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JUNE 20, 2006


Sound Money
By Chris Farrell


Rethinking the Immigration Debate
There could soon come a time when the U.S. actually encourages Mexicans to come here—but by then the incentive to do so won't be as great


Right now, immigration is a hot-button issue. But the issue will fade over the next few years. Talk of building a 2,000-mile wall along the border with Mexico will quiet down, and the U.S. will once again proudly put out the welcome mat for foreigners.

One major reason the heated political rhetoric and incendiary charges will cool off is that a cottage industry of sober economic and social research is creating a rich, nuanced portrait of the long-term impact of immigrants—legal and illegal—on the economy. It's largely a positive picture.

MEXICAN PROSPERITY? For example, competition from unskilled foreign-born workers has had relatively little impact on the wages of less-educated American workers. Most immigrants pay taxes—whether they are here legally or not. They contribute to the economy by buying everything from food to homes.

The children of immigrants do well at school and at work, making huge strides in narrowing the educational and earnings gap with native-born Americans. High levels of immigration were a factor behind the drop in crime rates since the 1990s. Immigrants from Taiwan to Mexico to Haiti are assimilating into the mainstream U.S. economy. Taken altogether, immigration has been a net boon to the U.S. economy and society.

Another big factor is that the number of immigrants coming from Mexico will decline, thanks to the improving Mexican economy. That's right, contrary to popular perception, Mexico is doing better. The ranks of its middle class are growing, with an estimated 40% of all Mexican households joining the middle class, up from 30% a few years ago. Home ownership is at record levels, and consumer loans are increasingly available to economic strivers. The government's budget is at its lowest level in nine years, and the country's inflation rate is below America's.

MEXICAN PROSPERITY? Perhaps most striking, Mexico is competing in the global economy with skilled workers. It is educating more engineers than the U.S., with some 451,000 Mexican students enrolled in full-time undergraduate programs vs. 370,000 in the U.S. (see BusinessWeek,com, 5/22/06, "Mexico: Pumping Out Engineers").

The long-term economic story for Mexico is even brighter. Economists at Goldman Sachs GS gained a lot of attention—or notoriety—with a 2003 study on the BRICs: Brazil, Russia, India, and China. The gang of four, which now accounts for less than 15% of the economies of the G6 nations, could collectively be larger than the G6 in 2050, according to Goldman's projections. In a follow-up study published in late 2005, Goldman looked into what other developing nations had BRIC-like potential. At the top of the list were Mexico and Korea. By their calculations, Mexico could become the world's 11th-largest economy by 2025 and the sixth-largest in 2050. That suggests Mexico could have a larger, more dynamic economy than Russia, Germany, and Britain in less than half a century.

What does an improving Mexican economy have to do with emigration to the U.S.? The answer lies with the so-called "Bhagwati J-curve," named after Jagdish Bhagwati, the dean of international economists and a professor at Columbia University. Bhagwati's argument is that emigration of unskilled workers increases as a poor nation gets wealthier. Rising prosperity makes it easier to pay the $1,500 or so that "coyotes" charge Mexicans to cross the border into the U.S. This has been the story of the increase in Mexican immigrants to the U.S. since the 1990s.

INDIA'S EXAMPLE. Yet as Mexico's gross domestic product and incomes expand, the incentive to cross the border will fall and emigration rates decline. "So you get the bell-shaped or u-shaped curve," says Bhagwati. The Bhagwati-J-curve also applies to skilled, legal migration. Take emigrants from India to the U.S. In the 1960s, '70s, and '80s, Indian students with education and money left to go to MIT, Stanford, and other premier schools. They often stayed in the U.S. because the entrepreneurial prospects were few and far between back home.

But since the late 1980s economic conditions have improved dramatically in India. There are more educational and economic opportunities than ever before. Not only has migration from India fallen off, but a number of successful Indians have moved back to their home country. "In short," says Bhagwati, this J-curve "applies to both illegal unskilled and legal skilled migration flows into the rich countries from the poor countries."

To be sure, Mexico has a lot of problems, ranging from an inadequate primary education system to systemic corruption to an inadequate social safety net. The current economic slowdown in the U.S. and higher American interest rates will negatively impact Mexico, too. Nevertheless, it's a safe bet that the numbers of immigrants from Mexico will decline as the Mexican economy gets stronger. Imagine, someday policymakers may even find themselves debating legislation geared toward boosting, not restricting, immigrants from Mexico.



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Farrell is contributing economics editor for BusinessWeek. You can also hear him on Minnesota Public Radio's nationally syndicated finance program, Sound Money, as well as on public radio's business program Marketplace. Follow his Sound Money column, only on BusinessWeek Online
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