The Third Pillar

by Raghuram Rajan

  Development efforts in economically weaker communities will be driven by community leadership whenever available, but also supported by the state. The community will be aided in building out infrastructure, helped in improving the quality of its schools and community colleges, and subsidized to provide community-based tailored support to those in need. Technology will help the state monitor lightly, even while decentralizing much to the community. Likewise, technology will help community members keep a check on local government. Many of these technological solutions are scalable and, once developed, can be reused across multiple communities, with some local customization whenever needed.

  To further inclusiveness, the state will break down barriers to opportunity and mobility that have built up over the years. For instance, barriers to building in some areas, which have made property prices prohibitive to newcomers, should be brought down. Some of this will interfere with community powers, but when inclusiveness goes up against localism, inclusiveness should always triumph. This is consistent with the theme throughout this book that when we have to choose between competition and property rights, we should invariably choose competition. More generally, though, markets have to be made more accessible, and the actions of market players more acceptable to the community. The first requires actions by the state, and the second requires a rethinking of the values of market players such as corporations.

  Will the populist nationalists ever retreat from their mission of taking over the country and remaking it in their image? Will they accept enclaves within the country if they feel they can have the whole country? Any serious analysis of large diverse rich countries will suggest to even the most committed populist nationalist that diversity will continue to increase despite a strict clampdown on immigration, simply because the existing poorer minorities in the country have higher fertility rates. Unless the majority group is willing to impose a draconian apartheid regime, maintained by violence, the character of the country will naturally change. If some in the majority genuinely fear being swamped culturally, inclusive localism gives them a way to maintain their culture through monocultural communities, even while the rest of the country celebrates multiple cultures. In aging countries with fast growing minority/immigrant populations, some accommodation like inclusive localism may be the only civilized option.

  I am hopeful that fear or resentment of the other will not be a permanent feature of our societies. Inclusive localism is not intended as an end condition. Instead, it will help alleviate pressures, giving everyone in society time to appreciate the value of diversity and figure out ways to manage it. We need to build a society for the future, when our peoples will be far more intermingled than they are today. We do not want to forget our cultures, our traditions, our very identities. At the same time, we do not want them to come in the way of embracing a broader humanity. Inclusive localism is a stepping stone to achieving both.

  Let us not underestimate how difficult all this will be. Nation builders—ranging from benevolent democratic ones like India’s Ambedkar and Nehru to murderous dictators like Russia’s Stalin—have found it easier to break down community identities, to resist localism rather than to let it thrive. Yet they could not do away with the hold the community had on people. Perhaps it is time to try another approach, especially as technology makes decentralization of governance, and communication between communities, easier.

  Similarly, Marxists have argued that the markets are based on destroying identity, on making everything commodity-like and transactional, while the community does exactly the opposite. They argue that markets and community can never be compatible. Yet although we have seen the tension between markets and the community repeatedly in this book, they do coexist. We trade anonymously in the market but then go home to volunteer for the school annual day festivities. We have multiple identities, as Amartya Sen emphasizes—trader during the day and deacon in the community church in the evening. Moreover, technology gives us the means to create more identity in the market, while giving us new ways of binding the community better together. Without minimizing the difficulty of our task, let us take hope from seeing that we undertake it in a different world than worlds past.

  9

  SOCIETY AND INCLUSIVE LOCALISM

  One of the most contentious issues facing developed countries today, as we have seen, is the diversity of their populations. Many developed nations already have ethnically diverse populations. Many will get more diverse because of fast-growing minority groups, as well as inflows of immigrants and refugees. There are costs associated with diversity. These include the burden of absorbing poor immigrants initially, which falls disproportionately on poorer domestic communities and the lower mutual empathy between communities once the nation becomes more diverse, which leads to less support for a national safety net. Ethnically homogenous countries also fear a loss of their cultural heritage. Nevertheless, for many countries, there is no turning back. Even if they stop most immigration, they will get more diverse unless they choose to become authoritarian and illiberal toward their minority and immigrant populations, thus imperiling their liberal democratic ethos. Moreover, there are also enormous benefits to diversity, as we will see. How do countries reconcile the prospect of increasing national diversity with the majority group’s genuine fear of being swamped, of losing cultural coherence and continuity? One way is through inclusive localism.

  For some Populist nationalists, immigration is their key worry. For others, it is existing minorities. For many, it is both. Let us focus on immigration issues for now, though much of what follows pertains to minorities also—after all, today’s immigrant is tomorrow’s minority—and the terms will often be used together.

  The life chances of a citizen of the United States are vastly different from the life chances of a citizen of the Democratic Republic of the Congo. Citizens benefit from national borders. Borders protect the rents citizens get from the country’s wealth, institutions, and power. In effect, nations are the last of the guilds. By restricting decision-making largely to those living in the demarcated land, borders give the citizens a sense of self-determination and political control over their lives, and an ability to protect their cultural traditions. By only allowing people in who share something common, such as values or ethnicity, they allow for collective national efforts and engender the mutual empathy that allows the country to create support structures such as public schools, safety nets, and disaster relief. Therefore, while borders get in the way of productive efficiency, they may be necessary for the structures that help citizens manage modern life. It would be nice to go toward one borderless world—where we feel empathy for one another as citizens of the world, even while celebrating our specific cultural traditions—and some of what I suggest later will be small steps in that direction. But we are not ready for it yet.

  Whether the lottery of birth that distributes citizenship is a fair one is a debate we will leave for global ethicists, and we will not enter the question of whether citizenship should be a right for those who have paid their dues—such as fighting in wars—or a gift to be bestowed by the citizenry who obtained their rights merely by birth. Taking the desire of citizens to control entry as legitimate, what factors should determine it? Let us start first with the benefits of a diverse population.

  THE BENEFITS OF GREATER POPULATION DIVERSITY

  THE GLOBAL SEARCH FOR TALENT

  The very diversity of immigrants and minorities adds substantially to the pool of talent in a country. I teach about two hundred very capable M.B.A students at the University of Chicago’s Booth School every year. The best students each year include many Americans (they account for two-thirds of our intake) but also a number from across the world. My most memorable students—in that they stood out distinctly from their cohort with their sheer capability—have been Chinese and Nigerian women. Talent knows no national, gender, or racial boundaries.

  Moreover, given the winner-take-most nature of business, count
ries that can attract the most capable people from within the country and from around the world to work for them will have an edge. Singapore, for instance, has a scholarship program that hunts for the best students in China and brings them into Singapore schools at an early age. The education minister told me that every time he went back to his constituency, native Singaporean parents complained, “These kids come in knowing no English and are at the bottom of the class in the first year, in a couple of years they have learned English and have caught up with many of our children, and when they graduate from school, they are at the top. Is this fair?” After hearing them out, he responded, “Look, these kids are undoubtedly phenomenal, but they also now have our values—they are Singaporeans. Ten years from now, would you like to have them working on your side, or competing against you?” The complaints died down . . .

  Apart from having a wider pool in which to search for raw talent, people from different cultures bring different perspectives and capabilities to teamwork. One culture may emphasize individualism and personal drive, while another may be better at building consensus. So long as teams have a basic understanding that allows them to communicate and engage, the whole can be better than the sum of the parts. Diversity, as many firms are recognizing, may aid performance.

  Yet another value of skilled immigrants is that they facilitate ties between their home and host countries, thus increasing economic activity on both sides. Many cross-border investments by US companies in emerging markets are championed by US managers who have emigrated from those emerging markets and now help bridge cultural and trust gaps. Australia has grown steadily in recent decades by attracting skilled immigrants. In doing so, it has changed its ethnic character, from largely white to Eurasian. The foreign-born account for 28 percent of the population, with those from Asia accounting for more than 10 percent.1 Not coincidentally, Australia has strong economic links with Asia today.

  ADDRESSING THE CONSEQUENCES OF POPULATION AGING THROUGH IMMIGRATION

  As nations get wealthier, women have fewer children, and have them later. Wealthy populations are, therefore, aging. As the population ages, the labor force shrinks, and fewer and fewer workers support more and more retirees. Forty countries now have shrinking working-age populations, including China, Japan, and Russia.2 Fear naturally sets in as middle-aged citizens wonder who will pay for their retirement.

  Japan is in the forefront of population aging, with its working-age population falling at 1 percent per year, and nearly four hundred schools shutting every year.3 Thus far, it has adapted in two ways. Its workers are staying in the workforce longer, beyond the normal retirement age, and women are working outside the home at a greater rate. At some point, these additional sources of labor will reach their limits. Recognizing this, Japan also plans to automate more, using robots to substitute for the lack of workers. For example, Pepper, a big-eyed humanoid robot made by SoftBank, can lead exercise activities for a group of the elderly, talk to lonely patients in nursing homes, and patrol corridors at night.

  There is another solution, though: Allow more immigration. After all, humans are still considerably more flexible than robots in accomplishing a variety of tasks. Immigrants have children who can add to the shrinking labor force and stabilize it, well before the burdens of supporting the elderly become impossible. They also spend their wages on consumption, something robots do not do. Because societies that are aging and shrinking suffer from weak domestic demand, immigrants can help out, especially with demand for goods that cannot be imported, such as housing and haircuts. Finally, humans supply humanity. Are we likely to be happier surrounded by unfeeling machines, programmed to make us think they are sentient, than by people, of a different ethnicity no doubt, who nevertheless listen, talk, laugh, cry, and are irrationally, unpredictably, gloriously human?

  The United States, which has had substantial immigration and higher fertility rates among women (the two are not entirely unrelated—poor immigrants tend to have higher fertility rates), has much less of an aging problem than Japan. Yet Japan has resisted immigration, fearful of immigrants gaining political rights and affecting their culture. In a homogenous society like Japan, this is indeed an important and difficult decision—whether to age and decline alone as a society while retaining cultural purity, or, open more to immigration, become younger but also changed. Japan is trying to attract more foreign guest-workers even while debating whether to open up even more.4

  Aging countries will have to decide whether to offset aging with immigration, for their wealth allows them the choice of immigrants today. If a country decides to proceed with immigration, it is probably wise for it to have steady and moderate immigration over time, so that immigrants can be integrated, and aging somewhat mitigated by births to immigrants. If the country waits till it experiences severe aging, immigrants may be scared off by the prospective size of the burden of supporting the elderly with taxes. A country which has not built structures to facilitate integration will also find it more difficult to absorb a large inflow of immigrants at that time of need.

  Since aging affects the entire workforce regardless of skills, a country that decides to open up more to immigration to offset aging (rather than just to attract the best global talent) will draw immigrants from a broader set than just the most capable. Indeed, since low-skilled jobs like caring for the elderly are low-paid and physically taxing, they are likely to draw young poor immigrants. When immigrants fill jobs across the spectrum, there is less likely to be a concern among the native born that immigrants have privileged access to good jobs.

  THE COSTS OF GREATER POPULATION DIVERSITY

  Immigration, and more broadly, population diversity, is not always a blessing for the host country. People have to learn to live with diversity, and it takes more time and effort. In the meantime, they are less willing to support one another. As we saw with the Harvard study on immigration described in Chapter 7, people’s intrinsic suspicion of immigrants is compounded by misinformation on their numbers, their skills, and their dependence on welfare. For the host country, the cost of greater diversity may well be a thinner and uneven public safety net, even for the native born.

  Furthermore, the benefits of immigration are highest when a country can allow entry selectively to the kind of immigrants it needs. Countries like Canada, protected by oceans and distance from poorer countries, have the ability to be selective, and typically welcome immigrants. A country has no ability to be selective if a large fraction of immigration is undocumented or when it faces a huge wave of refugees. Following years of drought in Sub-Saharan Africa, farm workers and their families in recent years have braved stormy seas in rickety overcrowded boats as they look for refuge in Europe. Many have died on this perilous journey. Such immigration raises legal, moral, and humanitarian issues, not just economic ones, for pushing the starving, the fearful, or the persecuted back at the borders is simply inhumane. It may also create a wider security problem if stateless youth, with little to lose, take up arms and vent their anger against the unsympathetic world. And in these volatile times, today’s reluctant host could be tomorrow’s refugee. One of the most hospitable countries currently to Venezuelan refugees fleeing a venal incompetent regime is Colombia, which remembers how Venezuela took in Colombians when they were fleeing violence.

  Nevertheless, the inflow of undocumented immigrants and refugees gives a number of countries only a limited ability to be selective. Typically, there is a mismatch between the skills and credentials these arrivals have and the skills and credentials that are needed, which means they are, in the short to medium run, effectively unskilled. There is a long and inconclusive debate about whether immigrants displace moderately skilled domestic workers or not. While the perception is that they do, the reality may well be that they compete with earlier immigrants for jobs that few native-born want. What is less in dispute is that the cost of hosting immigrants is also unevenly borne. Immigrants, typically being poorer, gravitate toward
poorer areas where housing is cheaper, adding to the burden of public services there. Across countries with substantial unselective immigration, the working class is angry that the upper-middle-class elite enjoy the benefits of cheaper immigrant nannies and household help, even while their own children learn less because their teachers struggle with schools full of immigrant children who do not speak the national language. While this would suggest allocating more resources to create public services in areas that absorb more immigrants, few countries do this well.

  Our views of immigration should, of course, not be based solely on a cost-benefit analysis to the receiving country. Immigrants themselves benefit tremendously, and this is typically ignored in cost-benefit analyses. Also, the emigration of skilled talent is a drain for the sending countries, for the talented typically do not return, and this is also ignored. Often, the sending country has spent enormous amounts in educating these students in its best schools to fill critically understaffed positions. When a doctor leaves Guinea, which had one doctor for every ten thousand people in 2016, to settle in the United Kingdom, which had twenty-eight doctors for every ten thousand people, she and the United Kingdom’s stretched National Health Service certainly benefit, but Guinea probably does not.5

  Most developed countries would benefit from a program of allowing immigrants in steadily and selectively. In practice, some have far less control than they would like. Immigration and refugee flows can overwhelm, especially if the country has accessible, porous, borders, bringing large numbers of people in who are poorly matched to the country’s needs. Over time, these immigrants will learn and adapt, as immigrants have throughout history, but the process can take time. Ideally, countries should gain some control over their borders so that the flows are manageable, even while they improve their processes to absorb immigrants. To deal with the humanitarian problem of refugees overwhelming some countries, the world needs to create a better system, where its safer countries can share the burden with each accepting some immigrants as part of their international responsibilities. This is an issue we will return to later. In the long run, only peace and widespread development will reduce the flow of refugees and undocumented immigrants. Populist nationalism goes in exactly the wrong direction!