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U.S. Economic Freedom Attracts Immigrants Who Support U.S. Institutions
By Robert Krol
Immigration from one country to another is driven by economic, political and personal safety reasons. Many immigrants are motivated by the higher potential income that can be earned in the destination country. Higher-quality institutions in the destination country, compared with the immigrant’s home country, also play an important role. Some people, however, worry that immigrants may, over time, weaken U.S. institutions as they participate in the political process in their new home. But such worries are inconsistent with the empirical evidence.
Understanding a Country’s Institutional Environment
It has long been understood that a country’s institutional environment can promote entrepreneurship and prosperity. Formal institutions include the definition and enforcement of property rights, contract enforcement and, just as important, an impartial court system. Less formal institutions include such things as culture, the level of corruption, social norms and trust. Institutions define the environment under which people and businesses must operate.
Weak institutions hamper investment and entrepreneurship. The financial benefits from starting a business are uncertain when property rights are insecure. Uncertainty over investment returns deters native and immigrant entrepreneurship. Countries with poorly defined and enforced property rights experience an exodus of entrepreneurs to countries that protect property rights. The certainty surrounding property rights and the rule of law in the U.S. explains its attraction to entrepreneurial immigrants.
The regulatory setting and the size of government (a proxy for general government intervention in markets) influence opportunities and returns to investment. Business regulation raises the cost to start a business and to keep it running, discouraging entrepreneurship. The fact that the U.S. has maintained a relatively light regulatory touch on the economy—and more modest tax rates than other industrialized and emerging economies—has made it an attractive destination for entrepreneurial immigrants.
Measuring Institutions and Government Oversight
The Fraser Institute’s Economic Freedom of the World Index (EFWI) measures, among other things, the quality of a country’s institutional environment and the degree to which governments intervene in the economy. The EFWI includes measures of government taxation and spending, the legal system, private property rights, monetary policy, international trade and regulation. It is also adjusted for gender-based legal rights. The index, first calculated in 1970, ranks 162 countries. A higher index value indicates greater economic freedom.
The quality of U.S. institutions, as measured by the EFWI, has remained stable, but with some modest improvements in certain areas. The U.S. ranked 6th in the world in 2018 (the most recent year for which data are available) for the overall level of economic freedom, with a score of 8.22 out of 10. It also ranked 6th in the world in 2008, with a score of 7.96. In those years, Hong Kong had the highest overall level of economic freedom, with scores of 8.94 in 2018 and 8.97 in 2008.
Property rights, regulation and government size are relevant to native and immigrant entrepreneurs’ expectations of investment success. For these subcategories, U.S. property rights scored 7.33 in 2018 compared with 7.56 in 2008; business regulation scored 8.82 in 2018 compared with 8.72 in 2008; and the U.S. size of government score was 7.5 in 2018 compared with 7.46 in 2008. These measures suggest that the quality of U.S. institutions remained stable between 2008 and 2018 with modest improvements in business regulation and government size (prior to the pandemic of 2020).
What motivates immigrant entrepreneurs is the quality of U.S. institutions relative to those in their home countries. A significant number of recent immigrant entrepreneurs have come from China and India. In 2018, China’s and India’s overall economic freedom indexes equaled 6.2 and 6.56, respectively. Both scores are well below the U.S. scores, and both countries scored poorly when it came to property rights, regulation and government size. This difference in economic freedom scores explains why the U.S. is an attractive destination for entrepreneurial migrants from India and China.
Does Immigration Reduce Institutional Quality?
Labor economist George Borjas has argued that higher levels of immigration from countries with poor institutions (weak property rights, government corruption and biased courts) may lower the quality of U.S. institutions. The concern seems to be that immigrants would vote to expand government regulation of the economy or increase political corruption. This outcome could negate the economic benefits and increased efficiency brought about by immigration, making it desirable to limit immigration.
The strongest argument against Borjas’ claim is that talented and motivated individuals who choose to leave a country with a weak institutional environment are unlikely to support those types of institutions in their destination country. Once immigrants gain voting rights, given their experiences back home, it seems unlikely that these immigrants (especially the entrepreneurs in the group) will vote to expand the role of government in the economy of their new home country. Rather, they will be more likely to support the stronger institutions that protect their rights.
Another theoretical argument against Borjas is that government growth might be limited as immigrants become a larger share of the population. This might occur if some native citizens are unwilling to expand social welfare programs from which immigrants would benefit. Although this is a nativist perspective, the effect would be to restrict government growth.
The EFWI rankings for the U.S. do not support Borjas’ hypothesis, and there is little evidence that immigrants are associated with a weakening of institutions. Quite the opposite: Using a cross-section of countries between 1990 and 2011, in a variety of empirical models, immigration scholar Alex Nowrasteh and economist Benjamin Powell find evidence of a positive relationship between immigration and overall economic freedom for some of the models they estimate. They also find that higher levels of immigration can result in stronger property rights and less regulation.
Economists Alexandre Padilla and Nicolás Cachanosky examine the impact of immigrants (both total foreign-born and naturalized citizens) on state-level institutions in the U.S. for the period 1980 through 2010. They use the Fraser Institute’s Economic Freedom of North America index, which measures economic freedom at the state or provincial level for the U.S., Canada and Mexico. The subindexes focus on government spending, taxation and labor-market regulation. Labor-market regulation is further broken down into a measure that captures minimum wage laws, government employment and union density.
Padilla and Cachanosky examine several model specifications in their analysis, and they find very few statistically significant results. However, they do find that increases in naturalized citizens as a share of all citizens in a state significantly reduce union density. This result implies that naturalized citizens are less likely to be union members. Perhaps they vote for laws that limit union power. Their presence tends to increase labor-market competition.
Immigrants are attracted to the U.S. because its institutions are better than those in their home countries, and these institutions provide the economic, political and personal security that immigrants desire. These immigrants are seeking opportunities to start businesses, to support their families and to prosper. There is little evidence that immigrants weaken U.S. institutions. Because immigration promotes innovation and prosperity, policymakers should reform the current immigration system in ways that would expand opportunities for legal immigration.