In a paper that just won the JPE’s Robert Lucas Prize, Desmet, Krisztian Nagy and Rossi-Hansberg model the evolution of the world economy over the next 400-600 years! Is it laughable or laudatory? I’m not entirely sure. The paper does have an insight that I think is very important, in addition to a number of methodological advances.
If we look around the world today we see that the places with the densest populations, such as China and India, are poor. But in the long-run of history that doesn’t make sense. As Paul Romer, and others, have emphasized, ideas are the ultimate source of wealth and more people means more ideas. As a result, innovation and GDP per capita should be higher in places and times with more people. The fact that China and India are poor today is an out-of-equilibrium anomaly that happened because they were slower than the West to adopt the institutions of free markets and capitalism necessary to leverage ideas into output. China and India weren’t relatively poor in the past, however, and they won’t be relatively poor in the future. With that in mind, a key long-run prediction of Desmet, Krisztian Nagy and Rossi-Hansberg becomes clear. If people are not allowed to migrate then the places that are densest today will not only equal the West, they will overtake the West in innovation and productivity.
One of the key determinants of these patterns is the correlation between GDP per capita and population density. As we mentioned above, the correlation is negative and weak today, and our theory predicts that, consistent with the evidence across regions in the world to-day, this correlation will become positive and grow substantially over the next six centuries, as the world becomes richer. Two forces drive this result. First, people move to more productive areas, and second, more dense locations become more productive over time since investing in local technologies in dense areas is, in general, more profitable. Migration restrictions shift the balance between these two mechanisms. If migration restrictions are strict, people tend to stay where they are, and today’s dense areas, which often coincide with developing countries, become the most developed parts of the world in the future…. In comparison, most of today’s high-productivity, high-density locations in North America, Europe, Japan, and Australia fall behind in terms of both productivity and population.
Thus, if migration restrictions are strict, density is destiny and the dense parts of the world will rule. But what if migration restrictions are loosened?
… if migration restrictions are lifted, then people today move to the high-productivity regions such as Europe and the United States and these regions become denser and so remain the high-productivity regions in the future. World welfare in this scenario goes up by a factor of three.
It’s much better to remove migration restrictions today because we get to a much richer world, faster. In addition, population is better distributed in accordance with natural amenities. All is not perfectly rosy, however, in the free migration scenario. So let’s conclude with a few sentences that would make Hari Seldon proud.
[in the free migration scenario]…growth in utility drops substantially in the short run as many people move to areas with high real GDP; hence these areas be-come more congested and become worse places to live (lower amenities). This initial loss in growth is, however, compensated in the long run by a large surge in productivity growth after year 2200.