants respond to folk xenophobia, but they are fundamentally flawed.

A good example? The Ferguson events in the United States. Obviously, the Michael Brown case couldn’t have done this. It’s just ignited the dissatisfaction with the social role of the black population in the country. It’s not how the events are portrayed, though. The media publish Brown attacking the shop owner and the aftermath of post-verdict nights in Ferguson. That looks like a proof that protests are not legitimate—at least, this is what the public says now.

But how much attention is being devoted to the fundamental causes of disobedience? The black population had been distanced from domestic policy making for 350 years. A 30% income gap between white and black men (equivalent to additional 2.2% unemployment nationwide) and disproportionate incarceration rates come straight from the history. Though not racial anymore, these problems persist across generations and affect the present.

The United States faces the same challenge again. This time it’s the rights of undocumented immigrants from Latin America. The immigrants do not participate in public decision making because, well, if they did, they’d be deported. In terms of civil rights, they’re close to the black population 200 years ago. And the official income gap between white and Latino men is 40% now.

Instead of finding solutions, there’s a fierce resistance even to the attempts to clarify the status of some immigrants, as Obama suggested in November. What does it mean? The immigrants will remain underground, and social tensions will be there for decades.

The United States is not the only country facing this problem. Cameron’s welfare ideas will also lead to immigrants isolated from other residents. Le Pens in France have more radical intentions. You can also look at the problem in Russia:


Russia has one million slaves among 140 million population. Most slaves are undocumented immigrants from Central Asia, with no rights or access to public services. Corruption eradicates their earnings, so immigrant income gaps are higher than in any developed country.

That’s why, apart from talks about tightening international migration and denying small welfare payments, it would be interesting to hear what policy makers think about helping existing immigrants to be part of a brighter future.