Time to reject false choices and fears about immigration

Basic freedom of movement across borders is fundamental to human dignity.

Srinivasa Ramanujan isn’t a name most people know, but his story illustrates the power of migration to improve the world.

Born to a poor family in southern India in the late nineteenth century, Ramanujan displayed a remarkable mathematical mind from an early age, developing complex theorums as a teenager.

He was a genius, but he left school in poverty and seemed destined to live a life of subsistence. By chance, Ramanujan was discovered by another Indian mathematician and ended up at Cambridge, producing ingenious new ideas and eventually becoming the first Indian to be elected a Fellow of Trinity College.

Ramanujan was lucky. Had he not been discovered when he was, he could have easily spent a life in poverty, his genius untapped and giving nothing to the world.

The west’s immigration laws make it remarkably difficult for latter-day Ramanujans to exploit their potential. Ramanujan represents not just the geniuses lying fallow in subsistence agriculture, but all human talent that is not being tapped to its full potential.

Whether the reasons are poor governance, cultural constraints, poverty or other restraints on human productivity, billions of people are being condemned to lives of relative squalor, with no way out.

A person’s productivity is enormously dependent on the circumstances they find themselves in. Taxi drivers in New York City, over 90 per cent of whom are immigrants, earn between $25,000 and $28,000 a year (£). Taxi drivers in, say, Benin can expect to earn less than $1,440 a year for exactly the same work.

Lowering the borders to allow more people from poor countries to come and work in the developed world would harness this and make the world dramatically richer in a very short space of time.

A 2011 study of the existing research around the GDP benefits of immigration by Michael Clemens of the Centre for Global Development (Economics and Emigration: Trillion Dollar Bills on the Sidewalk?) found that removing all barriers to migration could increase global GDP by between 67 per cent and a whopping 147 per cent – in other words, more than doubling global GDP. (In contrast, the studies reviewed found that removing all global barriers to trade – still an important goal – would increase global GDP by between 0.3 per cent and 4.1 per cent.)

Would these benefits mostly accrue to the host countries, depriving poor countries of the productivity of human capital? It doesn’t look like it. Development economist William Easterly has cited four reasons that "brain drain" from poor countries is a good thing: benefits to the migrants themselves, benefits to their families (through money sent back by those migrants), new skills and fresh ideas from migrants who do return home, and the global "brain gain" of tapping talent and unleashing the ideas of more people.

A World Bank study that compared the per-capita income gain to Tonga from microfinance, deworming programmes, conditional cash transfers and a seasonal migrant worker programme in New Zealand. The results were staggering – migrant workers sent home huge amounts of cash, increasing spending and investment in Tonga to raise per-capita incomes by 30 to 40 per cent - see graph below.

Graph from David MacKenzie on the World Bank blog.

We should reject the false choice presented by opponents of immigration between a fortress Britain and being "swamped" by immigrants. Fears of the welfare state being overrun are misplaced and do not reflect the reality that immigrants are actually helping to support state services. Immigrants to Britain pay more in taxes to the state than they consume in services – and since the average immigrant to Britain is young, we are counting on increased immigration to support our aging population.

There is a lot of evidence to suggest that immigrants are more entrepreneurial than the average person, as you might expect of someone who has travelled halfway across the world in search of a better life. A 2006 study in the US (pdf) found that "50 per cent of Silicon Valley engineering and technology startups were founded by immigrants (as were 25 per cent of such startups nationwide)." And, of course, the more innovation that takes place anywhere in the world, the better off we all are.

To libertarians and liberals, basic freedom of movement across borders is fundamental to human dignity. But everyone should be eager to make the world’s poorest better off and unlock the talent of more people like Srinivasa Ramanujan.

Sam Bowman is the head of research at the Adam Smith Institute

The backdrop to a speech about immigration. Photograph: Getty Images
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Let's turn RBS into a bank for the public interest

A tarnished symbol of global finance could be remade as a network of local banks. 

The Royal Bank of Scotland has now been losing money for nine consecutive years. Today’s announcement of a further £7bn yearly loss at the publicly-owned bank is just the latest evidence that RBS is essentially unsellable. The difference this time is that the Government seems finally to have accepted that fact.

Up until now, the government had been reluctant to intervene in the running of the business, instead insisting that it will be sold back to the private sector when the time is right. But these losses come just a week after the government announced that it is abandoning plans to sell Williams & Glynn – an RBS subsidiary which has over 300 branches and £22bn of customer deposits.

After a series of expensive delays and a lack of buyer interest, the government now plans to retain Williams & Glynn within the RBS group and instead attempt to boost competition in the business lending market by granting smaller "challenger banks" access to RBS’s branch infrastructure. It also plans to provide funding to encourage small businesses to switch their accounts away from RBS.

As a major public asset, RBS should be used to help achieve wider objectives. Improving how the banking sector serves small businesses should be the top priority, and it is good to see the government start to move in this direction. But to make the most of RBS, they should be going much further.

The public stake in RBS gives us a unique opportunity to create new banking institutions that will genuinely put the interests of the UK’s small businesses first. The New Economics Foundation has proposed turning RBS into a network of local banks with a public interest mandate to serve their local area, lend to small businesses and provide universal access to banking services. If the government is serious about rebalancing the economy and meeting the needs of those who feel left behind, this is the path they should take with RBS.

Small and medium sized enterprises are the lifeblood of the UK economy, and they depend on banking services to fund investment and provide a safe place to store money. For centuries a healthy relationship between businesses and banks has been a cornerstone of UK prosperity.

However, in recent decades this relationship has broken down. Small businesses have repeatedly fallen victim to exploitative practice by the big banks, including the the mis-selling of loans and instances of deliberate asset stripping. Affected business owners have not only lost their livelihoods due to the stress of their treatment at the hands of these banks, but have also experienced family break-ups and deteriorating physical and mental health. Others have been made homeless or bankrupt.

Meanwhile, many businesses struggle to get access to the finance they need to grow and expand. Small firms have always had trouble accessing finance, but in recent decades this problem has intensified as the UK banking sector has come to be dominated by a handful of large, universal, shareholder-owned banks.

Without a focus on specific geographical areas or social objectives, these banks choose to lend to the most profitable activities, and lending to local businesses tends to be less profitable than other activities such as mortgage lending and lending to other financial institutions.

The result is that since the mid-1980s the share of lending going to non-financial businesses has been falling rapidly. Today, lending to small and medium sized businesses accounts for just 4 per cent of bank lending.

Of the relatively small amount of business lending that does occur in the UK, most is heavily concentrated in London and surrounding areas. The UK’s homogenous and highly concentrated banking sector is therefore hampering economic development, starving communities of investment and making regional imbalances worse.

The government’s plans to encourage business customers to switch away from RBS to another bank will not do much to solve this problem. With the market dominated by a small number of large shareholder-owned banks who all behave in similar ways (and who have been hit by repeated scandals), businesses do not have any real choice.

If the government were to go further and turn RBS into a network of local banks, it would be a vital first step in regenerating disenfranchised communities, rebalancing the UK’s economy and staving off any economic downturn that may be on the horizon. Evidence shows that geographically limited stakeholder banks direct a much greater proportion of their capital towards lending in the real economy. By only investing in their local area, these banks help create and retain wealth regionally rather than making existing geographic imbalances worce.

Big, deep challenges require big, deep solutions. It’s time for the government to make banking work for small businesses once again.

Laurie Macfarlane is an economist at the New Economics Foundation