Immigration key to offset downside of ageing economies

WASHINGTON - For rich countries fretting about the economic effects of an ageing society and dwindling native workforces, embracing immigration would appear to be a sensible contribution to maintaining the economy's potential.

Experts say immigration alone will not solve the economic problems of ageing. But the risk of suddenly choking off migrant flows may be dangerous given looming demographics.

With United Nations data showing 59 countries worldwide already not producing enough children to avoid population decline, it seems odd why many developed countries, including the United States, are looking to tighten immigration laws.

Plummeting birthrates and falling populations - other things being equal - simply reduce countries' ability to produce and consume more goods and services and eat into growth rates, foreign investment and economic clout over time.

What is more, the drag on national coffers from growing numbers of elderly citizens drawing government benefits, relative to tax-paying workers, is a well-documented headache.

So, with the world's fertility rate as a whole set to fall below replacement levels by 2045, it may even be possible there will be intense competition for migrants in the decades ahead.

"Adding population growth to an economy makes it easier for the economy to grow and immigration is big factor," said David Kelly, senior economic adviser at Putnam Investments. "One of the reasons why Japan and Europe have wallowed in recent years is because they have very little population growth and so their natural economic growth rate is lower than the United States.

"And the young age at which people arrive in a country tends to make immigrants more of a contributor to economic growth than a drag on the welfare system," he said.

The median average age of new immigrants in industrialised countries is 30 years, according to the Organisation of Economic Cooperation and Development (OECD), and fertility rates among immigrant women are often relatively high.

The impact of immigration on population growth is rising everywhere, with some European countries already entirely reliant on immigration for any rise in population.

Yet, depending on immigration alone to bridge demographic gaps will not be enough, even if a necessary ingredient.

"Increased immigration can limit the adverse impact on living standards and government budgetary positions due to declining and aging populations, but cannot on its own resolve the problem," an OECD study from 2001 said.

The OECD report said most studies show immigration confers small net gains in terms of per capita output to the host country, but this is unevenly distributed and depends a lot on the education levels of the migrants and local populations.

The scale of immigration needed to "solve" the problems of old-age dependency would be staggering.

In an article for the Foreign Affairs journal last year, economist Phillip Longman cited UN data showing the US would need to absorb 10.8 million immigrants annually through 2050 to maintain the current ratio of workers to retirees over time.

That, he pointed out, would leave the US population at some 1.1 billion by then -- almost three quarters of whom would be immigrants since 1995 or their descendants.

So if immigration can't solve the whole problem, what is its scale and contribution to date?

Measured by numbers of the population born abroad, the percentage of immigrants in the United States is just over 12 per cent, or about 36 million, compared to 9.7 per cent for the European Economic Area free-trade zone and Switzerland.

Both numbers, according to OECD data, far outstrip the 0.8 per cent total for Japan and South Korea.

The net flow of migrants per 1000 of the population in 2003 was actually higher in the EEA/Switzerland at 5.3, compared with 4.4 in the US and far above 0.5 for Japan.

While Japan clearly has a problem, especially with its population due to start shrinking by the end of the decade, the perceived US economic advantage in attracting total numbers of immigrants appears weaker than many assume.

But the relative ease with which immigrants get work may mean the US has reaped most benefit from overseas workers.

"What's interesting about the United States is how our economy has been able to absorb immigrants and put them to work," said Pia Orrenius, a Dallas Federal Reserve economist.

"US immigrants have high employment rates compared with other developed countries," she wrote on the Dallas Fed website last month. "This is partly because we don't set high entry-level wages or have strict hiring and firing rules.

"You also have lower entry-level wages, but immigrants at least get their foot in the door," she said, adding that consensus estimates are immigration has depressed real wages a relatively modest 1-to-3 per cent over the past 25 years.

High-skilled immigration has a much more positive impact on the economy and many governments are now keen to target these well-educated migrants. But it's the low-skilled and often illegal migrants -- estimated at more than 11 million in the United States -- which are swaying the policy backlash.

"The negative side is how immigration undermines the position of low-skilled workers and exaggerates an already widening income gap in the US," said Kelly at Putnam.

In the end, Kelly said, the economy may well adapt over time to any given set of long-term demographic trends.

But "there is a risk any legislative solution will halt the flow of immigration that the country has come to rely on," he said. "Closing the border to any immigration or shipping out illegal immigrants would really shock the economy."

- REUTERS