Brain Drain Becomes Brain Gain?

Published: Thu 23 Aug 2001 10:53 AM
- July saw the highest net inflow of permanent migrants recorded since February 1997, continuing the improving trend of recent months.
- Our analysis and past experience suggests that, in the near term, new migrants are likely to contribute more to aggregate demand in the economy than to aggregate supply.
- Over the medium term, increased net inflows of skilled migrants should have a positive impact on overall economic performance. However, in the near-term, the turnaround in migration flows may exacerbate, rather than alleviate, skill shortages, thus further reducing the likelihood of additional RBNZ easing.
Migrant flows begin to turn in NZ’s favour
Over the past four years, New Zealand has exported a net 31,000 people - around 0.8% of its population - to the rest of the world. This outflow has revived the “brain drain’ debate that was a feature of the late 1980s, when significant net outflows were also recorded.
Net Migration
Source: DB Global Markets Research, Statistics NZ
Outflows surged at the beginning of this year, as people sought to beat the introduction of tighter benefit criteria in Australia. However, more recent data suggests that migrant flows may now have begun to turn in New Zealand’s favour. A net 1140 people moved permanently to New Zealand in July - the strongest inflow recorded since February 1997.
The turnaround in net migration flows has been led by a strong rise in arrivals. At least in part, this probably reflects the early impact of the Government’s decision to aim to increase the total number of skilled and business migrants approved entry into New Zealand each year from 17000 to 27000 (total arrivals also includes those migrants granted entry under other categories - such as the family reunion and refugees schemes - as well as returning New Zealanders). Departures have also eased off slightly in recent months, no doubt reflecting the impact of the global slowdown on perceived job prospects abroad.
Arrivals from Asia are growing strongly
The strongest growth in inflows has stemmed from Asia. In the year to July, arrivals from China increased by close to 80% compared with the previous year. China still lags the UK and Australia - typically the most substantial donor countries - on an annual basis. However, for the month of July, arrivals from China were substantially greater than from any other country. Arrivals from India and the Republic of Korea are also rising sharply. The recent growth in immigration from Asia probably reflects the early impact of the easing of entry criteria for migrants who do not speak English fluently.
Source of Permanent Arrivals
Country of Origin Year to July
2001 - 2000 - 1999
United Kingdom 14,683 - 14,952 - 12,248
Australia 11,169 - 10,742 - 9,726
China 8,679 - 4,838 - 3,106
Japan 3,774 - 3,850 - 4,025
India 3,337 - 2,176 - 1,678
South Africa 2,584 - 2,326 - 2,411
USA 2,556 - 2,534 - 2,457
Fiji 2,211 - 1,679 - 1,358
Republic of Korea 1,643 - 913 - 637
TOTAL 71,173 - 61,530 - 56,638
Source: DB Global Markets Research, Statistics NZ
Going forward, given the relaxation of entry criteria and the Government’s higher target for skilled and business arrivals, the increase inflow of migrants looks likely to be sustained. Moreover, with New Zealand’s economic prospects currently stronger than many industrial countries, departures are likely to remain subdued over the near-term, although the medium-term forces attracting skilled New Zealander’s to emigrate overseas remain in place. Taken together, this suggests that net inflows will continue to be recorded over the next couple of years.
Demand side effects of migration dominate
Given widespread skill shortages, at first glance a rise in skilled migrants might seem positive for an easing of pressures on labour costs and inflation. However, while we would agree that skilled migrants have a positive impact on overall economic performance over the medium-term, in the near term, we think that migrants are likely to contribute much more to aggregate demand in the economy than to aggregate supply, thus contributing to, rather than alleviating, pressures on inflation.
In the first instance, this reflects the substantial direct set up costs associated with the settlement of new migrants. In particular, migrants need to find and furnish accommodation. This inevitably spills over to new dwelling construction once available slack in the market has been taken up. Migrants’ demand for housing will have flow on effects throughout the economy. A pick-up in housing demand will typically lead to growth in house prices. And the wealth effects from higher house prices will lead subsequently to stronger domestic demand from the incumbent population. Growing infrastructure needs can also result in increasing pressures on resources from public spending. This demand pulse easily exceeds the growth in the economy’s productive capacity that stems from migrants entering the labour force, leading to greater skill shortages and increased pressures on labour costs and inflation more generally.
Population Growth and Dwelling Consents
Source: DB Global Markets Research, Statistics NZ
The experience of the past decade illustrates these forces at work. The strong inflow of migrants in the mid 1990s led to a surge in construction and house prices. This helped to sustain the post-1991 economic recovery, sending indicators of skill shortages to historical highs. More recently, net migrant outflows have resulted in weak levels of population growth, contributing to a stagnant housing market, and a fall in nominal, and more particularly, real house prices. This has acted to undermine consumer demand.
Real House Prices and Consumer Spending
Source: DB Global Markets Research, Statistics NZ, QVNZ
Migrant flows will be watched by the RBNZ
Current net inflows remain modest by the standards of the mid 1990s. However, the turnaround in migration trends is still in its infancy, and it remains to be seen where the trend will settle over coming months. Although migration data usually attracts little if any market attention, we think it is worth keeping an eye on migration trends over the period ahead - we are sure the RBNZ will be doing so. If recent inflows are sustained over coming months, or accelerate further, in our view this will provide another reason for the RBNZ to leave the OCR on hold over the remainder of this year, with the prospect of a first tightening in Q1 2002.

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