Wednesday, September 16, 2015

It's the economy stupid: Why can (and should) Europe welcome many more refugees

How many refugees can European countries reasonably take? How many should they take? Although some on the European right believe the answer is none, most agree that some refugees must be accepted. 

To look at the burden refugees place on host countries, some (VoxThe Economist) look at the number of refugees taken by countries relatively to those countries' population size. This makes intuitive sense -- for example, the more populated a country is the more people work per refugee, the lower is the burden of integration on individual communities, and the more secure people are that their country's culture is not altered. Nonetheless, a more direct approach to measuring countries' ability to accept refugees is being dismissed -- the size of their economy. An economy's size is a good proxy for the amount of resources a country can employ if it so wishes to. The richer a country is the easier it should be for it to welcome refugees, regardless of its population size.

The blue and red charts bellow are reproductions of the charts presented by The Economist. They present data on the number of positive decisions taken on asylum applications by European countries in 2014 (Source: Eurostat, OECD). The blue chart shows that Germany leads the group with the highest number of asylum seekers accepted. The red chart shows the same data proportional to countries' population. Using this measure, we see that Sweden is by far the most accepting relatively to its population. Germany's welcoming attitude to refugees seems much less impressive now. I added the orange chart, showing this data proportional to countries' GDP at purchasing power parity. While the change is not drastic, we can suddenly notice Bulgaria's commendable efforts given its poor status in Europe. Less inspiring, we can also see that Germany only took in about 15 asylum seekers for each 1 billion US dollars of economic activity. At an estimated cost of 15,000 USD per asylum seeker per year, we find that Germany spent about 0.1% of its GDP on asylum seekers.

Acceptance of Asylum seekers
Acceptance of Asylum seekers
More importantly, we can now gain a different perspective on the manner in which Europe can manage the recent refugee crisis. Lets look at the change over time in the burden of refugees on countries relative to the size of their population and economy. For example, it was said that this refugee crisis is the worst Europe has faced since WW2. That may very well be correct when we look at the number of refugees, but not when we consider Europe's available resources in handling the wave of refugees.

Refugee burden over time
Refugee burden over time

The charts above show the relative burden of refugees over time on Germany, The Netherlands, and Spain. Most European countries show similar trends. The left chart shows the burden relative to population size. As the Netherlands' population increased from 13,000,000 to 17,000,000 between 1970 and 2012, a refugee accepted in 2012 places about 80% of the burden on the Netherlands relatively to a refugee accepted in 1970. The reason is that population has grown only little in Europe during that time.

The right chart presents the relative change in economic burden. Using this measure we can see that a refugee in 2014 places only 10% (!!!!) of the burden on the Dutch economy relatively to a refugee accepted in 1970. It is then wrong to compare this refugee crisis to past immigration waves as if it was an apples to apples situation. In reality, Europe is much better equipped than ever before to take in and integrate the many refugees escaping a grim existence. It should do so.

One sidenote: In this post I only consider refugees as a burden on their host countries. This is only a partial view of the reality surrounding immigration. This is especially the case with Europe since European countries are aging rapidly and hence require a younger working force to sustain the economy. In the longer run, these refugees may actually contribute to their host countries' economy.

Sunday, May 3, 2015

How the Republicans and Netanyahu are helping Obama’s Iran deal

The Book of Genesis describes God's decision to punish Sodom and Gomorrah for their wickedness. God tells Abraham about his intention, turning Abraham into an advocate for the two cities. In his new role, Abraham bargains with God over the threshold of evidence required to find Sodom and Gomorrah guilty. Step by step, Abraham succeeds in decreasing the number of righteous people required to demonstrate there is a reasonable doubt that the cities are guilty of wickedness. The negotiation ends with God's promise that the cities will be spared from destruction if ten or more righteous people are found.

Negotiation and bargaining are ingrained in human nature: children haggle about bedtime, shoopers bargain for better deals in the market, and diplomats negotiate over treaties. Common to all these activities are conflicting goals and a desire to reach a beneficial agreement. Of course, each party to a negotiation wishes to achieve the best possible outcome for itself. One way to do so is by announcing that no matter what, the party will not accept any offer lower than a certain threshold. This strategy can be problematic though -- it is unlikely the announcement will be taken seriously because it isn't very credible.

Imagine a game with 10 Euros on the table and two participants, Hassan and John. Hassan decides how much of the 10 Euros to take for himself and how much to leave for John. John can accept Hassan's allocation and take his share, or reject it and ensure that both he and Hassan receive nothing. This game is called an Ultimatum Game, a common setting used by Economists and Psychologists to study individual behavior. It is also a simple form of negotiation.

How much money should Hassan leave for John? If Hassan does not care for John, he should offer him the minimum amount John would accept. Hassan's challenge is to learn what this minimum is. John would like Hassan to think his minimum sum is high because it will lead to a higher offer from Hassan. As a result, any announcement from John about his own acceptable minimum sum is not taken too seriously by Hassan. This is referred to in Game Theory as a 'non-credible threat' -- John's announcement, or threat, not to accept low offers is not credible. If John could make his threat credible then he would guarantee a high offer from Hassan.

One way to do so is for John to become known for irrationality, leading Hassan to believe he will reject low shares of the 10 Euros. Another way to make a threat credible is to have an external, observable, constraint that limits his minimum acceptable sum imposed on himself. In many respects, a confrontational Republican congress and Benjamin Netanyahu's rhetoric are such a constraint on John Kerry and Barack Obama. In negotiating with Iran, Kerry can credibly threat that a weak agreement, with limited restrictions on Iran's nuclear capabilities, will not be politically viable for the Obama administration. Thus, the existence of 'credible minimum' grants the US negotiators a stronger hand than they would otherwise had.

Ironically, it is possible that the detractors of the Iran deal will assist the eventual agreement to be palatable enough for the American public opinion to support it.