Hamish McRae: Immigrants may bring growth with them to UK

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The Independent Online

So it seems the Government is going to try to restrict the ability of workers from the new EU member states to come here after all. Is this good or bad news for our economy ­ or does it not make a lot of difference either way?

Economic integration often throws up surprises. Germany has been surprised that unification has subtracted from its economic performance rather than added to it. Nafta, on the other hand, is generally recognised as being at least as successful as was expected, arguably more so.

We are now only 10 weeks from the entry of another 10 countries into the EU so it is fair to ask whether there might be some surprises in store here, starting with the issue of the potential for migration.

This is causing huge political angst at the moment, for it seems we are stepping back from the previous position that Britain would, if necessary alone among existing EU members, grant free entry to workers from the accession countries. This may be important in political terms but it is hard to see it becoming a major economic issue.

The first thing to remember here is that half the population of the accession countries lives in Poland (see first graph). That apart, the new member states are small. The Czech Republic and Hungary have a little over 10 million people apiece but after that you are down to a few million. And of course all history suggests that most people tend to stay near to home.

So the question as to whether there will be a huge number of new potential workers is answered by the fact that the numbers of people who are likely to want to move country are not that big in relation to the present UK workforce ­ unless much larger numbers of people want to cross borders than has previously been thought.

That looks unlikely. The second graph looks at what happened in the run up to accession in three existing members ­ Spain, Portugal and Greece ­ and compares it with what we know about the propensity to up sticks in five new members and one probable new member. As you can see, there was really very little population movement in the three existing members or in the larger new ones, Poland and the Czech Republic. Nor has there been much movement in Romania, which hopes to join shortly. True, there has been a big exodus in Estonia and Latvia, but the absolute numbers are small and in any case most emigration has been to Russia. I would suppose this is Russian-speaking people moving "home".

At any rate, the National Institute has just published a paper on enlargement that estimates that over the next decade only 350,000 people are expected to migrate to the existing EU members and that only a small proportion will come to the UK.

Could there be a surprise here? It is certainly possible that the combination of a very strong job market in the UK relative to the rest of the EU, coupled with the exclusion from jobs elsewhere, could mean that the flows suggested here might be "front-end loaded" to Britain. The NIESR might well be right about the flows over a 10-year period ­ indeed I think it will be ­ but we may get rather a lot of people in the first few months.

But is that bad? Surely not. If Britain could replace some of its illegal temporary workers with legal entrants from EU countries, surely that will not only raise the quality of the workforce but bring a lot of unregulated activities back into the regular economy. There may, of course, be more of a "benefit tourism" problem, but that is a different issue. In any case, we have that problem already.

So I think we can set aside the fears of an unmanageable flow of migrants. The most positive point here is the possibility of improving the quality of our workforce. There are a host of skill shortages now evident: in construction, in computer management, in some aspects of engineering, in many service skills, and in specific industries where we seem to have lost our training tradition, such as plumbing. It will be absolutely fascinating to see to what extent we can use this once-in-a-generation opportunity to lift the quality of the workforce.

If this line of argument is right, the immigrants from the accession countries should give a material boost to growth in the short and medium term by easing labour market shortages.

But there is an even larger prize: the possibility of lifting long-term growth rates too.

There are several strands to this argument. One is that most of the larger accession countries have had a very good growth performance. In the third graph I have put four of these plus some forecasts of growth through to the end of next year. Note that all four ­ Poland, Hungary, the Czech Republic and Slovakia ­ look set to grow at least as quickly as the UK and very much faster than the eurozone.

Now the tail will not wag the dog. Do not expect the accession of fast-growing countries to do much to pull up EU growth as a whole because they are not large enough to do so. On the other hand there is no question of the new members being like East Germany: sustained only by huge subsidies from the West. They may be recipients of EU funds on a modest scale but they bring growth to the party.

That leads to a second strand to the argument. It is reasonable to expect these countries to rebalance European economic dynamics, just as the accession of the Scandinavian members changed the economic balance of Europe, pulling it north and bringing in a host of hi-tech industries.

There is a practical point here: more of the EU will be outside the eurozone. Thus more of the EU will have flexibility of monetary policy and some flexibility in fiscal policy. On the experience of the past four years, that is likely to help overall EU growth. These economies are still small in themselves, but add them to the UK, Sweden and Denmark, and you have a dynamic, fast-growing group that to some extent will pull the rest of Europe along. The UK is the third largest import market in the world and as such is already hugely helpful to the eurozone. Now the eurozone will get a further modest lift. Thus the faster Poland grows, the more that must help neighbouring Germany. If you can only manage at best about 1.5 per cent growth (and no growth at all last year), to have 38 million people on your doorstep growing at 4.5 per cent must be to the good.

So there could well be positive surprises in the months ahead as a result of enlargement. The more open the UK economy is towards these countries and their people, the more likely we are to be beneficiaries of those surprises. It must surely, on a balance of risk and reward, be right for Britain to be as open as it can.