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There’s no company line at Fortune & Freedom – I’m free to disagree with Nigel Farage. And I happen to be in favour of a lot more immigration than he is, as far as I can tell anyway. In fact, I believe the UK’s position as a prime destination for immigrants is the most important advantage we have for our economy’s future prospects. Yes, more important than Brexit.
You see, there are two ways to grow your GDP. More people or more productivity per person. That’s it, there’s nothing else.
Of course, GDP isn’t necessarily the most important thing to an economy, let alone our lives. And GDP per capita (per person) is a better measure anyway. How wealthy we are, adjusted for our population size, reveals more about what it’s really like to live in the UK than our total national economic output.
But there’s a big exception to this per capita adjustment. You see, our national debt doesn’t adjust for changes to our population.
If the population of the UK were to halve, our GDP would around about halve too. Our GDP per capita needn’t change though – living standards per person could be just as high as before. But our national debt would remain the same. This means a doubling of the debt-to-GDP ratio, twice as bad as before.
Now debt and interest must be paid with GDP – hence the focus on the debt-to-GDP ratio of nations when we compare how indebted they really are. The debt must be measured by adjusting for their ability to repay the debt. And that is the national GDP, not the per capita GDP, because the nation as a whole owes the debt.
All this sets up the conclusion I want to point out today: the nations that can use immigration to control their national GDP have a whoppingly large advantage when it comes to managing dangerously high levels of government debt. The sorts of debt which we’re all in thanks to the pandemic.
If your debt-to-GDP ratio is getting too high, you just open the immigration gates and boost GDP to bring it back down again. That is, of course, assuming that you can attract those immigrants…
Meanwhile, the nations facing depopulation and thereby falling GDP are going to struggle to repay their debts. Even if their GDP per capita grows, their total GDP could still decline, making that debt burden ever worse.
This is the dirty little secret of Japan, by the way. GDP per capita has been growing just fine. Living standards are very high. But total GDP for the nation has struggled and so the debt-to-GDP ratio is off the charts compared to other countries.
The same demographic change that played out in Japan will occur in much of the developed world as demographics continue to turn, despite my best efforts.
But some nations, especially the UK, Australia, the United States, Canada and New Zealand, have a GDP tap called immigration policy which they can turn to when it’s time to boost GDP. This dramatically changes their ability to deal with excessive government debt, giving them a crucial advantage in an age where excessive government debt is about to become a real problem.
A case in point is Australia. In 2008, Australia didn’t even have a recession. Some say that it was because of China’s demand for resources. But, on a per capita basis, there was a recession. It’s just that many people flooded into Australia from depressed European economies in search of work.
That influx pushed up the nation’s GDP, and so a recession was never technically announced. But living standards as measured by per capita GDP did get crunched for a while.
Or consider an example much closer to home which features both an influx and an outflow. I am thinking of the dynamic between Eastern Europe and the UK.
Eastern Europe’s demographics are extremely bad. But they are downright frightening once you take into account the emigration to Western Europe. In 2018, Quartz reported that UN projections were that, “The top 10 countries with the fastest shrinking populations are all in Eastern Europe.”
Bulgaria saw its population drop by two million from just under nine million over the course of the last 30 years. Romania’s population went from over 23 million to just over 19 million today. A large chunk of emigration went to the places I grew up in as this change took place – London, Ireland and Germany.
This is largely a transfer of productive working people and thereby GDP from one nation to another. It gives a huge advantage to the recipient nations when it comes to the burdens of national debt, welfare, healthcare, and taxes – depending on how it is managed… or mismanaged.
Whatever you think about the cultural and social consequences, the economic benefit to GDP is there. And, when it comes to bearing the national debt burden, GDP matters.
Nations like the UK and Australia can [now] turn migration on and off like a tap because they are desirable places to live, for a long list of reasons not worth going into here.
Japan, for example, is struggling with the dynamic of attracting people. This is partially because Japan is a comparatively xenophobic nation with institutions that rely on cultural cohesion. I rediscover this every day because I’m stuck in Japan right now.
The ritual of taking out the garbage is an extraordinarily complex activity in Japan, which is monitored by community members for compliance and cleanliness. They have all given up trying to explain the details to me. It’s just too complicated.
Reading in Japanese effectively requires memorising 2,136 kanji, as a start. I gave up after five, and that was just the reading, not the writing. The 2,136 takes Japanese children much of their school years to learn, and there are plenty more new ones to learn depending on what you study. This puts immigrants at a rather extreme disadvantage, even if they get a grip on the other two alphabets used in Japan, which I have learned.
The Brazilian aged care workers in my mid-sized town here in Japan walk on the road, not the sidewalk, causing great consternation and confusion to the locals.
I do trampoline lessons with a lady who had never spoken to a foreigner before me. She was terrified of me when we first met.
It took two weeks to establish what to do with my middle name on my local government documentation because Japanese people don’t have middle names and they reverse the order of surnames and first names. This combination left everyone confused about which order to put Nickolai Christopher Hubble.
It was entirely incomprehensible to the local licensing authority that I should have a UK driver’s licence, but an Australian passport. Repeated visits were required.
Japanese people are frequently annoyed that, although they are expected to speak English, English speakers don’t bother to learn Japanese. I think they don’t realise that most of the people speaking English to them are German, French and Spanish tourists trying to use the international default language which so many people learn as their second language.
So, to sum up, in case you missed the point of the anecdotes, Japan struggles badly with the challenges of immigration. Or immigrants struggle with Japan. And so I expect Japan to struggle badly with the problems of demographic decline. As that country has done, measured by GDP and debt to GDP.
Although, in many ways, Japan has already come to terms with those problems after experiencing them for decades. But the shifts which took place are also insightful because they reveal what will happen in places that fail to attract immigration and grow their economy’s GDP.
Japanese people don’t believe that the stock market goes up in the long run. That is because it doesn’t – or hasn’t done so in the last 20 years or so.
Property in Japan is considered a depreciating asset, like a car. When young people inherit property in Japan, it is seen as a burden because of the costs of upkeep or demolition. Arson by the owner to escape tax and insurance fees is a real problem.
Because of this depreciation, it’s common for people to stay in the same home their whole lives. They can’t sell out and leave because the value has fallen and they can owe more than this value to the bank. The lack of mobility which results is a huge economic drag.
Imagine similar shifts taking place in the UK today. It would upend the economic and financial order in extreme ways. As it did in Japan after the huge asset price bubble burst in 1990.
But Japan doesn’t face the most dangerous challenge – emigration. The same dynamic which will benefit migration destinations will further disadvantage the nations who see their best, brightest and hardest working leave to support the economies of other nations.
To sum up, I believe we are entering a world where migrants will be welcomed by governments looking to enhance the growth of their GDP, as Australia has done so successfully in the past. Nations will try to attract talent and workers. And those people will have choices for where to live.
The UK will be a leading beneficiary of this. At least, it could be…
Editor, Fortune & Freedom
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