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Monday, January 30, 2006

Hot Labour Anyone?

This post has one sovereign virtue: apart from in the current sentence it will not refer, either directly or indirectly, to the Catalan Statute. The topic it does deal with however is probably equally vital for the future of Spain. The issue is Spain's housing boom, and the role of immigration in fuelling it. Two facts above all others stand out: Spain is currently 'enjoying' the longest and deepest housing boom (in the current round) among all the world's developed economies (see this useful article from the Economist, or this one from Business Week), and Spain is also enjoying sustained rates of immigration which - at around 2% of the population per annum, may well be the most intense ever experienced in a developed economy. For purposes of comparison I could point out that Spain’s net migration rate of 17.6 per thousand in 2003 contrasts sharply with that recorded for the old European Union 15 for the same year – 5.4 per thousand – and is even well above the level recorded by Germany in the early 1990s – a maximum of 9.6 per thousand in 1992 – or by France in the early 1970s. So there is a housing boom, and there is immigration, the question is, what is the connection?

Before going any farther on this, I would just like to draw attention to a recent Live Journal post from Randy McDonald. Spain's demographic problems are more or less common knowledge. During the 1980s and 1990s it was among those European countries where the fertility rate dropped to what has become known as the lowest-low level (hitting an all-time low at around 1.2). The consequence of the fertility decline coupled with the continuing rise in life expectancy (Spain with a life expectancy of 79.52 is eleventh in the global rankings) is a very rapid ageing of the population, and an anticipated loss of population of something like 9 million people by 2050, which means a population drop from the 2000 figure of 40 million to 31 or even 30 million in 1950 (United Nations 2002 provisionss, median estimate). But all that was before immigration really got going.

Spain's population on 1 January 2005 was 44.1 million (up by more than 4 million from the 2000 figure) according to data from the National Statistics Institute (INE), of this increase some 600 - 700,000 a year are immigrants, and some 80,000 a year or so are a 'natural increase' due to the steady ageing of the population. In fact in 2003 net migration was estimated to account for 93% of Spain’s population growth.

Now all of this leads Randy, reasonably enough, to ask, whether immigration will not be the saving grace for Spain:

"Within the space of a decade, Spain's population composition has changed radically thanks to a population increase of almost 10%. No one saw this wave coming, but this came nonetheless and transformed things radically. Given this single compelling example, it seems if nothing else prudent not to trace out population curves out to infinity."

The issue here however is one of sustainability. At this point enter commenter Pepe from Madrid, who in an earlier discussion on the fertility problems of the Czech Republic made the following, extremely insightful point:

In purely economic terms, I would liken low fertility to a low savings rate. In such an environment, an influx of foreign capital is needed to maintain growth.

In monetary terms, this can take the form of FDI or foreign equity investment (“hot money”). Now, when people talk about immigration (human capital inflows) as one way to compensate for low birth rates, a similar distinction has to be made between immigrants who become integrated on the one hand, and what I call “hot labour” inflows on the other.

So there is 'hot money' (which everyone is familiar with) , there may also, however, be 'hot labour', labour sucked into an economy which is badly overheating, and which is not a stable element in any given country in the longer term. Like hot money, hot labour can be subject to 'flight', and this is just what Pepe and I fear may happen when the housing boom finally ends.

Now one thing is for sure, immigrantion is steadily nudging up Spain's fertility rate. A good starting point for looking at this would be a recent paper by Marta Roig Vila and Teresa Castro Martín: Immigrant mothers, Spanish babies: Longing for a baby-boom in a lowest-low fertility society. As they indicate:

"Coinciding with the increasing presence of immigrants, there has also been an increase in the population’s natural growth. In particular, the crude birth rate increased from 9.1 per thousand in 1996 to 10.5 per thousand in 2004. This coincidence is not fortuitous: in 2004, the crude birth rate of the foreign population was 20.5 per thousand, double that of Spaniards (9.7). Indeed, the foreign population has an age structure conducive to higher natality. The median age of the foreign population, 31.2 years in 2001, is well below that of the Spanish population (37.8), and the proportion of women in childbearing age is significantly higher among foreigners (70.6% of all women) than among nationals (52%). ........ the proportion of births whose mother has foreign nationality has experienced a remarkable increase in recent years. In 2004, 13.7% of all live-births were to foreign mothers –and 16.9% to either foreign mother or father–, a proportion that exceeded the proportion of foreign nationals in the overall population (7%). As noted earlier, the crude birth rate of the foreign population is twice that of Spaniards, but this could be partly due to their younger age profile."

But there are reasons to think that this boost to Spanish fertility may be temporary. As Roig and Castro Martin point out, there are two main issues. In the first place the operation of what is known as adaptation behaviour, as migrant women steadily 'adapt' to the fertility bavaviour of their adoptive country:


The second issue is the decline in fertility which is already well advanced in the 'sending' countries (ie female migrants may well soon be coming from countries which already have below replacement fertility themselves: this is already true of the Central and Eastern European 'transition' countries):

"With regard to the foreseen future, according to United Nations projections, the fertility in the five countries examined - Morocco, Ecuador, Colombia, Peru and the Dominican Republic - will range from 2.22 to 2.36 in 2015-2020 (United Nations, forthcoming). Thus, in the next decade, immigrants not only will depart from a country with an average fertility close to replacement, but if educational selection continues at play, they will have lower fertility than the national average."

So if the long term impact on Spanish fertility is doubtful, what about the sustainability question, since these new migrants are almost exclusively here for economic reasons, what are the reasons for assuming that they will remain in more adverse circumstances?

Pepe suggests that we divide the migrants into those who will stay the course (those looking for a permanent home) and those who won't, who will move on to the next country and the next job as soon as things get too rough here. I think he is right, but quantifying the situation is hard. Al I can do is offer an anecdote.

My partner's parents have an Ecuadorian women looking after her mother who has Alzheimer. This woman went home to Ecuador for xmas, and now she has come back she has decided she needs a document of salary (or nomina in Spanish). She needs this since talking to other female migrants (she has btw residence papers) she has decided that she would like to go to the bank and borrow 10,000 euros. She needs this money, since she wants to rent a flat in her own name so she can offer accommodation to new immigrants coming - on a sub-let basis - and thus make money from the boom herself (here in Barcelona there is now a new weekly paper for Latin American migrants which they hand out in the metro - it's called appropriately enough Latino - and last week's front page item was about a small flat in the very centre of Barcelona with 25 Ecuadorian women living in it. So there is certainly scope for business.

The point of all this is that the arrival of so many immigrants so quickly has pushed the rent on flats out of the roof: it is more expensive - in monthly payments - to rent a flat than it is to buy one, and that surely is a sign that something is badly amiss. The other point of this little homily is that ideas traval fast. In the age of mobile phone connectivityyou can quickly have viral entrepreneurship, and of course, rapidly built pyramid chains.

So what might happen when the 'boom' ends. Well in the case of our Ecuadorian woman, with a flat which she can't rent if no immigrants come, and with a rent liability she herself cannot meet, and with an outstanding loan to the bank of 10,000 euros she cannot pay, possibly the most intelligent thing she could do would be to get on a plane and go home. The owner of the flat would have a different problem set: they have an empty flat with no tenant in sight, not for kilometres and kilometres and kilometres. And of cousre the bank wants to know about next months mortgage payments, since the majority of these flats which are up for rent are being bought by someone who doesn't need it 'as an investment'.

Now lets think about the building contractors problem set. Well people in this occupation normally live on credit, and normally pay salaries and other costs out of money borrowed from the bank till the building in question is sold. The bank accepts the situation as long as it has good reason to assume that the building eventually will get sold. But this is just it, when the boom breaks for some significant period of time the flats won't get sold, at least not in anything like the quantities they were (Spain's last boom ended in Olympic year 1992, and the property market didn't recover till 1995). Now when the bank sees that their customer isn't going to be able to sell, what does it do? It cuts the line of credit, that's what it does.

What this means is that one fine Friday the boss has no money to pay his workers. So he goes to the site and tells them this, sorry lads, off you go, and no money for now, I'm afraid. That's if he has the 'face' to do this. Some of them of course simply launch themselves from the 13th floor of the unfinished building.

Now imagine what is actually going to happen the day the bubble bursts. This process can happen in building sites all across Spain, and in a very rapid period of time. The Spanish workers will be more or less Ok, but the migrants? Again it's hard to put numbers, but I reckon we could at some point see a million migrant workers, on the streets with no work, and no reasonable prospect of employment, with their home governments possibly pressurising the Spanish one to organise flights and fly them home.

And just when might this nighmare end game to Europe's best known fairy story come to pass? No one has any idea. Since the thing which is driving the boom is the ridiculously low interest rates which are currently on offer from the ECB (in Spanish, not German terms) and since there is little likelihood of any substantial rise in these any reasonably foreseeable future the show looks like it will continue to run, until, of course, the day it doesn't that is.




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