Thursday, August 31, 2017

Does Immigration Make an Economy Less Productive?

It is probably global public knowledge by now that Japan is probably the least immigration-friendly developed country in the world.  The number of skilled workers, not to mention unskilled ones or refugees, is puny compared to those taken in by Europe and America in the past decades.  And part of the reason that anti-immigration policies persist in the country despite labor shortages is overwhelming support for anti-immigration policies among the general public.  And the popular support, unlike in the West, extend to the very top, among the wealthiest and most educated of Japanese citizens.

A conversation the author had yesterday was quite illustrative.  The person speaking a senior manager in a major foreign bank's Japanese head office.  Diverging from a topic on why economics is interesting, she argued the Japanese government and media's incorrect understanding of economic principles is pushing some to support immigration to Japan when from a purely economic perspective, Japan does not need any immigration to begin with.  While quite surprising coming from someone who worked in a foreign company with foreign coworkers for decades, the sentiment nonetheless deserves a mention for its commonality among the people here.

Her argument is that Japan's current economic woes, including stagnant wages, low growth, and declining consumption, comes fundamentally from inability to increase labor productivity.  Because labor productivity does not rise, firms cannot justify higher wages, which means consumption cannot grow.  In other words, her arguments goes, if individual Japanese workers can create more value for the economy, then their wages will naturally rise.  Immigrants, her belief goes, will only further reduce labor productivity by increasing the number of workers while holding overall economic value created constant.

Her solution to the low productivity problem is a classic Japanese one.  It involves technological investment that can increase the capacity of individual workers in their respective positions.  An example she gave was to increase the size of all delivery trucks in the country so that each truck driver can deliver more goods in the same amount of time.  For where workers are lacking to begin with, such as farming and care for the elderly, robots should become the main labor force, with dozens if not hundreds under the command of one human worker.

But this commonly held notion ignores a fundamental reality of the Japanese economy.  At its level of development, the Japanese economy can no longer squeeze much more productivity out of structural reforms of existing industries.  A culture of long working hours and already high productivity means that any technology-based solution will only show short-term results that cannot generate sustainable growth for years and decades.  This is not even considering that fact that a large segment of the Japanese economy is in the service sector, where output quality is proportionally lowered if one worker serves more customers in the same amount of time.

Instead, the Japanese economy, to acquire continuous productivity increase, must turn to innovations that can create new sources of economic value.  And this is precisely where Japan has fallen behind in the past decade and where immigrants can create direct value for the Japanese economy in ways the local population cannot.  Immigrants in Japan hold two distinct advantages that make them more suited than the local population while in Japan.  One is that, unlike the Japanese who are already quite used to the realities on the ground, immigrants are more likely to spot unmet demands and thereby opportunities to fill those gaps.

On the other hand, immigrants provide the better opportunities for struggling Japanese firms to go abroad, expanding their value by adapting to foreign markets.  While understanding of laws and customs in their respective countries of origin, immigrants will be suited to provide the appropriate logistical support and liaisoning Japanese firms need to introduce their products and services into foreign markets.  Without foreign staff to support with localization, it will be difficult for Japanese firms to gain permanent footholds on foreign shores no matter how innovative their products may be for the local market.

Finally, it should not be forgotten that innovation today is fundamentally a global business.  Any successful business may have a founder from country A, a host country B, an investor from country C, and ultimately be bought out by a company from country D after expanding into a whole list of other countries.  National borders and ethnic identity mean little in the world of productivity created by innovation.  In this world, only those who are capable and willing to constantly cross political and cultural boundaries to seek out new opportunities, new markets, and new resources can succeed.  Robots cannot replace these people.  

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