18: The Coming Battle for Immigrants

The ability to absorb foreigners could determine whether nations in the industrialized world will grow or stagnate

It's a long-standing tradition in Colmenar Viejo, a suburb of Madrid. As the sun sets, old folks make their way to the benches in the central plaza. It's a perfect place to watch children play and teenagers flirt. This summer, the benches are as packed as ever. But one thing has changed: Hardly any kids are mulling around.

The scene on the plaza is a poignant barometer of one of the most profound trends sweeping the industrialized world: the graying of the population. Due to plunging birth rates, the number of children under 15 has shrunk by 23% in Europe since 1970. And the shift will continue. There still are four working-age people to support every European aged 65 or older. In a few decades, predicts the U.N. Population Div., that number will fall to two. The pattern is just as dramatic in Japan and Korea, and to a lesser degree in the U.S. A few decades hence, big developing nations like China, Russia, Brazil, and Thailand also will see a surge of retirees. By 2050, the average age of the world is expected to rise from 26 today to 36. In Spain, the average age by mid-century should hit 55.

The economic implications are huge. Who will do the work in geriatric societies? Who will support the burgeoning class of pensioners? And what will happen to growth? After all, in addition to productivity, a rising labor force is the key ingredient of economic expansion. Harbingers of a stagnant future already are seen in Japan, a nation that seems content to live off its savings, and in Italy.

Wealthy nations have another choice: to import workers on an unprecedented scale. That's essentially what the U.S. has been doing for the past two decades as the baby-boom generation matures. The U.S. takes more than 1 million immigrants annually, including illegals. That is one key reason economic growth has averaged 3.7% a year for the past decade. Immigrants have supplied crucial technical and scientific talent, founded thousands of Silicon Valley startups, and helped hold down prices by filling low-wage jobs.

If the rich nations other than the U.S. choose to keep immigrants out, they will have to achieve radical gains in productivity to keep their economies from hitting a wall. According to one estimate, Europe must boost its productivity by two-thirds before 2020 just to keep its economy from shrinking. But that requires investment in labor-saving machinery and new plants. "And who will invest in these countries if their markets are shrinking and they won't have an adequate labor supply?" asks Paul S. Hewitt, co-author of a two-year study of the economic impact of global aging by the Center for Strategic & International Studies in Washington.

To escape this vicious cycle, governments outside the U.S. are starting to reconsider the immigration question. Officials in South Korea, which has tight controls on foreigners, say they want to dramatically increase the number of three-year work permits. Currently, 266,000 Chinese, Filipinos, Bangladeshis, and other foreigners work illegally in everything from fisheries to construction sites. Many Taiwanese businessmen, who now are shifting manufacturing to China, hope relations with the mainland will warm so that they can recruit that nation's enormous pool of engineers and laborers. And in Europe, corporations are lobbying for more freedom to hire foreigners. "We have full employment here [in the Netherlands], and companies can't find workers," says venture capitalist Roel Pieper, a former Royal Philips Electronics (PHG ) and Compaq Computer Corp. (CPQ ) executive. "Yet politicians want to close the door."

Pieper is right: While many policymakers and executives see the advantage of welcoming immigrants, the rest of society tends to see them as a threat. Outside the U.S., few countries have the laws and administrative capabilities--let alone the desire--to absorb so many foreigners. In Europe, political pressure is growing in the opposite direction. The recent electoral success of hard-right politician Jean-Marie Le Pen in France is largely because of his anti-immigrant stance. Curbing immigration is a key issue for the Netherlands' List Party. It placed second in May legislative elections--even after its leader, Pim Fortuyn, was gunned down.

To be sure, immigration isn't a complete solution. For one, the numbers would have to be astronomical. Germany would have to boost immigration twentyfold and Japan fiftyfold "to offset the population implosions," estimates Sylvester J. Shieber, research director for manpower agency Watson Wyatt Worldwide. "And that just isn't going to happen." Even maintaining current inflows, the U.S. will likely face labor shortages by 2010.

Governments can also urge women to have more children. China can end its one-child policy. But few nations have succeeded in persuading women to bear more kids once they have access to birth control, jobs, and an urban lifestyle.

Another option is to extend the retirement age. Only 40% of people age 55 to 64 now hold a job in Europe, for example, thanks to generous early-retirement programs. But expanding the number of older workers solves only part of the problem: Economies need young workers to start families and form households. Another strategy is to get more women into the workforce. Take South Korea, where a sharp plunge in births per woman in three decades, from 4.5 to 1.4, means the elderly population is expected to double by 2019. The pension system could go bust by next decade if benefits aren't cut, predicts Korea Development Institute researcher Lee Hye Hoon. Currently, 52% of women work. Seoul wants to raise that to 61%.

In most countries, such strategies will only marginally ease a huge, looming labor crunch. And if they rely on temporary work visas, countries will have enormous populations of second-class citizens, a recipe for social strife. At some point, politicians in each developed economy will have to confront the overwhelming need for more immigrants. Cultural purists will be outraged. Unionists will take to the streets. But the ability of societies to absorb foreigners could well determine which economies will grow for the rest of this century--and which will fade into the twilight.

By Stephen Baker

With Moon Ihlwan in Seoul, Pete Engardio in New York, and Aaron Bernstein in Washington

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