Question

Consider U.S. immigration policy. Specifically, consider two policy extremes: completely closed borders and completely open borders. Under closed borders non-citizens are not permitted to enter the country for any reason, while under open borders non-citizens are free to enter the country and stay for any reason. Use the Solow model to analyze these two policy extremes. What conclusions can you draw?

Answer 1

The Solow model of economic growth is considered as one of the benchmark theories that is often used to determine the palatable economic growth of a nation or an economy. The Solow model establishes the possibility of the economic growth in the longer run of the economy by taking in to account the growth of the population, the increase in the production capability of the nation, the accumulation of capital in the long-run and the overall technological advancement of the country. With the help of this Solow model of economic growth, let us discuss the two extremes as given in the question.

From the above diagram, we can see that Capital is measured along the X-axis and the Savings, Output, Investment in the Y-axis. Here, CB is the curve that represents the overall economic development of the country in the longer run when the borders of the country are Closed, and the curve OP represents the overall economic development of the country in the longer run when the borders of the country are Open.

If we take the first scenario where the borders of the country are closed, then according to the Solow model, in the sorter run, the economy may be able to survive in the economy with the available capital. It will experience a normal growth, savings and investment rate. This is lead it to a sustainable growth in the shorter run, however, in the longer run, the economy is bound to experience negative returns. This will be caused by the lack of foreign labor available in the market. With the lack of labor in the economy, it will directly and indirectly lead to a decrease in the availability of capital in the hands of the Government. This lack of capital will lead to a limited amount of savings, and therefore minimal output and minimum capability of investment in the hands of the government. All these will lead to a negative growth of the economy and as can be seen with the curve CB, it will stay stagnant in the first phase, but will fall down and bulge down in the longer run.

If we now take the Second scenario where the borders of the country are open, then according to the Solow model, in the sorter run, the economy may experience a shortcoming of economic growth. It will experience a minimal growth, savings and investment rate. This is because, in the shorter run, with the borders open, there will be influx of foreign labor and capital. In the short-run, all the foreign national’s will be a dependent force upon the economy thereby increasing the burden of economic development. This will decrease the sustainable growth in the shorter run, however, in the longer run, the economy is bound to experience higher and positive returns. This will be caused by the availability and performance of foreign labor available in the market. With the increase of labor in the economy, it will directly and indirectly lead to an increase in the availability of capital in the hands of the Government. This availability of capital will lead to a huge rise in the amount of savings, and therefore maximum output and maximum capability of investment in the hands of the government. All these will lead to a positive growth of the economy and as can be seen with the curve OB, it will stay negative and bulge down in the initial stage in the shorter run, but will rise up and bulge up in the longer run.