Open Doors: Why Refugees Are Good For Economies

Shashank Mattoo, Class of 2020

In 2016, The Oxford University Press’ Children’s Word of the year was “Refugee.” Oxford’s choice served to demonstrate just how much the refugee crisis had captured the consciousness of the global media and citizenry, ever since their plight was highlighted against the backdrop of the Syrian civil war in 2015.

The mass exodus of refugees from the Middle East evoked strong reactions in nearly every corner of the world, and formed a large part of the wave of popularity that several populist candidates rode, from Donald Trump in the United States to Marine Le Pen in France. The ensuing poisonous political climate and anti-immigration rhetoric has distorted public opinion about refugees. Despite the extensive media coverage it has received, the impact refugees have on their host countries’ economies is little understood and is highly controversial. Through this article, I hope to demonstrate the massive potential for growth that migrants bring with them, as well as dispel some commonly held myths regarding the negative impacts of taking in refugees.

MYTH 1: Refugees take jobs meant for locals

A large part of the opposition to accepting refugees stems from a widespread fear that refugees undercut locals and steal jobs from them. World Bank economist Caglar Ozden recently looked into the matter and found little truth to the claim. Ozden stated that immigrants mostly took jobs that natives either couldn’t do or didn’t want to do. During the course of my own research, I found that in countries where a strong welfare system was already in place, such as the US or Greece, natives preferred to apply for welfare benefits rather than take up low paying jobs. Refugees don’t have the same options open to them, and therefore fill up the excess demand in these low pay-low skilled jobs.

So where does this image of the job stealing immigrant emerge from? 
The answer lies in the “Lump Labour Fallacy”, which by its very definition, is incorrect. The idea is that there exists a fixed amount of work to do in any economy and therefore, any influx of new job seekers will undercut existing workers. But the Lump Labour theory fails for a very simple reason: the amount of work in an economy is never fixed. By this I mean that if refugees enter an economy, they will invariably demand food, clothing and other services, thereby boosting demand for the same, which will in turn create jobs. Unfortunately, this fallacy has been misused time and again by those opposed to immigration. Traditionally, whenever the economy is experiencing sluggish growth, the theory is brought out to pin the blame on immigrants and to galvanise public opinion in support of tougher immigration laws.

MYTH 2: Refugees force wages down for everyone

Ozden also found that unskilled migrants didn’t create a downward pressure on local wages, as is so often claimed by anti-immigration activists. He used the example of Malaysia, where the influx of a large number of migrants allowed several high school educated locals to become junior managers of immigrant labour rather than to become labourers themselves. The migrants not only didn’t drive down wages but created a new and higher paying job for the natives. David Card, an economist from the University of California, Berkeley, provided further evidence by studying the Mariel boatlift of 1980, during which close to 45,000 Cubans moved to Miami, causing the city’s labour supply to increase by 7%. Card found that the influx of immigrants had no discernible impact on wages or employment for existing job holders in Miami.

MYTH 3: Refugees take out more than what they put in

Some opponents of taking in refugees have claimed that refugees are a drain on the resources of the government. They believe refugees extract benefits from the welfare system in the country, while staying unemployed in government shelters for extended periods of time. Yet, an independent study carried out by PNAS found that, on average, an adult refugee who received aid from the government would increase annual real income in the local economy by $205 to $253, significantly more than the $120–126 in aid that each refugee receives.

The above graph, supplied by the Cato Institute, shows that relative to their native counterparts, immigrants tend to have higher employment rates, something of immeasurable value to any economy.

Therefore, we have addressed the concerns regarding refugees paying into the system and their rates of employment in the economy. This, however, doesn’t usually convince people. Their constant rebuttal is:

Do refugees boost the GDP growth rate of the country? If so, how?

As this graph illustrates, in the short run, accepting refugees has a negative impact on the economy of the country. The reasons are simple: settling refugees in as well as finding them housing and employment takes both time and resources, and as such, short term pain is to be expected. But as even the most conservative estimates show, the arrival of refugees has a demonstrable positive impact on the economy of the host country. Here again, the reasoning for accepting refugees seems apparent: The influx of motivated individuals fills up demand for workers. When they spend money on consumption of goods and services, it increases aggregate demand in the country, which in turn boosts the GDP growth rate.

Immigrants also have a well-documented history of boosting productivity in their host countries. The most notable example of this is the United States, where immigrants own 25% of new businesses, despite only comprising 13% of the population. But let’s take a moment and step away from the quantitative measures we have and simply observe the examples of immigrants we know who’ve made it big. Steve Jobs at Apple and Sergey Brin of Google, both second generation immigrants from Syria and Russia respectively, are just two examples of immigrants who have redefined the playing field in their profession. Today, the companies they founded have become the backbone of the global technology industry.

The success of the immigrant community in the US is by no means an isolated incident. Turkey, which has borne the brunt of the Syrian refugee crisis, has seen close to 4,000 Syrian refugee-owned businesses pop up, which are estimated to have a capital base of $220 million, with cash flows from Syria into Turkey coming up to approximately $10 billion.

The X Factor: Rapidly Aging Populations

In my opinion, the fact that the workforce is aging rapidly in most countries is probably the most important reason for countries to seriously re-examine their migration policies. A short while back, I read the book “Rise and Fall of Nations” by Ruchir Sharma. Sharma carried out a case study of 56 countries in his book, all of which had maintained a sustained economic boom for at least a decade. He found that all the countries that achieved an economic boom shared one common characteristic: a rapidly growing and young workforce. But this vital driver of economic growth is fast disappearing with global demographics shifting. Added to the problem of a rapidly aging workforce is the fact that global population growth rates have begun to decline. As a result, Sharma pointed out that it was going to become nearly impossible for countries to generate the same level of economic growth that they have now become used to.

As the European Commission warned in 2005, “Never in history has there been economic growth without population growth”. Yet, there is a silver lining in this gloomy economic picture, and it comes in the form of refugees. Chancellor Angela Merkel realised this quite early in the game, and despite the political backlash she has suffered by throwing open Germany’s doors to refugees, it is ultimately the smartest way for her country to maintain its competitive edge, as it battles against an aging and shrinking workforce. Japan, by contrast, seems to have become the anti-Germany, closing its borders as tightly as can be for a modern nation. Many have seen Japan’s unwillingness to accept refugees as a return to its ancient isolationist foreign policy called sakoku. This could be a potentially disastrous combination for Japan, as it possesses not just the fastest aging workforce in the world but also cripplingly low fertility rates.

I don’t intend to downplay the challenges of cultural integration that many countries that open their doors to refugees will face, especially in ethnically homogeneous nations like Japan. Yet, throughout the annals of history, we find nations that have successfully surmounted these obstacles and emerged from their ordeals stronger: not just socially, but also economically. It seems to me that despite the political price that the governments of Canada, Germany and other similarly open minded countries are having to pay, it will be these countries that turn out to be the major drivers of economic growth in the 21st century. For their own sake, I can only hope Donald Trump and others like him are watching and learning.