Fear of opening economic borders: Countries to lose instead of gain

Ken Schoolland addressing the Bastiat Society

Fear of opening economic borders

“Don’t harbour fears about opening economic borders. You are to gain rather than losing when economic borders are open.” This was the piece of advice which Ken Schoolland, Associate Professor of Economics and Political Science at the Hawaii Pacific University, left with his audience when he delivered the keynote address at a recent event organised by the Bastiat Society of Sri Lanka in Colombo. 

The event marked the publication of selected texts on liberty and economics of Frederic Bastiat, the 19th Century French economist, philosopher and legislator, in Sinhala by the Bastiat Society of Sri Lanka. 

 

Ken Schoolland: The creator of Jonathan Gullible

Ken Schoolland is better known for his classic fairy tale in the style of Lewis Carroll’s Alice in Wonderland, The Adventures of Jonathan Gullible, an odyssey by a young man experiencing good economics and bad economics practised in a contemporary society. 

It fits very well the first rule of Bastiat: that is, bad economists see only what they can see with their naked eyes and good economists see beyond their eyes. The book, intended to educate the ordinary laymen of the working of an economy, has been translated into 77 foreign languages including Sinhala since its first publication in 1988 and is about to be released as a major movie shortly.

 

Open border policy was extensively practised by ancient Sri Lanka 

What Schoolland told his Sri Lankan audience is not novel to Sri Lanka at all. From ancient times, the economic borders of Lanka had been open to the two way traffic of goods, expertise and even spiritual wisdom. 

The country situated on a very strategic point on the maritime Silk Route prospered from free trade of both goods and services. In that era in which there was no passport requirement as in the modern day, movement of people from and to Lanka was free. 

According to the Mahavamsa, the great chronicle of Lanka, Prince Vijaya who was settled in the island in the 6th century BCE is said to have got a princess as his royal queen and 700 other maidens for his supporters from the nearby Pandava Desha in India. 

This was then followed by the immigration of various technicians from India to Lanka. This was the practice that had been followed by all the kings who ruled the island since then. Accordingly, trade in ‘goods’ and ‘services’ was free enabling the island nation to become one of the prosperous countries in the region. 

 

King Parakramabahu the Great set up an entrepot trading centre in ancient Lanka

During the reign of King Parakramabahu the Great in the Polonnaruwa period – the period considered as the golden era in the country’s history – Lanka had played the role which modern Singapore had played a few decades ago as an important entrepot trade centre. 

Goods produced in many parts of the world were brought to Lanka and merchants from all over the world visited this trade centre to buy them. Since it was necessary for the king’s officials to communicate freely with merchants of different countries, one of the disciplines taught to them at the Public Servants’ Training School was foreign languages. 

Governments in post-independent Sri Lanka have abandoned open border policy

However, the successive governments that had come to power since its independence in 1948, Sri Lanka had been following a weird trade policy. In term so of that policy, exports are encouraged while imports are discouraged. The outward migration of workers, both skilled and unskilled, is encouraged while inward migration is virtually prohibited. While Sri Lanka is willing to sell its services to foreigners, buying such services from foreigners is discouraged. 

Sri Lanka is ever ready to disseminate its wisdom of spirituality to the rest of the world. But, when such wisdom comes from outside, it is not accepted in the same enthusiasm as it is spreading its wisdom to the rest of the world. It is therefore ironic that Ken Schoolland had to come all the way from Hawaii to give this piece of wisdom to Sri Lankans.

 

Open border policy countries have prospered

Schoolland says that countries which had followed an open border policy for migration had benefited by attracting unskilled, skilled and expert knowledge. This is obvious when one compares the per capita income growth of countries since around 1820. 

The world had followed more or less a closed border policy till about 1950 and until this time, per capita income had remained stagnant. However, after about 1950, the countries which had a liberal border policy for migration had experienced a phenomenal growth in per capita income leaving behind those countries with border controls. Countries like Australia, Canada, New Zealand, Western Europe and Japan belong to the first category. The laggards have been the countries in Asia, Eastern Europe, former Soviet Union and Latin America. This is intuitively understandable because when unskilled labour comes to a country, its labour force expands reducing wage rates and increasing its competitive advantage. 

Skilled and expert knowledge will augment a country’s ability to invent, innovate and capture the world markets. These are the fundamental ground rules for continued economic prosperity of a nation.

 

An open approach to ideas a must

Schoolland quoted in his address two economists who have done extensive research on the relationship between economic prosperity and openness to trade and migration, namely, Francesc Ortega of the Queens College of the City University of New York and Giovanni Peri of the University of California, Davis. 

In a paper which these two authors have prepared in March 2011 for the Institute of the Study of Labour in Bonn, Germany under the title ‘The Aggregate Effects of Trade and Migration: Evidence from OECD Countries’, it has been argued that “an important part of the economic success of countries is driven by their openness to ideas, investment, capital and labour from the rest of the world.” 

When an economy is open, they have argued, there are several benefits which a country would enjoy potentially fuelling its economic growth. In addition to getting new ideas and goods and generating greater competition improving the efficiency of the economy concerned, a country can overcome the shortage of skills and talents which are not available within its borders. 

However, a general trend has been to view open immigration as a threat to local employment levels impeding the creation of local jobs. This argument may be true if a country remains at the same level of economic activity. However, with the new immigrant labour, if a country could expand its economy, its fruits are equally shared by the local population as well. 

 

Maldives has prospered through open labour policy

A good example is provided by Sri Lanka’s neighbour to the south, the Maldives. With a limited population scattered over more than 2000 islands, the Maldives is faced with a chronic and acute shortage of both unskilled and skilled workers to run its hospitality sector that earns the main livelihood to Maldivians. With migrant labour, the Maldives has been able to develop a vibrant tourism industry that contributes to about 75% of the country’s national income and about 90% of the revenue of the government. 

The Maldives, with no any natural resource, has been able to maintain a high import programme and the highest level of per capita income in South Asia by employing migrant workers in its hotels, garment factories and schools. If migrant workers are prohibited, the Maldives would regress to the state of the poorest country in South Asia with no any economic opportunity available to it. 

Migrants have a burning flair for success

Adrian Furnham, Psychology Professor at the University College, London and popular writer on psychology, quotes Schoolland, has recently explained how the first generation migrants introduced entrepreneurship to American society. 

In a recent article in Psychology Today under the title ‘Immigrant Entrepreneurs’ (available at: https://www.psychologytoday.com/blog/sideways-view/201309/immigrant-entrepreneurs), Furnham has said that there is a lot of data to suggest that the first-generation American migrants were starting businesses at over twice the rate of natives and start-up businesses at twice the rate of the second-generation migrants. And that pattern, he says, is common for most of the Western countries. This is wholly due to the entrepreneurship flair which migrants carry with them when they decide to move into a new country. Furnham has identified four reasons for this unusual flair shown by migrants. 

 

Choosing to migrate is risk-taking

First, those who choose to migrate are different from the rest of the people in a population by motivation, abilities, risk-taking, adjustment-capability and proneness to hard-working. Since they have to settle down in a new land completely different from their own, choosing to migrate itself is a risky activity. Thus, in the new land they settle down, they have to work twice better than those of the indigenous population if they are to succeed in life. 

 

Discrimination of migrants makes them work hard

Second, migrants always face subtle barriers in their new adoptive homes. These barriers may take the form of racism or being labelled as outcasts in social groups. Whatever it may be, they do not have a level playing field to compete with indigenous businessmen. This factor starts a burning fire in their system making them hardier in everything they do. 

Furnham says that it is a positive development arising out of discriminatory practices exercised against migrants because those migrants have to find another way for leading a successful life with no well-trodden paths, leg-ups or building success on family names.

 

Live together to ensure protection

Third, with discriminations and hurdles placed before them, the migrants tend to build up social networks to support each other. Furnham says that it is observable in big cities where certain parts are fully colonised by people of certain countries or ethnic groups. 

Living together gives them the needed economic, financial and emotional protection and it in turn causes them to work together rather than alone. Thus, migrants work together and work hard in order to avoid being failures.

 

The lazy native populations living on migrants’ hard work

Fourth, when migrants work hard and create wealth, the natives too start enjoying benefits disproportionately. Governments tax the migrants and pass on the benefits to natives. But it would make the natives a privileged class and that privileged position makes them complacent. This is the reason why the second generation of the migrants is not so successful as their forefathers. Once economic affluence is gained by a family or a nation, the old ideals of working hard and creating wealth are easily abandoned. 

Furnham says the best way to teach children about money is not to have any so that they are exposed to the hard realities of societies from early childhood. Even the successful indigenous entrepreneurs are migrants from another part of the country and their second generations, in many cases, are not as successful as the internally migrated first generations.

 

British planters in Ceylon were a different lot

The success story of the British planters who migrated to Sri Lanka in the mid-19th century is a testimony of Furnham’s thesis. For these British planters, the life awaiting them in upcountry Ceylon – as Sri Lanka was called at that time – was not pleasant or comfortable at all. 

They had to work with a hostile local population, wild elephants and even little insects like mosquitoes that brought in deadly malaria not only to them but also to their workers. There was no banking system to transfer money from England to Ceylon or vice versa and therefore, capital was brought in the form of coins called specie in physical form. 

 

Saradiel, the first anti-FDI gangster

Trunk-loads of specie as well as the provisions had to be transported in caravans of bullock carts suffering immense hardships.  These caravans were often waylaid by highwaymen who operated outside the legal system. One example was the exploits of the Saradiel of Uthuwankande who waylaid the caravans in transit. He is reported to have shared a part of the loot with the local population to win their allegiance as well as to ensure their silence. 

As a result, Saradiel had been hailed as a hero and not someone who had destroyed the entrepreneurial spirits of planters and the fledgling foreign direct investments to the country. But these migrant planters worked as a group, created a modern plantation sector in Ceylon and contributed to the economic growth of the country for centuries. The government taxed them heavily and passed the benefit lavishly to the local population in the form of subsidies, free goods etc. The result, as observed by Furnham, was the creation of a complacent local population which even today expects free goodies from the government including jobs for those who pass out from universities. The sentiments of the local population have been exploited by shrewd politicians at successive elections promising them everything under the sun but forgetting their promises immediately after they return to power.

 

Finally it boils down to good governance and establishing strong institutions

What does this mean? It means that it is not open economic borders per se that would help a country to become prosperous on a sustainable basis. It is the economic environment that one faces that would force a person to work hard and create new things. If the life is easy and looked after by someone else, there is no incentive for a person to put in the maximum into what he does whether he is in business or in the government service. Mere hard work does not help if there is no protection of the fruits of his hard work – commonly known as the protection of property rights. Property rights cannot be protected if there is no rule of law and an independent judicial system. 

Finally it boils down to having good governance in society. Good governance should not be a mere ‘catch-word’ to win elections but an ideal to be introduced with proper checks, balances and accountability for what one does. Then, it is the institutional system that helps a nation to ensure that it has good governance and all its ground conditions. 

What Sri Lanka should fight today is not to elect given individuals who promise good governance to office but establish a strong and effective institutional system that would ensure that they keep to their promise. 

 

The need for managing open border policy wisely

Open economic borders contribute to the economic prosperity of nations as suggested by Ken Schoolland. However, unless it is properly managed, it leads to adverse second-generation issues as has been shown by evidence from different parts of the world. Hence, it is a double-edged sword: You handle it wrongly, you end up cutting yourself. 

(W.A. Wijewardena, a former Deputy Governor of the Central Bank of 

Sri Lanka, could be reached at [email protected] )