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How to Make the World Richer

By Morgan Housel - Jan 26, 2016 at 1:37PM

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We're sitting on so much untapped potential.

Where will future economic growth come from? With high debt and bad demographics, you may worry. But the world is brimming with more untapped potential than you may realize. 

This is a thought exercise to show how much potential the world has but chooses not to unleash because of social norms. It's not a serious proposal because it could never realistically happen, since people like their social norms.

Economic growth happens when 1) the working population grows, and 2) people share ideas and learn how to do things more productively. After practicing the two for several thousand years the world has figured out how to produce about $78 trillion of goods and services every year.

That's impressive. But it might be $100 trillion short of what we should be producing. 

That shortfall comes from two social barriers:

  • Women make up a disproportionately low share of the workforce, especially in the developing world. 
  • Immigration control prevent workers and thinkers from moving to where the opportunity is.

A bunch of different research added up how much these two social restrictions cost the world economy. In aggregate, it could be more than $100 trillion per year.

To get to $100 trillion you have to envision a world where there are no borders, and anyone can freely move to any country they want. You also have to envision a world where child care is universally a paid occupation, rather than provided by a nonworking parent.

Neither will ever happen.

But, again, this is an exercise in seeing what people are capable of, not what we should expect them to do. The benefit of this kind of exercise is realizing that the world has far more potential than it's currently realizing, even if the opportunity is a fraction of $100 trillion.

Here's how the numbers work out.

Gender equality

Women make up half the world's working-age population but generate only 37% of GDP, according to a lengthy report by the McKinsey Global Institute.

The gap comes from a lower share of women working outside the home, and wage inequality when they do. It's really extreme in parts of the world: Women contribute just 17% of GDP in India, 18% in the Middle East, and 24% in South Asia.

McKinsey calculated what would happen if all women participated in the workforce, worked the same hours, and earned the same wage as men. The answer is that global GDP would rise by $28 trillion, or the equivalent of two United States. Realizing how far-fetched this is, it calculated what would happen if every country achieved the same gender equality as the most equal parts of the world, like Western Europe. Doing so would add $12 trillion to the global economy, which McKinsey points out "is equivalent to the current GDP of Japan, Germany, and the United Kingdom combined."

Japan is an interesting example itself. Its economy has been stagnant for decades, largely because its ageing demographics mean a shrinking supply of workers. It also has a low share of female labor participation – 49% versus 57% in the United States. Goldman Sachs calculated that bringing Japan's female labor participation rate up to that of males would add eight million Japanese workers to the payrolls and boost GDP by 15% -- enough to solve a lot of its slow-growth problem. 

Open borders

Remove all global borders and all immigration restrictions and global GDP could literally double, adding about $80 trillion to the economy, according to economist Michael Clemens.

How? Consider two things.

Google co-founder Larry Page was born and raised in Michigan. But he's good with computers, so he went to college and started his company where likeminded people flocked: Silicon Valley. If Page were forced to stay in Michigan his whole life there would be no Google, no techies wearing hoodies, and we'd all be worse off.

Extend that logic throughout the world. But this time, it's reality: Think of the number of people in one country who can't move to countries with more opportunity because of immigration restrictions. It means new ideas and new businesses are restricted, even if immigration policies make sense for other reasons.

Combine that with another truth: There are tens of millions of smart, capable people in poor countries willing to move to rich countries and work for lower wages than native workers. But we don't let them, again because of immigration control.

When you remove borders, jobs and wages are determined by skill and productivity, rather than birthplace. The economic machine works way more efficiently, and the whole pot grows. By a lot.

Clemens writes (emphasis mine):

The gains from eliminating migration barriers dwarf -- by an order of a magnitude or two—the gains from eliminating other types of barriers. For the elimination of trade policy barriers and capital trade policy barriers, the estimated gains amount to less than a few percent of world GDP. For labor mobility barriers, the estimated gains are often in the range of 50–150 percent of world GDP ... When it comes to policies that restrict emigration, there appear to be trillion-dollar bills on the sidewalk.

Ironically, some of the same people who oppose the minimum wage are also the firmest supporters of tight (even closed) immigration quotas. But, economically, the two are virtually the same. Both are politically determined subjective limits that prevents someone who wants to work for a low wage from doing so. Economist Ha-Joon Chang writes:

Wages in rich countries are determined more by immigration control than anything else, including any minimum wage legislation. How is the immigration maximum determined? Not by the 'free' labor market, which, if left alone, will end up replacing 80– 90 per cent of native workers with cheaper, and often more productive, immigrants. Immigration is largely settled by politics.

(For those who argue more workers will always lead to lower wages for everyone and thus no progress, catch up on the lump of labor fallacy).

So, up to $28 trillion in gains from gender equality, and $80 trillion in gains from labor mobility. 

That's how you make the world richer. 

These are complicated topics. Some of our social norms are defensible and make sense outside an economic lens. Others aren't. But even the ones that aren't shouldn't be expected to change overnight. It can take decades to implement a solution, even when most people agree on a topic. And no one is actually suggesting we remove all borders. 

But maybe this stuff will make you a little more optimistic. If we're not growing at our potential, it's not because we're running out of ideas, running out of workers, or running out of resources. We're just getting in our own way. And, maybe one day, we'll step a little bit to the side. 

For more:

Contact Morgan Housel at mhousel@fool.com. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares), and has a disclosure policy.

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