Economics: The EC must learn to live without walls

THE BREACH of the Berlin Wall on 9 November 1989 is the defining event of our times. The sharp fall in the German mark and the dissolution of Italy's Christian Democrats, both in the last week alone, are ultimately attributable to its effects. But the most significant impact is taking longer to develop. Like the mass production of the Model T Ford, it will never be the subject of a newspaper front-page 'splash'. But it will radically alter the economies and societies of Western Europe.

The European Community has become an economic area with, in effect, an open land frontier stretching for some 1,000 miles. Beyond it live millions of people who are indistinguishable in appearance from Western Europeans, who are often skilled and educated, but whose wages are less than a tenth of ours. Given the persistence of high unemployment in Eastern Europe, emigration on a large scale is inevitable.

While the Soviets shot people who tried to escape to the West, the Western Europeans could enjoy both the most effective immigration controls of any land frontier on earth and the warm feeling that went with objecting to them. The new reality is that Western Europe's rich labour markets are now as open to Eastern Europeans as those of the United States to Mexicans.

Although the Austrians have moved a large part of their army to the Hungarian border, they stand as little chance of halting the flow as the US Border Patrol. About a million immigrants are arrested each year in the US, 90 per cent of them near the 2,000-mile southern border. They are put back over the frontier and many just try again that night. Despite an amnesty that legalised 3 million immigrants in 1986, the same number again have probably arrived since then.

This flow of 'wetbacks' - so-called because many have to cross the Rio Grande - is in addition to a legal flow of immigration into the US that is still running at three-quarters of a million a year. A study under the auspices of the World Institute for Development Economics Research (Wider) estimates that, since 1970, some 4 per cent of the population of Mexico has shifted into the US (1).

The Wider study shows that the potential shift between Eastern and Western Europe is enormous. There are more than 3 million ethnic Germans in Poland, Romania and the former Soviet Union, all of them with citizenship rights in Germany and hence work rights in the European Community.

If 3 per cent of the remaining population in the European area of the former Soviet empire wished to migrate, the total number of potential migrants would rise to 13 million. If there are no further recessions or civil wars, and if there is no pent-up backlog of unsatisfied migration, there might be a flow of a million people a year or some 0.3 per cent of the population of Western Europe.

By popular myth, immigrants take indigenous jobs. However, this is not necessarily the case. Economic theory suggests that immigrants can be complementary to domestic workers - allowing everyone to produce more - rather than substitutes for them.

If immigrants provide skills in short supply, or if they do jobs that the natives will not do, output and employment will be higher. If they also compete with native workers and thereby relieve wage pressure, the level of unemployment needed to stop wage increases from outstripping what the economy can deliver may be lower.

History suggests that any short-term unemployment caused by immigration is rapidly absorbed. The migrations from the Mediterranean countries to France and Germany during the Fifties and Sixties were huge, and they occurred during the long post-war boom with negligible effects on unemployment.

West Germany's unemployment rate did not rise in 1990 and 1991, despite the sudden influx of Ossis. Britain, too, had a large influx of immigrants during a period of historically low unemployment, though the economic picture is less clear-cut because the immigration was more than offset throughout the post-war period by native emigration.

The effect on wages is more controversial. There are various studies that have looked at the impact of migrants on wages in the US by comparing cities that have many immigrants with those that have few. Most of the literature suggests a relatively small impact on native earnings, but the Wider study cites the most sophisticated work on the US as showing that a 1 per cent rise in the labour force caused by immigration leads to a fall in native wages of 1.2 per cent. Similar work on returning Algerian pieds noirs in France during the Sixties suggested that a 1 per cent rise in the labour force cut wages by 0.7 per cent.

The big impact, though, may be less on overall pay than on the distribution of income within the receiving country. Immigrants to the US (and probably Europe, too) tend to be relatively poorly educated and skilled, which means that they compete in turn with the less well educated and less well skilled. The immigration into the US between 1980 and 1988 may have cut the relative earnings of less educated Americans by 2.5 per cent, Wider estimates. This is one of the reasons for the growing gap in the distribution of US pre-tax incomes during the Reagan years.

A recent estimate suggests that the top-earning tenth in the US earns 4.9 times the bottom-earning tenth, a ratio that compares with 3.3 times in France, a typical European figure (3). Immigration in Europe will tend to widen what has been, by US standards, a relatively flat distribution of gross income.

There are various policies the Western European countries can pursue that will make the strains more tolerable. If much of the European migrant flow is illegal, the impact will be focused on the low-paid and low-skilled. The migrants will find jobs in the black and cash economy, such as catering, cleaning, construction and domestic service.

But if much of the flow is legal, there will be less impact on wage distribution. There may be more skilled people in the mix, and those that come will participate in the normal social security arrangements.

The pressure for migration will also relent if we treat the Eastern Europeans well. Apart from migration, there are two other ways in which the income gap can close. The first is investment in the East, which has been relatively generous so far. But the most important is free trade, where the West's record is poor. The Eastern Europeans must have the opportunity to raise their own incomes by exporting simple products, such as food, textiles and basic consumer goods.

It is also important that Western Europe maintains the defining features of what Michel Albert calls the 'Rhine model' of capitalism - its commitment to a meaningful social safety net and to a high level of social provision. Western Europeans will need to be well educated and trained if they are to move upmarket. They will also need to feel secure in a period of rapid structural change.

But the collapse of communism - that ubiquitous Berlin Wall again - makes the politics of the welfare state more difficult, because it removes one of the great civilising influences on the European bourgeoisie. If the middle classes are no longer afraid of Red revolution - a real fear in both France and Italy after the war, when the communists were the biggest opposition party - will they be prepared to pay relatively high taxes as the price of social cohesion? Or will America's proposition 13 and tax revolt - and its underclass ghettoes - also cross the Atlantic?

(1) 'East-West migration: the alternatives' by Richard Layard, Olivier Blanchard, Rudiger Dornbusch and Paul Krugman, MIT Press, pounds 11.50. (2) 'The changing course of international migration', OECD, Paris. (3) 'Wage inequalities in east and west' by Dominique Redor, Cambridge.

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