Europe & Immigration

Europe & Immigration

Up until now I have been relatively skeptical of the growth in right-wing nationalist movements of Europe. From the historic approach it has always been present in Europe regardless of the century, the shape it has taken and the consequences have changed. In this it is essential to see how this time is different.

UKIP has a growing political platform in the U.K. and the party is clearly giving rhetoric that appeals. In this we may examine that central to their platform is “leaving” Europe and moreover tightening our controls on immigration. My question is why do the main political parties ignore the clear economic potential of lowing barriers to immigration?

There are clear potential gains from reducing barriers to immigration. The table below gives a clear comparison how immigration barriers stack up against reducing trade and capital barriers. Even if we argue that these figures are exaggerated they are still so substantial that the avenue should surely be explored at the least.

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This calls for a natural experiment with immigration. Israel is a country that had a very specific yet clearly open immigration policy, if one were Jewish they could commit themselves to an Aliyah and become an Israeli citizen. This option is still open to Jewish people from around the world today. Originally this had been an integral factor in the acceleration of Israeli economic growth from the 1960s, alongside the flow of capital and aid from the United States. However, more recently one can examine the sudden influx of Ethiopian Jews. Israeli media was split upon the economic affect this additional population, with essential resources such as water in the region already scarce. The skeptic’s fears were not met, with strong government intervention citizenship enabled them to find jobs and make a living. With their wages in many cases greater than the average Ethiopian.

One important aspect of this immigration is that entire families had immigrated; it was not just children or parents. This is important in the perspective of keeping the consumption within the economy. Gross national product is a popular indicator for developing countries such as the Philippines, as citizens immigrate to Western countries and repatriate their earnings. Since entire families had moved to Israel there was no repatriation of these earnings or if any it was limited, so there was increased consumption in the economy. Israel had hugely benefitted from an increase in population through immigration. All the while the country has not lost its natural identity or culture.

In regards to wages between two countries opening up to immigration we may observe the following case whereby wages in the developed country decrease, and wages in the developing country effectively increase. In this it is important to note how the marginal decrease is smaller in comparison to the marginal increase.

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The affect on wages is dependent on the elasticity of demand for the wage-labor market. We can see how the mixture in quantity of labor changes through immigration in the movement from L to L’. While the shaded areas are a representation of the efficiency gained through immigration.

Immigration is not an economic evil; we tend to be averse to it due to the ignorant fear that immigrants “steal jobs”. Closing of our economies and returning to super-nationalism is not the solution, we would be stepping back 100 years.

In the wake of Charlie Hebdo there is going to be increasing support for these nationalist groups. However it is important to remember the benefits of immigration. Fox News came under heavy fire as a commentator suggested that Birmingham was a Muslim city, and a no-go zone for non-Muslims. The greatest problem with this is that the comments came from Steven Emerson who was educated in Brown University and is seen as an expert on counter-terrorism and terrorism. There is a glaring misconception of Muslim population is Western countries. They are all part of a mutually beneficial working economic society. Of course new immigrants are not going to call themselves British or French, but their children will.

There are real economic benefits to opening up to immigration and reducing barriers, especially in the case of highly skilled migrants. I am not in favor of eliminating all barriers; this would eradicate the benefits shown in the model above. It has to be a gradual process in order to allow the population to naturalise. The relatively young United States would do well to remember how it become an economic superpower through the influx of people in the early 18th century.

Copyright Almog Adir © 2015 · All Rights Reserved · My Website

Eurozone Round-Up

No surprises this morning as the Bundesbank has slashed the German growth forecast to 1%. This has followed the past few months where there has been tangible uncertainty about Germany’s macroeconomic vision. With criticism coming from those suggesting that Germany has regularly failed to provide a level of investment, which would lead any kind of recovery, coupled with bullish behaviour in keeping its high trade surplus.

The interdependence of the Eurozone has become increasingly clear since the crises, and it was well understood that Germany maintaining its surplus had constrained the growth of the weaker Eurozone members. The German hopes were that this would still help drive growth, but shown through interdependence the German economy is slumping.

Continuing with the lack of surprises the European Central Bank informed us that the expected inflation for this year would be 0.5% with a forecast of 0.7% for 2015. The last target of the ECB that I can recall was that of inflation being 2%. Germany is clearly causing a whole host of trouble due to its economic weight on the Eurozone, but shows no insight into the potential change of policy as they are still predicting growth to rally to 1.6%. Jens Weidmann throws some spurious figures and he then claims to be surprised by a lack of performance, although nothing has been out of the ordinary for the past two years.

Moreover, it is clear that the only person in the ECB that needs more support is Mario Draghi. I would go as far as to claim that he is the Eurozone’s only hope, with his desire to pursue quantitative easing in a strategic and defined manner in aiding structural reform is essential. With an overall aim of returning the size of the ECB’s balance sheet to that of 2012. It is fair to state that asset purchases do not have defined results, but it would be an improvement in comparison to Weidman’s insistence on a more passive approach. I am not the biggest advocate of quantitative easing, and more in line with structural reform to European labor law and the ease of businesses, but I believe that Draghi is representing an interventionist mixture that will lead Europe to sustained and reliable growth.

It will be interesting to see how the year closes off and what 2015 has to offer in terms to tangible change in our approach to modern economies which no longer fall in line with some of the traditional approaches still used and insisted upon.

Copyright Almog Adir © 2014 · All Rights Reserved · My Website

Cutting The Deficit

As we near the time of elections in the United Kingdom there is a greater focus on the condition of the economy, and what needs to done in order to return the economy to its previous strength. Austerity has been the way forward, and whoever wins the next general election will have to maintain the burden if it is to be effective.

Now austerity is often subject to ferocious attacks as to its actual benefit to society, and that cuts are never made in proportion to the people they are affecting. I am admittedly glad that I am not in the position of the Chancellor of the Exchequer having to make those unbelievably difficult decisions. There seems to be no way to please everyone, but that is not a new concept in the game of politics.

From an economic perspective we can note that in terms of policy its incredibly difficult to decide what extent a cut occurs, and the time frame for it to occur. If you protect the elderly it might mean putting the younger generation at risk of unemployment or a reduction in education. There are insurmountable opportunity costs that we may realise if we start looking at what to cut. The Financial Times have produced a UK budget deficit calculator, which brought me to frustration as no decision seems favourable to any extent (except cutting overseas aid, and freezing elements of the defence budget). I highly recommend having a go at the calculator, because I never cut enough to reach the required amount, with my best effort being £38 billion:

http://www.ft.com/ig/sites/2014/deficit-calculator/

Copyright Almog Adir © 2014 · All Rights Reserved · My Website

The Decline of European Car Manufacturers

The European automotive industry has suffered over the past three years with declining revenues across multiple manufacturers, and now with growing popularity for Asian car manufacturers there is a greater competition on the pricing of cars, and a grab of market share in a continually diversifying market. PSA Peugeot Citroën is the second largest European based automaker. In regards to market share, the firm was the eighth largest in the world as of 2010. However a decline in car sales, and increased foreign competition, the company reported an annual loss of €5 billion. This goes to exemplify the monopolistic competition nature of the car industry in Europe & America.

Definition “Monopolistic Competition”:

It can be defined as the existence of monopoly power for a firm within a certain period of time in the short run. The firms in the long run will compete on price and other factors (e.g. branding, quality, etc.) eventually losing monopoly power over time as firms begin to differentiate less and create products of homogenous nature.

Main Factors:

  • There are Car Manufacturers, No Firm Has Total Control Over Market Price
  • Asymmetric Information
  • Independent Decision Making
  • High Barriers to Entry & Exit

Analysis:

The article goes on to establish the monopolistic nature of the European car industry, and takes a close look at the performance of PSA Peugeot Citroën. The article reveals the monopolistic nature of the market, as it mentions the “sizeable” cash pile the firm maintains, and the fact that the firm reported an annual loss of €5 billion. The graph below displays the current short-run situation that the firm exists in.

Picture1

The firm is running at a loss because of the declining market share, as there is greater competition from Asian manufacturers such as Kia entering the European market. The Asian firms are taking market share from the smaller range of cars (PSA target market) and then moving upmarket to medium luxury vehicles. European manufacturers such as Mercedes-Benz and BMW have also begun to produce small size vehicles similar to PSA to try and enter this particular section of the automotive industry, as they can use their economies of scale to effectively compete in this partition of the market.

Evaluation:

Another factor attributing to the firm making an annual loss can be noted in the operational cost of the factories. 40% of the firms manufacturing is completed in France, and due to this the firm has to deal with strong unions keeping worker wages high. As well as the influence of the government pushing PSA to keep factories open even though demand for cars has dropped over the past two years or gone over to Asian car manufacturers. The firm can be compared to Renault which is the direct French rival firm, as Renault moved the majority of its manufacturing overseas to reduce the cost of workers’ wages and general operations. The French government has already supported the group with €7 billion in assistance, helping the firm maintain the loss.

PSA’s main rival is the Volkswagen Group, which have an advantage over PSA as they have greater economies of scale. Volkswagen is able to offer consumers similar cars but at a lower cost, this can be noted in the differences between the Volkswagen Golf and the Citroën DS5. The DS5 starting price is £22,700, whereas the Golf starting price is £16,285. This identifies Volkswagens economies of scale, but also identifies another monopolistic characteristic of Citroën since they cannot compete on price, they compete on advertising and aesthetics of their car range. It also establishes the existence of asymmetric information as the Golf has a smaller engine, and less space compared to the DS5.

It is evident that the French firm cannot continue to operate at a loss in the long term as eventually the cash reserves will run out. This means that in the long term the firm may seek government assistance, or it will have to reduce high fixed costs such as factories, and the salaries of workers. This would lead to a reduced unit production and as a result there may be a dwindling market share, but a possible return to normal profit.

The firm is likely to remain loss making unless there is resurgence in the demand for cars, as the market has become increasingly competitive and exiting the market is unfavourable due to the high barriers of exit.