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Is Free Migration Compatible with a European-Style Welfare State?

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Is Free Migration Compatible with a European-Style Welfare State? Is free migration compatible with a European-style welfare state? Philippe Legrain, Visiting Fellow, European Institute, London School of Economics Expert report nr. 11 to Sweden’s Globalisation Council 00212.36_Inlaga_080408b.indd212.36_Inlaga_080408b.indd 1 008-04-088-04-08 117.03.597.03.59 EXPERT REPORT NUMBER 11 TO SWEDEN’S GLOBALISATION COUNCIL © THE GLOBALISATION COUNCIL 2008 AUTHOR Philippe Legrain GRAPHIC DESIGN Nina Rosenkvist PRINT Edita, Västerås 2008 ISBN 978-91-85935-05-5 ISSN 1654-6245 ORDER The Globalisation Council PHONE 0046 8 405 10 00 E-MAIL [email protected] www.sweden.gov.se/globalisation 00212.36_Inlaga_080408b.indd212.36_Inlaga_080408b.indd 2 008-04-088-04-08 117.03.597.03.59 Preface Free immigration is widely believed to be incompatible with a welfare state, on the left as well as on the right. This report examines in greater depth the possibility that rich countries act as “welfare magnets” for people from poorer countries. More careful consideration reveals that this view is too simp- listic. Looking narrowly at the impact of free migration on pu- blic finances ignores its broader economic benefits. These are potentially huge, and would make it easier to pay for the wel- fare state. Migration should be seen as an opportunity, not a threat. It is a matter of human rights and humanitarianism as well as self-interest. The 11th report to the Globalisation Council treats the question on how to combine free immigration and a developed social insurance system in a welfare state. The Swedish government already allows free migration from the EU. It is now proposing a reform of immigration law in the latter half of 2008 that would open up more channels for those outside the EU wishing to come to Sweden to work. The author believes that this would be a big step forward creating a simplified procedure for re- cruiting non-EU workers based on labour-market demand that is flexible, transparent and aims to be sustainable in the long term. Still, it is argued that in order to realise the full potential of immigration, further liberalisation is needed. The author Philippe Legrain is the author of Immigrants: Your Country Needs Them. He is a visiting fellow at the London School of Economics’ European Institute. He is also a commentator on globalisation, migration and European issues for publications such as the Financial Times, the Guardian, The Times, as well as for BBC TV and radio. The author takes full responsibility for the results and analysis presented in the report. Stockholm, April 2008 Pontus Braunerhjelm Principal Secretary, The Globalisation Council 00212.36_Inlaga_080408b.indd212.36_Inlaga_080408b.indd 3 008-04-088-04-08 117.03.597.03.59 Globalisation Council members The Swedish Government has established a Globalisation Council to promote a dee- per knowledge of globalisation issues, draw up economic policy strategies and broa- den public dialogue about what needs to be done to ensure that Sweden can compete successfully in a world marked by continued rapid globalisation. The Council’s work is expected to lead to proposed measures whose purpose, broadly defined, will be to boost Sweden’s competitiveness and attractiveness on the international scene. In addition to regular Council meetings, background reports will be written by in- dependent researchers and other experts. These will be quality assessed by reference groups composed of representatives from academia and the Government Offices and by leading economists on the Council’s Advisory Board. The work of the Council, which must be completed well before the 2010 general election, will be documented in a final report along with economic policy recommendations. Plans are also being drawn up for a number of external activities, such as conferences and seminars. The Council comprises representatives from the business sector, the Government, social partners, the government administration, the media and the research commu- nity. It is chaired by the Minister for Education and Research, Lars Leijonborg. The Principal Secretary is Pontus Braunerhjelm. The other members are: Kristina Alsér, Mercatus Engineering AB, County Governor, Kronoberg County Hans Bergström, columnist and reader in political science Carl Bildt, Minister for Foreign Affairs Urban Bäckström, Director-General, Confederation of Swedish Enterprise (Svenskt Näringsliv) Lars Calmfors, professor of international economics Per Carstedt, CEO, SEKAB Group Dilsa Demirbag-Sten, journalist, author Anna Ekström, Chair, Swedish Confederation of Professional Associations (SACO) Lars Leijonborg, Minister for Education and Research Sven Otto Littorin, Minister for Employment Wanja Lundby-Wedin, President, Swedish Trade Union Confederation (LO) Karin Markides, President, Chalmers University of Technology Elisabeth Nilsson, President, Swedish Steel Producers’ Association (Jernkontoret) Aina Nilsson Ström, Head of Design, AB Volvo Sture Nordh, Chair, Swedish Confederation of Professional Employees (TCO) Mats Odell, Minister for Local Government and Financial Markets Maud Olofsson, Minister for Enterprise and Energy and Deputy Prime Minister Carl-Henric Svanberg, President and CEO, Ericsson Lena Treschow Torell, President, Royal Swedish Academy of Engineering Sciences (IVA) Harriet Wallberg-Henriksson, President, Karolinska Institutet Marcus Wallenberg, Chair, International Chamber of Commerce (ICC) Olle Wästberg, Director-General, Swedish Institute (Svenska Institutet) 00212.36_Inlaga_080408b.indd212.36_Inlaga_080408b.indd 4 008-04-088-04-08 117.03.597.03.59 Table of contents Preface 3 Globalisation Council members 4 Abstract 6 1 Introduction 7 2 Are rich countries welfare magnets? 9 3 Are immigrants a burden on public finances? 16 4 Labour rights without social rights? 24 5 The economic impact of free migration 29 6 Does immigration undermine political support for the welfare state? 35 7 The impact of Sweden’s proposed reforms 39 8 Conclusion 41 IS FREE MIGRATION COMPATIBLE WITH A EUROPEAN-STYLE WELFARE STATE? • 5 00212.36_Inlaga_080408b.indd212.36_Inlaga_080408b.indd 5 008-04-088-04-08 117.04.007.04.00 Abstract This report examines the interaction between free migration and a European-style welfare state, with particular reference to Sweden. It considers whether rich-country welfare states act as a magnet for migrants from poorer countries, examines immigrants’ net impact on public finances, and suggests ways of reconciling free migration with a generous welfare state. It looks at how the broader economic impact of free migration would affect the affordability of the welfare state and examines the claim that greater diversity reduces political sup- port for the welfare state. It concludes that while free migration may pose challenges to a European-style welfare state, the two are not incompatible. On the contrary: by boosting economic growth, free migration could actually make the welfare state more affordable. Philippe Legrain is the author of Immigrants: Your Country Needs Them (Little, Brown, 2007), which was shortlisted for the 2007 Financial Times Goldman Sachs Business Book of the Year Award. He is a visiting fellow at the London School of Economics’ Euro- pean Institute, a journalism fellow of the German Marshall Fund of the United States and a contributing editor to Prospect magazine. He is also a commentator on globalisation, migration and European is- sues for publications such as the Financial Times, the Guardian, The Times, as well as for BBC TV and radio. Previously trade and econo- mics correspondent for The Economist and special adviser to World Trade Organisation Director-General Mike Moore, his first book was Open World: The Truth about Globalisation (Abacus, 2002). He blogs at www.philippelegrain.com. 6 • EXPERT REPORT TO SWEDEN’S GLOBALISATION COUNCIL 00212.36_Inlaga_080408b.indd212.36_Inlaga_080408b.indd 6 008-04-088-04-08 117.04.007.04.00 1. Introduction It’s just obvious that you can’t have free immigration and a welfare state. Milton Friedman1 Milton Friedman’s claim that free immigration is incompatible with a welfare state is widely believed, on the left as well on the right. The logic behind it is simple: if people from poorer countries can migrate freely to rich ones and claim welfare benefits there, and are better off doing so, then many will – and this will pose such an economic bur- den on rich-country taxpayers that political support for the welfare state will be undermined. On the surface, Friedman’s argument seems plausible. But more careful consideration reveals that it is narrow and simplistic. While it is certainly conceivable that free migration could make a European-style welfare state economically and politically un- sustainable, this is neither inevitable, nor indeed likely. Friedman’s argument has parallels to the notion that globalisation is inexorably destroying the welfare state through a “race to the bottom”, as the movement of people and companies to low-tax economies erodes the tax base in high-tax ones. This belief, also widely held across the political spectrum, is demonstrably untrue: Sweden, for one, com- bines a highly open economy with very high taxes. While Sweden’s taxes are arguably too high, and doubtless cause some people and companies to relocate, globalisation does not render them unsustain- able. Although Swedes are free to move anywhere within the Euro- pean Union (EU), only a few have emigrated for tax reasons. Fears about a race to the bottom have not been realised for seve- ral reasons. First, taxes are not simply
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