Why Nobody Invests in Japan
Tokyo’s Failure to Welcome Foreign Capital Is Hobbling Its Economy
Opponents of immigration are ascendant. From Poland to the United States, politicians are shutting borders and turning away refugees. “Our Country is FULL!” U.S. President Donald Trump tweeted in April. But misplaced fears over security, slow assimilation, and stolen jobs have distracted from the real demographic crisis looming over Europe and North America: not one of too many immigrants but one of too few.
The next several decades will see populations in Europe and North America age and shrink as people have fewer and fewer children. That trend will hurt economic growth and dynamism and leave too few workers for every retiree. Robots and artificial intelligence will not save rich countries from the economic consequences of a shrinking population. Nor, without a dramatic reversal of current policies toward immigrants, will a flow of workers from elsewhere. To avoid sclerosis and decline, the rich world will have to compete to attract immigrants, not turn them away.
The average woman in Europe today has 1.6 children, and the average woman in North America has fewer than 1.9—well below the number needed to keep populations stable. Ten European countries, along with Japan, are forecast to see their populations fall by 15 percent or more by 2050. Over the next 65 years, the working-age population of the European Union as a whole is expected to fall by 44.5 million people. And as populations shrink, they will also age. In Europe, a quarter of the population is already over 60; by 2050, that proportion will reach more than one-third. In 2080, the EU will have 53.3 million more retirees than it does today. The situation in the United States is little better. Some 80 percent of U.S. counties saw their working-age populations fall between 2007 and 2017.
Aging populations will strain welfare systems to the breaking point. Spain, for example, will have to raise spending on health care, elder care, and pensions by ten percent of GDP between 2004 and 2050. Aging populations hurt economic dynamism, too. Since 1960, in G-7 countries where retirees made up less than ten percent of the population, annual per capita GDP growth rates averaged four percent. When retirees made up between ten and 20 percent of the population, the average per capita growth rate was two percent. And when more than 20 percent of the population was above the age of 65, per capita GDP grew at an average of just 0.4 percent. According to an estimate by economists at the RAND Corporation, population aging will shave 1.2 percentage points off of annual U.S. GDP growth in this decade and a further 0.6 percentage point in the next.
Governments have tried raising native birthrates to slow population decline, but even generous incentives have failed to push fertility above replacement levels. The evidence suggests that giving parents child subsidies does boost birthrates, but only by a little. Free childcare, although a good idea in its own right, isn’t a panacea, either. In Italy, Norway, and Spain, government-supported childcare seems to have encouraged families to have more children. But in Germany, although improved access to childcare led more mothers to join the workforce, and those who were already in the workforce put in longer hours, it had little effect on the number of children born, according to research by the economist Alexander Bick.
If governments can’t raise domestic fertility, but their economies need a new generation of workers, can robots fill the gap? The experience of countries such as Germany, which has some of the highest levels of both automation and manufacturing employment, suggests not. Productivity, including that generated by automation, tends to rise hand in hand with labor-force participation, suggesting that, if anything, automation creates more demand for workers rather than less. That leaves just one other solution to the demographic crisis: for rich countries to open their borders to immigrants.
Higher immigration levels are the most important reason for the United States' demographic advantage over Europe.
Bringing in foreign workers quickly improves the ratio of working to nonworking people. And immigration helps with fertility rates as well: foreign-born people make up about 13 percent of the U.S. population but give birth to 23 percent of the country’s children. (Although as immigrants assimilate, their birthrates generally decline to match those of the native population.) According to U.S. Census Bureau forecasts, without immigration and births to foreign-born mothers, the U.S. population would decline by about six million between 2014 and 2060. With them, it is forecast to grow by 98 million. Higher immigration levels are the most important reason for the United States' demographic advantage over Europe.
Immigrants also help the people in the communities to which they move. Research by the economists Gaetano Basso and Giovanni Peri indicates that in the United States, when immigrants move to an area, wages for natives of all education levels tend to rise. Their finding matches reams of evidence suggesting that even dramatic increases in immigrant worker populations tend to help native workers. In a study he conducted with the economist Francesco Ortega, Peri further found no evidence that immigration weakens institutions or worsens income inequality. Claims that immigrants will overwhelm housing supply or government social programs are unconvincing when the native population is falling and the United States employs immigrants to supply those very services.
Immigrants are already a vital part of the U.S. labor force, filling positions that native workers can’t or won’t. Among low-skilled workers, this is a well-known phenomenon. American farmers hire huge numbers of migrants during the summer harvest, even though they are legally required to offer seasonal jobs to U.S. citizens first. In North Carolina in 2011, for example, farmers advertised 6,500 seasonal farm jobs; 268 U.S. citizens applied and just 163 showed up for the first day of work. The rest of the jobs went to Mexican farmworkers. Immigrant workers are just as important in highly skilled professions. Some 38 percent of scientists and 27 percent of doctors in the United States are foreign-born, along with 71 percent of tech employees in Silicon Valley.
That immigration to many rich countries is stagnating or even falling, then, is cause for concern. Although average wages in the United States are more than three times as high as those in Mexico, more Mexican citizens are currently leaving the United States than entering it. The United States has temporarily shored up its population of undocumented immigrants by making it more difficult for them to cross the border to and from their home countries, forcing many to simply stay in the United States long-term. But greater enforcement still hasn’t been enough to stem the decline in the undocumented population, which has fallen from 12.2 million in 2007 to 10.7 million today.
Even in areas with open borders, migration flows are meager. The EU has major income disparities—workers in poor areas of Bulgaria make about 20 times less than workers in London, for example—and fairly low transportation costs, short geographic distances, and small linguistic differences, at least compared with other major immigration routes. But the vast majority of people in the EU still don’t move to areas with better opportunities. In 2015, just 4.5 percent of EU citizens lived in another EU country, up only slightly from three percent in 1960. Despite Greece’s dire economic situation, less than four percent of its population has immigrated elsewhere in Europe. Less than two percent of Spaniards live elsewhere in Europe, even though Spain’s youth unemployment rate stands at an eye-watering 32 percent.
One reason for the faltering supply of immigrants is that people are getting richer. The economist Michael Clemens has shown that until a country reaches a per capita GDP of about $7,500 (equivalent to Albania’s average income), the richer it gets, the more people move abroad. After that point, however, the pattern reverses. The problem is that today, a majority of the global population—about 57 percent—lives in countries with an average income above $7,500. If developing countries grow at an average of three percent each year between now and 2050, countries home to just nine percent of the world’s population today will still have average incomes below $7,500 by then. After each country passes the tipping point, further economic growth will produce fewer immigrants. Global demographic trends are another reason to predict declining migration flows. Young people are the most likely to leave home, so as the world ages, more people will stay put. Europe benefits from proximity to Africa, where populations are still young and growing rapidly and GDP per capita remains low. But fertility is dropping and incomes rising in that region, too. Even if Europe stopped spending billions of euros keeping migrants out, the flow of labor might soon start to decline.
In 2012, the EU forecast that by 2020 it would fall a million workers short of its demand for health-care professionals alone.
The migrant shortage is likely to be most acute among the highly skilled. Between 2000 and 2011, the number of immigrants to Organization for Economic Cooperation and Development (OECD) countries with a postsecondary education rose by 70 percent, to around 35 million people. But that is a drop in the bucket when more than a third of the working-age population in the OECD—over 280 million people—has a college education. In 2012, the EU forecast that by 2020 it would fall a million workers short of its demand for health-care professionals alone, including some 230,000 doctors and 590,000 nurses.
The United States has traditionally done well at attracting skilled immigrants. About 57 percent of immigrants who have patented an invention move to the United States, as do 41 percent of the global stock of college-educated migrants. But the competition is stiffening. Canada, China, France, Germany, and the United Kingdom have all recently reformed their immigration laws in an attempt to attract entrepreneurs. And according to research by the economist Vivek Wadhwa, the proportion of high-tech start-ups founded by Chinese and Indian immigrants in Silicon Valley dropped from 52 percent in 2005 to 44 percent in 2011, in part because potential entrepreneurs are returning home.
The number of foreign students staying to work in the United States after finishing their studies has risen fast over the past ten years. But that could change quickly. In the early years of this century, fewer than two out of every ten Chinese students studying abroad returned to China after graduating. By 2017, eight out of ten did. In 2001, 98 percent of Chinese students who had received doctorates from U.S. universities and had temporary visas at graduation were still in the country five years later; today, that figure has fallen to 85 percent. In another worrying sign, after years of growth, the number of international graduate students enrolling in U.S. universities fell from 126,516 in 2015 to 117,960 in 2017.
What can Western countries do to avoid demographic disaster? Japan, where more than a quarter of the population is already over the age of 65, shows one way forward. Although the country has traditionally spurned migrants, the foreign share of the Japanese population has tripled since 1985, from 0.6 to 1.8 percent, and the government has launched schemes to recruit more immigrants.
Western countries could also look to the Middle East. The members of the Gulf Cooperation Council—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates—have populations that are on average 20 percent foreign-born, a higher proportion than France and the United States (both 13 percent). In some Gulf countries, the majority of residents are migrants. Companies and governments in the Gulf use recruitment agencies that search for foreign workers, match them with jobs, and pay for their travel. The United States and Europe should not copy the system wholesale. Many immigrants in the Gulf work for lower pay and under worse conditions than the recruitment agencies promised them, and because employees can work only for the firm sponsoring them, they often cannot voice complaints or quit their jobs. Europe and the United States should offer foreign workers more protections. Furthermore, most immigrants to the Gulf don’t stay very long, which means they bring fewer benefits to the receiving countries than people who relocate permanently. But the broad approach may be worth emulating. OECD governments should work with firms facing labor shortages to source workers with the requisite skills, provide any additional training required to meet regulatory or licensing standards, and help with relocation.
Because cultural links and social networks are crucial to encouraging immigration, Europe and the United States should help create them when the opportunity arises. That might be when conflicts create waves of refugees that could form the nucleus of a new migrant community. By taking in refugees, countries can both perform a valuable humanitarian service in the short term and encourage immigration in the long term. Offering visas to family members can help sustain such immigration flows.
By taking in refugees, countries can both perform a valuable humanitarian service in the short term and encourage immigration in the long term.
Governments should also work to attract immigrants from a wider range of countries. Doing so would not only boost numbers of immigrants but also increase their economic impact. A diverse stock of first-generation immigrants brings significant benefits, such as more patents and higher overall incomes, according to a 2015 study by economists at Harvard University and Bar Ilan University. The reason for this, the economists reasoned, was a wider range of perspectives allowing residents to interpret and solve problems differently.
In the United States, the visa lottery program gives citizens of countries that have sent fewer than 50,000 immigrants to the United States over the past five years the opportunity to enter a random draw for a work permit if they have a high school education or two years of training in a job skill. Washington should expand this program. And countries that use points systems to control immigration should award points to immigrants from underrepresented countries.
To boost high-skilled migration, governments should recognize foreign diplomas in licensing and regulatory matters. They might also try training people living abroad in specific skills. Finland, Germany, Italy, and Norway have started programs along these lines to ameliorate nurse shortages. Hospitals and ministries of health work with their peer institutions in origin countries to train workers to meet specific requirements. Building on that idea, Clemens has proposed a “Global Skill Partnership,” in which employers in countries with skill shortages would pay for training in source countries, so long as the trainees commit to work for the employers. Since companies might abuse such a system, Clemens suggests several mechanisms to protect employees, such as giving them the right to buy out their contracts and work for other firms.
Whatever the economic benefits, many politicians believe that more immigration is a political nonstarter. But they overestimate the populist backlash to immigration. Actual immigration levels have fueled the rise of right-wing populism far less than fear-mongering has. In fact, the more immigrants in a region, the more pro-immigration people there tend to be, and there is some evidence that the arrival of additional immigrants makes people see them in a friendlier light. In 2016, the economist Andreas Steinmayr found that places in Austria that were randomly assigned more refugees saw lower vote shares for far-right parties and greater optimism about refugee integration than areas with fewer refugees.
Despite the electoral success of right-wing populists, immigration is getting more, not less, popular—especially among young people, who will have to deal with the costs of aging, declining populations. In surveys conducted this year by the Pew Research Center, asking people whether immigrants “make our country stronger” or “are a burden on our country,” 29 percent of respondents in the United Kingdom and 34 percent in the United States said “burden.” The figures for “stronger” were 62 percent and 59 percent, respectively. An analysis of surveys in 25 European countries suggests that people are likely to get even more positive about immigration over time. The researchers found that old people tend to oppose immigration, so as populations begin to age, anti-migrant attitudes rise. But as aging continues, a change sets in: the working-age population embraces immigration in response to the need for more workers, and overall attitudes swing toward greater support for immigration.
The problem of demographic sclerosis goes well beyond the West. The UN projects that the global population of those older than 65 will increase from 665 million in 2020 to more than 1.9 billion in 2090, from nine to 18 percent of the total population. The trend will hit China especially hard: 22 percent of the Chinese population will be older than 65 by 2040. China also lags far behind in attracting immigrants, with the foreign-born accounting for less than one-half of one percent of the total population. The West, by contrast, is lucky to have large existing immigrant populations.
But that luck will last only if governments open up their countries. Rather than pandering to the nativism of an aging minority, politicians in Europe and North America should think seriously about how to preserve the economic vitality of the West. That means finding and attracting more immigrants. In an age of international terrorism, people crossing borders receive immense attention from the national security community. But in the future, governments will have more cause to fear the drought than the flood.