Solution to capitalism's crisis is freer immigration

The crisis in global capitalism is the result of building walls between markets - especially the market for labour of all kinds. Freer immigration laws will free all economies from the tyranny of demography

R Jagannathan August 14, 2011 09:44:35 IST
Solution to capitalism's crisis is freer immigration

The triple crisis of the world's top three economies - the US, the European Union and Japan - is a clear indicator that all is not well with global capitalism. Or at least the part of the capitalist world that is also democratic.

Right-wing triumphalism after the fall of the Berlin Wall was anyway premature. We have since found out how hollow it was: we have seen Japan stagnate for two decades with its zombie-like Keynesianism; in contrast, we have seen the rise of oligarchic and authoritarian capitalism in Russia and China. In the former, the state plays favourites with some capitalists; in the latter, the state periodically primes the pump for growth by using state-run banks to boost investment.

It is these mutant forms of authoritarian capitalism that are now on the ascendant, comprising two of the five BRICS.

The 'I' in BRICs - India - is following its own form of mixed capitalism that combines cronyism with incipient welfarism and a marked suspicion of private capital.

In the West, we have witnessed the decimation of the Anglo-Saxon economies. To survive, we saw the short-term rise of socio-capitalism in 2008, where banks and major companies were briefly rescued by public ownership before escaping back to the private sector; and, now, the US and Europe are again facing a crisis of unprecedented proportions.

Will capitalism, in its original and mutant forms, emerge from its latest crisis unscathed?

My guess is that it will - for the prime strength of capitalism is that it has a unique ability to adapt if it gets the right information signals from the economy. Which is why it has survived and Communism has not.

The primary information in capitalism is price - and right now the price signals are flashing red in the US and European economies.

The Standard & Poors downgrade of the US sovereign rating is a signal that the price of money is too low in the US and the country is spending too much; the rise of yields on sovereign bonds in Europe's fringe economies (the PIIGS - Portugal, Ireland, Italy, Greece and Spain) is sending out a message that these countries are overleveraged and should bring down their public debts. The question is whether this should be done through domestic austerity or a partial debt forgiveness - or both.

The unemployment numbers send another kind of price signal: both the US and Europe are at 9-10 percent unemployment. This again is a signal from the real economy that (1) there is not enough innovation or upgradation of skills to absorb labour at higher cost, or (2) that there is not enough openness to import labour at costs that are viable for manufacturing and services, or (3) wages are too sticky on the downside.

Capitalism will adapt and survive if governments, businesses and individuals read these signals right and take appropriate action.

A brief recap of how capitalism adapted and survived in the past would be useful before we look at whether it can now adapt to the current challenge of slowdown, western decline and demographic adversity.

US capitalism was built by robber barons (just as Indian capitalism is now being built by crony capitalism) who expropriated surpluses and accumulated capital. When this process went too far, in the late 19th century and early 20th centuries, culminating in the Wall Street collapse of the 1930s, we had the government stepping in with strong regulation, anti-trust action and the welfare state.

Solution to capitalisms crisis is freer immigration

Daniel Wallis /Reuters

Two factors are primarily responsible for the US's current crisis: imperial over-reach, and excessive welfare costs, especially in healthcare. The Iraq and Afghanistan wars have cost upwards of $3 trillion, and the US budget deficits are driven largely by an expensive medical care system.

In Europe, which was always close to Socialist ideas, the big state was accepted as inevitable. There was less fear of monopoly, and more acceptance of higher taxes and state intervention in economic activity.

This is what has brought on the current crisis: too much unaffordable welfare imposed by a mindless expansion of the European Union without adequate fiscal preparation. The rich will thus have to bail out the poorer members of the Union to keep it together.

But Europe has a more structural problem: it has labour rigidities, and very high tax rates which inhibit investment and the creation of new jobs. For example, in the core euro area of 16 countries, the tax-GDP ratio, which measures the overall tax burden as a percentage of GDP, is as high as 40 percent (India's is currently less than a third of that), with top personal tax rates going as high as 56 percent in Sweden (ours is 34 percent). And tax rates are high primarily because of the need to finance cradle-to-grave welfare.

The net result is a sclerotic euro economy, where unemployment is high and sticky: around 10 percent for the euro area as a whole, and even higher in Greece and Spain at 16 and 21 percent. This huge difference between unemployment rates even within Europe shows that the labour market is rigid - even intra-EU movement of labour is not happening enough to level the rates between, say, a Spain at 16 percent and a Germany with 7 percent unemployment.

Capitalism stalls whenever walls are built between markets. Of the four main factors of production that economics textbooks teach us about - land, labour, capital and organisation - capital and organisation move freely. Land cannot move freely (but it can be acquired freely if national laws don't restrict it) and labour faces restrictions everywhere.

If labour were free to move to the areas of best return, no country would face a demographic challenge (Europe and Japan are suffering due to the ageing of populations, which only immigration can solve). The US, which is relatively more relaxed over immigration, will not face this kind of constraint to growth. It also has the most flexible labour laws in the world - and this makes capitalism healthy and adaptable.

In contrast, Europe, Japan and China have the most restrictive immigration policies on earth brought on by cultural factors, mercantilism, and nationalism - in varying degrees in each of the three.

India, in contrast, not only has a favourable demographic mix, but its porous borders with Bangladesh give it a regular influx of labour at the bottom end of the market. Bangladesh is to India what Mexico is to the US.

Two conclusions emerge from this analysis: capitalism will adapt faster in countries that allow freer immigration or are already endowed with favourable demographics; elsewhere, it will atrophy and stall.

The US and India will emerge as the bulwarks of capitalism (assuming we don't screw up with politics). Europe, China and Japan will either slow down to a crawl as their demography changes or will have to reverse their immigration policies to take in more people from elsewhere.

The real nemesis for capitalism is thus culture, xenophobia and mercantilism. The solution to the current crisis is freer immigration.

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