Barriers to Entry

How opening borders gives economies a lift.

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Americans spent much of this summer arguing over immigration reform, and South Africans spent much of it contemplating Nelson Mandela's legacy. But the link between the two went unnoticed: One of Mandela's biggest legacies was to show that immigration reform -- on a scale hugely more ambitious than anything proposed in the halls of the U.S. Congress -- can benefit everyone, in real economic terms.

One of the earliest acts of South Africa's first post-apartheid government was to break down borders within the country that had prevented members of the black African majority from choosing where they worked and lived. In economic terms, this reform created a true single market, equivalent to what would happen if the United States pulled down the border fence with Mexico and gave all comers citizenship. To many Americans, that's a terrifying thought -- as it was to white Afrikaners, who predicted economic collapse. But, instead, virtually everyone got richer after borders were opened within South Africa -- and in relatively short order. Mandela's government demonstrated that large-scale border dismantling can be good for people on both sides of the fence.

Among its litany of evils, the white South African government had declared that blacks were nationals of particular "homeland" states, or Bantustans, based on their ethnicity. The apartheid regime drew up the borders of these supposed states with little regard to economic rationality or practicality, let alone the views and concerns of the proposed residents. In 1970, black South Africans were issued papers for one of the 10 Bantustans, and many were stripped of their South African citizenship. Millions of blacks were forcibly resettled to their new homelands, desperately poor places like Transkei and Bophuthatswana that relied on cash transfers from the South African government to function at all. Those who remained outside the Bantustans clustered in slums around the edges of the country's major cities or its mines -- employed, if at all, as "guest workers" ineligible for the legal and financial protections accorded South African citizens. (The process was not dissimilar to the U.S. government drawing up reservations and forcibly relocating Native American tribes in the 19th century.) Given the gross inequalities fostered by the apartheid system, it is no surprise that, in 1993, white South African households enjoyed an average income almost five times higher than that of black households.

Days before Mandela became South Africa's president in 1994, the homeland system was rapidly dismantled. According to South African government statistics, about 12 percent of the country's population moved between 1996 and 2001, the considerable majority to large cities like Cape Town and Johannesburg. Beyond ending one of apartheid's most toxic institutions, the shift was a huge experiment in what happens when barriers to labor mobility fall, as economist and immigration expert Michael Clemens has argued. What were essentially different "countries," with race-based quotas and employment rules, all became a single (officially colorblind) labor market. A black population that today is about nine times the size of the white population was at last free to compete for the same jobs -- and even benefit from some positive discrimination in the labor market.

Consider this parallel for scale: Brazil, China, and India have a combined population nearly nine times that of the United States -- the same ratio of blacks to whites in South Africa. Now imagine if the citizens of those three countries were not only right next door to the United States, but suddenly had the legal right to move in and compete for American jobs on an equal basis with U.S. citizens. (It's probably fair to say that support in Washington for this kind of immigration reform would be low.)

As it turned out, what happened was that South Africans as a whole got richer over the next 15 years. Economists Murray Leibbrandt of the University of Cape Town and James Levinsohn of Yale University report that average household income in South Africa more than doubled between 1993 and 2008. For black South Africans, incomes rose an average of 61 percent, but far more dramatic was the 275 percent average increase in white South African incomes. Even poor white households, those potentially most at risk from the influx of cheap labor, got richer. In the end, everyone benefited from an economy made stronger by the free movement of people and labor.

It's a lesson that also emerges from other experiments in dismantling barriers to migration. In 1993, citizens of European Union countries were given the right to work in any other member state. Once again, the doomsday predictions proved false. Overall migration increased, but it didn't cause Denmark's economy (with a per capita GDP of $20,410 at the time) to collapse under the weight of Portuguese immigration, despite the fact that the Iberian pipsqueak had a per capita GDP of only $12,327. In fact, both countries had a long run of reasonably good growth until the eurocrisis and austerity ended the party. Denmark's annual GDP growth in the 15 years after 1993 averaged 2.2 percent; Portugal's averaged 2.3 percent. And subsequent expansion of the European Union to countries like Poland gave a boost to Western economies, particularly Britain, where tens of thousands of Poles flocked in search of work.

These real-world experiments in opening borders suggest that poor, less-skilled workers in a privileged region shouldn't fear an influx of even poorer workers from outside. That holds true for the United States and Mexico, too. South Africa demonstrates that the practical benefits of open borders -- when compared with the selfish interests of those on the "right" side of the line -- outweigh the concerns. When the levee breaks, the rising tide lifts all boats. So perhaps it's time to think big and loosen that most peculiar and outdated institution: the right to work only where you're born.

Photo: Susan Winters Cook/Getty Images

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Why Walmart may have done more for the poor than any business in American history.

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There is much to dislike about Walmart: the union-busting employee rules, putting mom-and-pop grocery stores out of business, all that plastic garbage it sells us, the shady business scandals. It's the mortal enemy of locavores, the big bad box store that environmentalists and community organizers demonize. But for all its manifold offenses, Walmart may have done more for poor consumers in the United States, and around the world, than any other business in American history.

The world's largest retailer, Walmart shrugs off the controversy for a simple reason: The stuff it sells is cheap. Beyond its immense buying power (which sucks profit margins from suppliers), its incredibly efficient logistics systems and sourcing from low-wage foreign labor allow Walmart to drive down the cost of making and shipping many of its products. And Walmart is only the most visible example of a far bigger phenomenon: Globally, even in places thousands of miles from the nearest blue-shirted greeter, more efficient production and transportation are reducing the prices of many of the basic goods purchased by the world's poorest people. If that's rapacious, Walmart-style capitalism, let's have more!

More than 1 billion people still live in the borderlands of absolute deprivation, scraping by on less than $1.25 a day. Nevertheless, many have more access to goods and services than they did only a few years ago (even if they're not yet buying their cassava at the Ouagadougou Walmart). That's in part because companies around the world have figured out how to make and ship the stuff that poor people want at lower cost, which makes lives better. Call it the global Walmart effect.

There are two ways to help poor people buy more of what they need. One is to help them make more money. The other is to make the money they have go further. And Walmart has proved incredibly adept at that second approach. Take food, for instance. Walmart is the world's biggest food retailer, and it offers foods at prices considerably lower than those at traditional supermarkets -- as much as 25 percent lower, according to economists Jerry Hausman and Ephraim Leibtag. Factor in all the other stuff it sells, and Walmart's overall impact on its shoppers' spending power is even greater.

Walmart's low prices come in part from relying on efficient production in developing countries. Of course it isn't just Walmart's procurement agents who are buying cheap stuff from Asia; pretty much the whole world is, including retailers from Bangalore to Bangui. That's because manufacturers in China, India, and elsewhere have become particularly adept at producing low-cost versions of goods demanded by "bottom of the pyramid" consumers -- otherwise known as the world's poorest people.

Think of the mobile phone. There are about 6 billion subscribers worldwide -- 86 out of every 100 people on the planet. And many of them are texting and calling on Chinese-made devices. China produced more than 1 billion mobile phones in 2012 alone. But it's not just telephones. China manufactures as many as four out of five of the world's bicycles, and it's the leading maker of penicillin, producing more than 50 percent of the global supply. A whole range of goods purchased by some of the planet's poorest people are now made at low cost in the Middle Kingdom.

What about India? A study found that generic companies based in India supplied 53 percent of the antiretroviral drugs to treat HIV in sub-Saharan Africa from 2004 to 2006. In fact, one-third of Indian drug exports went to sub-Saharan Africa between 1999 and 2006. That really matters when World Health Organization estimates suggest public expenditure on drugs in that region averages below $10 per person each year. It also has a knock-on effect: Recent analysis by researchers Tamara Hafner and David Popp argues that African imports of antibiotics and other drugs from India and China reduce the price of identical drugs imported from high-income countries, suggesting fiercer competition is reducing costs.

The generics effect is widespread: Basically, the things poor people want appear to be dropping in price faster than the stuff rich people want. It may even be that the bottom of the pyramid is benefiting from lower prices more than the luxury-buying elite. (That's not well reflected in global income statistics because the standard price indices used to construct these metrics are weighted toward luxury goods -- fancy cars and granite countertops, not bicycles and plastic sheeting.) In effect, the world's poor people are still very poor, but they aren't quite as poor as the stats would indicate.

That helps explain why many of the world's most destitute people own more stuff than they used to. Take Madagascar, a very poor country that has technically been getting poorer over time. Between 1992 and 2009, the country's real GDP per person fell from $843 to $753. But the percentage of households with a phone climbed from less than 1 percent to 28 percent, the proportion with a motorbike climbed from 4 percent to 22 percent, and the percentage with a television increased from 7 percent to 18 percent. People in Madagascar, as well as in much of the rest of the developing world, are living better and longer with more possessions to their name. That's true even if, officially, they are as poor as they've ever been. And Madagascar doesn't even have a Walmart -- yet.

Still, for all the "everyday low prices," whenever a new Walmart opens, local competitors really are often forced to shutter their doors. Imagine that happening on a global scale. Harvard University economist Dani Rodrik, for one, worries that Africa and Latin America are seeing their manufacturing sectors shrink, perhaps in part because East Asia has taken most of the global low-end manufacturing opportunities. And that may leave the rest of the developing world looking in vain for that first step up on the ladder to industrialization.

That's a problem, to be sure, but one that should, in theory, solve itself. As China gets richer, labor will inevitably get more expensive and factories will migrate. Some already have -- to places like Vietnam and Indonesia. And if retailers like Walmart continue to seek the cheapest, most efficient suppliers and manufacturers, those Asian production centers will eventually shift to Africa in search of cheap labor. That may take decades. But in the meantime, China's efficiency means that poor people's scarce resources can go a little bit further -- which is enough to put a grin on even the most dejected round, yellow smiley face.

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