We’ve had a couple of posts recently (from regular contributor Natalie Ritchie and guest poster Anton Moiseienko) about the corruption-related problem associated with so-called “golden visa” and “golden passport” programs (GV/GP programs), which grant either residency (golden visas) or citizenship (golden passports) in exchange for “investments” (or sometimes simply direct payments to the government) that exceed a certain threshold. Both Natalie and Anton reference recent reports by Transparency International-Global Witness and the European Commission, both of which focus in particular on the EU, and which are both very useful in documenting the risks associated with these residence/citizenship programs—including though not limited to corruption and money laundering risks. That said, the solutions proposed, while certainly helpful, feel a bit thin, in part because both the TI-GW and EC reports assume that these programs have at least some legitimate uses, or at the very least that it would be overstepping for outsiders (be they international bodies, other countries, or NGOs) to try to coerce states into abandoning these programs altogether.
My inclinations are somewhat different, and a bit more radical: I’d push for abolishing these programs entirely—certainly the golden passport programs, but probably the golden visa programs too. The risks associated with GV/GP programs are well-documented in Natalie and Anton’s posts, as well as the TI-GW and EC reports (and other sources), so I won’t dwell on them here. In short, as these and other sources convincingly demonstrate, GV/GP programs may provide safe havens for wealthy criminals and their money, often produce corruption in the programs themselves, and may also have more diffuse pernicious effects associated with the commodification and marketization of membership in a political community. I acknowledge that the risks associated with well-run programs may not be huge, but they’re not trivial, either. And I can’t for the life of me figure out what benefits these programs could have (to society, not to the governments that run them) that could possibly justify those risks.
The usual story is that these programs attract necessary foreign investment, stimulate the economy, and create jobs and raise government revenue. I’m no macroeconomist, and so I may be about to reveal my ignorance in embarrassing fashion, but I have yet to hear a convincing argument, let alone see a persuasive study, that establishes that these programs indeed have substantial economic benefits. Let me explain my puzzlement, and if I’m obviously misunderstanding some crucial point, either about how the programs work or about the economics, I hope some readers out there will correct me.
- First of all, though it’s fairly common (especially among those touting these programs) to highlight the headline numbers—the millions or billions of dollars or euros or what have you that have flowed into this country or that country under a GV/GP program—those seemingly impressive numbers don’t actually tell us what we need to know. Even if we assume for the moment that all we care about is how effective these programs are in attracting foreign investment, what we care about is the marginal impact of the program—the extent to which they increased investment over what we would have seen in the absence of the program. It’s utterly implausible that none of the projects in which GV/GP applicants invested would have attracted any foreign investment in the absence of the GV/GP program. I buy the claim that for small economies (like Malta and Antigua), the marginal impact of these programs on overall net FDI inflows may be substantial. I’m much more skeptical that this would be true for a large economy like the United States or even a medium-sized economy like Malaysia. So just for starters, we need to treat all the big numbers being thrown around with some healthy skepticism.
- But let’s put that to one side and suppose, for the sake of argument, that a given country’s GV/GP program really does substantially increase FDI into that country. Is this a good thing for that country? It might seem self-evident that it is, especially since so much focus of the policy discussion in many countries is how to attract more FDI. Certainly FDI can have significant benefits, especially in developing countries, if it is associated with the transfer of new technology or better management practices, or if the country in question is sufficiently poor that lack of access to capital is a major constraint on economic progress. But does anyone really think that, say, Chinese investment in the United States, or investment in Portugal by Eastern European oligarchs, have any of these benefits? Is there evidence that it’s even true for smaller economies like Cyprus or St. Lucia? I’m not aware of any. While I appreciate that foreign investment can sometimes be economically helpful, I tend to think that FDI inflows are more useful as an indicator of how well capital-poor countries are performing with respect to economic policy, and their level of political risk. Because the marginal product of capital is higher in capital-scarce countries, neoclassical economic theory predicts we should see large capital inflows into those countries. The fact that we often don’t see that happening is often ascribed to economic or political problems (including corruption) that scare off foreign investors. Increasing FDI is a sign that those problems are being addressed more effectively. But attracting FDI in other ways—such as bribing potential investors by offering them a second passport—doesn’t really address the underlying economic or political problems, such as low labor productivity or high political risk.
- Moreover, and building on the previous point, even if the cash infusion into the domestic economy from a GV/GP program is very large relative to the country’s GDP, it’s not clear to me that this would necessarily be a good thing. Here I fear I’m going to be especially conspicuous in revealing my macroeconomic ignorance, but from what little I know I can think of at least three adverse economic consequences that might follow from a GV/GP-stimulated foreign cash infusion, even if we concede that this investment will lead to some job creation. First, a surge in demand for, say, commercial real estate (one of the sectors often associated with GV/GP programs) could significantly raise prices, or even contribute to a bubble in that or other sectors. Second, in the case of revenues that go directly to the government, the history of resource booms and analysis of the impact of foreign aid both supply reasons to be at least circumspect about the prospects for sudden cash infusions, especially those handled by the government, to produce long-term economic benefits in poor countries with weak institutions. To make the point a bit more general: As noted above, governments want to attract investment and raise revenues, and if they realize the reason they’re not doing so is because of weaknesses in their economic environment or political systems, they have an incentive to address those underlying problems. But if they can attract a lot of cash without needing to raise productivity or reduce risk—say, by selling oil or passports—there’s less of an incentive to address these other problems. Third, a significant boost in FDI will boost a country’s exchange rate, with ambiguous economic effects: imports will get cheaper, but exports will become less competitive, worsening the country’s overall terms of trade. This may or may not be a bad thing, depending on other factors, but I would tend to think that for countries that rely a lot on tourism or commodity exports, an appreciating currency would not be so great for the economy.
- Additionally, while this post, like most of the existing discussion, has so far focused on the effects of GV/GP programs on the countries that adopt them, that’s not really what we should care about from a social welfare perspective. What we should care about is the aggregate effect of these programs. And here again, considering only the economic effects, it’s not at all clear to me that these programs have any benefits. Think about it this way: In the absence of these programs, wealthy individuals would still use their money for some mix of consumption and investment, with the the investment choices presumably made to maximize risk-adjusted returns. Now the GV/GP programs come along and distort those consumption and investment decisions. There will likely be some distortion away from consumption to investment (the sorts of investment that provide foreign residency or citizenship), and there will also be some distortion in investment away from those investments that maximize risk-adjusted returns to those that, while somewhat (or much) less profitable, have a golden visa or passport attached to them. Is this reallocation of resources a good thing for the global economy overall? Who knows? It certainly doesn’t maximize overall economic efficiency (unless one thinks that other market imperfections lead to suboptimal investment in GV/GP countries in the absence of those programs, or one treats the inability to buy citizenship or residency as itself a serious market failure—and neither of those possibilities seems convincing to me). If we have zero basis for believing that reallocating capital in this way will have social benefits, but we know for sure that these programs have serious costs and risks, what’s the justification for keeping them?
So that’s basically where I end up: Critics of these programs have highlighted their many risks and costs—including though not limited to corruption risk—while proponents have not, so far as I can tell, gotten beyond flouting mostly meaningless headline statistics regarding investment inflows. So why should we make any concessions to the programs’ advocates?
One thing I’ll add here, perhaps for our readers out there who do quantitative economic research: I looked for but could not find any “event studies” of the economic impact of GV/GP programs. Given the variation in the timing of when these programs were introduced, the fact that some have been terminated, the fact that the exact timing of introduction (and termination) was probably close-to-exogenous, and the fact that at least some of the key outcome variables are probably pretty easy to measure, this seems like a fruitful area for study. I don’t have the tools to do it myself, but I hope some bright economists out there might take this up as a research project. It’s frankly kind of shocking how little serious study there seems to be of the impact of these programs. But maybe it’s out there and I just missed it?