Fear of opening economic borders:

Countries to lose instead of gain

Ke
n Schoolland addressing the Bastiat Society

Monday, 13 July 2015

Fear of opening economic borders
Dont 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
Carrolls 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 countrys 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 kings 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 countrys 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 Lankas 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
countrys 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/immigrantentrepreneurs), 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 Furnhams 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 waw1949@gmail.com )
Posted by Thavam