Thursday, June 28, 2007

Professor Max Corden on Immigration

I am attending the Dynamics, Economic Growth and International Trade Conference organised by the Asian Economics Centre, University of Melbourne. Apart from participating in a panel on Climate Change and Economic Growth I am also providing a brief commentary on the contributions to the economics of immigration of one of Australia's most important contributors to international economics, Professor W. Max Corden. My draft remarks are below - reader comments are very welcome.

Max Corden has intersected with immigration debates in three ways:

(i) Max is an immigrant who arrived in Australia as a young boy in 1939. He is also someone who has spent a lot of time living outside Australia both in the UK and the United States as he reveals in his discussion with William Coleman in The Economic Record in December 2006.
This means that Max, who has always had an applied interest in the Australian economy, has looked at issues both from the viewpoint of an insider and an outsider. His attitudes to immigration I would characterise as ‘radically liberal’ and I think that this partly reflects Max’s understanding of sound economic theory which I believe points in this liberal direction. But Max’s liberal and tolerant attitudes towards immigrants and different cultures also reflect his background.

(ii) The second intersection that Max has had with immigration discussions arose from his interactions with Harry Johnson and James Meade (his PhD thesis supervisor) while Max was a student at the LSE. Harry Johnson was interested in the links between economic expansion (including expansion caused by population growth) on international trade and the terms of trade. Drawing on some thinking of Meade, Max provided an ingenious, geometrical framework for analysing the effects of a wide range of growth shocks on the terms of trade and the pattern on trade (Corden (1956)).

Max emphasised that both the production and demand consequences of such shocks must be assessed. For fixed terms of trade the production effects of factor endowment changes can be assessed via Rybczynski ‘s (1955) analysis. This suggested that the increased endowment of a scarce factor (specifically, labour in Australia) would lead to an expansion of the sector that used that input intensively (the labour-using, import-competing, manufacturing sector in Australia) and to a contraction in other export-oriented sectors (primarily, in Australia, agriculture). This would create an excess world demand for agricultural output thereby suggesting an improvement in the Australian terms of trade. Max’s key insight was that these effects could potentially be overruled if the growth was also associated with particular changes in consumer preferences. For example suppose the increase in labour supplies arose from immigration, and the preferences of the immigrant workers were strongly biased towards manufactures. These latter effects need to be very strong indeed to overrule the production effects, but, if they are, the terms-of-trade effects suggested on the production side can be reversed and these terms of trade can in fact deteriorate.

It is worth noting however that it is these perverse demand effects that are relied on in settings, such as in the Monash model and in the recent use of this model by the Productivity Commission (2006) to generate the startling and, in my view incorrect conclusion, that immigration of even skilled migrants generates unfavourable effects on the terms of trade which adversely impacts on the economic welfare of incumbent residents and their progeny (Clarke (2007)).

Max applied this analysis to studying the effects of population increase on a country’s trade in a broader setting in The Economic Record (Corden (1955)). Max examined the arguments that immigration might increase unemployment, create internal inflation and cause deterioration in the balance of payments. The argument he adopted inconsistently followed the style of James Meade. Like Meade’s total utility maximisation rule for determining optimal population – the optimal immigration intake for Max occurred once the fall in consumption per head that was a consequence of having more people was no longer compensated for by the political and other non-economic advantages of immigration. The slight inconsistency in Max’s use of this criterion is that, at one stage, he writes of determining optimal population in terms of maximising the average product of labour which I think Meade would not have done. Maximising the average product of labour leads to average utilitarian rules for optimal population of the type discussed by John Pitchford (1974) which focus naturally on ‘scale economies’ and ‘diseconomies’ issues.

Max is modest about these early papers but I think they initiated a valuable discussion that raised most of the key issues in analysing the economic implications of increasing human populations: Specifically Max discusses effects on fixed resource stocks, on incentives to invest and most importantly on the composition of international trade. Max makes the interesting insight that opening an economy up to trade reduces the size of the optimal population although, of course, living standards will be higher as the economy opens up. This insight is linked to the Brigden Committee’s (1929) famous ‘Australian case for protection’ which argued that the optimal population is lower if tariff protection is removed because protection will defend the level of real wages.

(iii) The third recognisable intersection that Max has made with contemporary immigration debates. I have enjoyed conversations with Max where he displays wide knowledge of the social and cultural impacts of immigration on settler countries like Australia and the United States. Max remains interested in immigration economics – as evidenced by his 2003 Richard Snape Lecture (Corden (2003)) but he is also keenly interested in broader assimilation and cultural diversity issues.

In the Snape Lecture Max assesses contemporary Australian immigration debates. He argues that the sensible population options for Australia are for moderate intakes of 100,000 migrants per year leading to a population of about 26 million by 2050 or for a more ‘radical’ policy that would raise intakes to 200,000 thereby leading to a population of 40 million by 2081. Max prefers the more expansionary option but argues that it is unlikely to be realised because of ‘the conservative approach to immigration policy by the public and the pragmatic approach by government’.

I wish to close by questioning this presumption. Many things are changing in Australia’s immigration environment. The Coalition Parties in Australia have substantially increased the size of the Australian immigration intake – the 2006/07 program involves up to 144,000 places while the Humanitarian Program has an intake of up to 13,000 (Fact Sheet 20 (2007)). The reasons for this expansion relate as much to macroeconomic conditions in the Australian economy as ideology. Australia is approaching the 17th consecutive year of its economic expansion and is enjoying low inflation, low unemployment and strong economic growth.

Moreover, we have substantially reduced the family component of the migration program thereby diffusing community concerns that the program was become interest-group driven. About two-thirds of those entering as migrants during 2006/07 did so because of the work or business skills they had. The rigidity in labour markets has been reduced through the Hawke-Keating government’s promotion of enterprise bargaining and later reforms.

With low unemployment concerns about the unemployment consequences of immigration fade. Indeed immigration is increasingly being seen as a means of containing demand-side pressures in the economy that emerge because of the unparalleled growth in commodity demands from countries such as China. In addition, since the migration intake is primarily oriented to accepting those with skills, concerns raised by earlier critics of the program (discussed in Lloyd (1993)), that sectional interest groups were driving immigration have faded. The shrill voices have become less strident.

If unemployment continues to it might yet be the case that Max’s enthusiasm for a much expanded immigration program will gain more general support.


J.B. Brigden, D.B. Copland, E.C. Dyason, L.F. Giblin & C.H. Wickens, The Australian Tariff: An Economic Inquiry, Melbourne University Press, Melbourne , 1929.

H. Clarke, “Comment on James Giesecke: The Economic Impact of a General Increase in Skilled Migration”, People and Place, 15, 2, 2007, 12-14.

W. Coleman, ‘A Conversation with Max Corden’ The Economic Record, December 2006, 379-395.

W. M. Corden, ‘Economic Expansion and International Trade: A Geometric Approach’, Oxford Economic Papers, June 1956, 223-228.

W.M. Corden, ’40 Million Aussies? The Immigration Debate Revisited’, Inaugural Richard Snape Lecture, Productivity Commission, 30 October 2003.

W.M. Corden, ‘The Economic Limits to Population Increase’, The Economic Record, November 1955, 242-260.

Department of Immigration and Citizenship, Australian Immigration Fact Sheet, Migration Program Planning Levels, 20, June 2007.

P.J. Lloyd, ‘The Political Economy of Immigration’ in J.J. Jupp & M. Kabala (eds), The Politics of Australian Immigration, Bureau of Immigration Research, AGPS, Canberra, 1993.

J.E. Meade, The Theory of International Economic Policy, vol 2, Trade and Welfare, Oxford University Press, London, 1955.

J.D. Pitchford, Population in Economic Growth, North Holland, Amsterdam 1974.

Productivity Commission, Economic Impacts of Migration and Population Growth, Productivity Commission, Final Report, Melbourne, 2006.

T.M. Rybczynski, ‘Factor Endowment and Relative Commodity Prices’, Economica, November, 1955.

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