Golden Visa/Passport Programs Have High Corruption Risk and No Demonstrated Economic Benefit. So Let’s Abolish Them.

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 by bribing potential investors with 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 things 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?

6 thoughts on “Golden Visa/Passport Programs Have High Corruption Risk and No Demonstrated Economic Benefit. So Let’s Abolish Them.

  1. It is true that the current setup of golden passport and visa programs is open to manipulation and poses many risks- it provides a place to park foreign money, creates tax havens, and drives up real estate prices. But I’d argue strongly against eliminating these programs altogether. To the contrary, in a country like the US, where the immigration system itself is deeply flawed with long wait times and the unlikely chance of ever securing a green card (for instance, see https://www.cato.org/blog/150-year-wait-indian-immigrants-advanced-degrees), golden visa systems can be highly valuable. They can serve the dual goal of bringing in investment to developing regions and securing tax dollars, while attracting high net worth or high income individuals to the US. What is needed is a fundamental overhaul of the system, so the golden visa and passport systems, at least in the US, are accessible only to those who truly live here.

    Here’s what I’d suggest- the golden passport or visa system should be a natural extension of other US visas, for instance, F1 visas, or H1B visas. You’d need one of those visas to be eligible. The golden passport system should then serve entirely as a shortcut for immigrants seeking to jump the long waiting lines. These ‘golden visas’ or passport could even be auctioned off, or priced higher, bringing in not just tax dollars from those who purchase them, but ensuring a steady future tax stream by keeping high skill or high net worth immigrants in the country. The current requirements entail investment in specific earmarked areas- these should be tightened up, and a very clear residency requirement should be set to ensure that people living in other countries aren’t just using these to park assets. It’s true there are several loopholes, but they are fixable, and the golden passport concept needs to be overhauled, not eliminated.

    • Although we disagree (for now–my views are provisional) as to whether these programs are worth maintaining in some form, let me start my reply by emphasizing a few points of strong agreement: (1) In many countries, the US included, the ordinary process for getting residency status/citizenship is badly flawed and in need of reform; (2) If GV/GP programs do continue to exist in some form, they need to be substantially overhauled; and (3) If countries are going to continue to have GV/GP programs, they should only be available for individuals who would qualify for a visa (or citizenship) on some other grounds, such that the investment or payment is essentially a fee to speed up the processing of the visa application, not a separate ground for eligibility. (That third proposal is, so far as I know, an original idea of yours, and worth developing further.)

      So if we agree on all of that, where and why do we disagree? My instinct is still that, even with your proposed reforms, these programs probably do not have sufficient benefits to justify the costs and risks–though your proposal to restrict GV/GP programs to those who are eligible on some other basis is, I admit, something I hadn’t thought of until now. My reasons are essentially the same as the ones I note in the post, and so I won’t repeat them here, except to emphasize that I’m not convinced, from the perspective of any individual country, that attracting investment/revenue by selling passports is really good for the overall macroeconomic health of the country (and I have yet to see any studies showing that it is), and that from a global perspective, it seems to me that these systems simply reallocate wealth and investment (for reasons that are basically unrelated to economic efficiency or productivity), and so wouldn’t seem to have positive welfare effects unless you make some very strong additional assumptions about other market distortions.

      I also think it’s worth noting that you’re making some assumptions that might be true some places but not others. In particular, those who acquire golden visas do not necessarily become long-term residents of the country that grants the visa, nor do all jurisdictions with such programs impose significant taxes on wealthy residents/citizens, especially those living abroad. (I suspect you may reply that when this is true, those programs should be changed, which is a fair point.) Additionally, I’m not sure I’m comfortable with letting super-wealthy people “jump the queue” for, say, H1B visas (which, for those who don’t know, is the US visa for high-skilled workers). I’m not sure it’s a great idea, from the perspective of either efficiency or justice, to allocate such visas on the basis of ability to pay, rather than on the basis of degree/importance/rarity of the applicant’s special skills, or through a random lottery. But that’s a much longer philosophical discussion.

      I’ll end my reply to your very thoughtful and helpful comment with a question/challenge: Both of us agree that a substantially reformed GV/GP program would be better than these programs as they currently exist, and for the moment we disagree as to whether a reformed GV/GP program would be better than abolishing such programs altogether. But suppose we take your ideal reformed GV/GP program off the table, on the grounds that it’s just not feasible that most countries that have such programs would or could adopt the strict eligibility criteria you have in mind. (Put the US aside and consider, for example, what these programs look like in places like Malta, Antigua, Malaysia, and Portugal.) So the choice is to either except the status quo (maybe with a little bit of reform around the edges, like what the EC Report suggests, but not the radical reforms you prefer), or else abolition. If you’re confronted with that stark choice, which option do you think is better?

    • Disha, I think you make some good points here about ways in which the U.S. EB-5 system could be improved, but I’m afraid I’m still left feeling a bit uncomfortable about even the patched system you propose. I agree the U.S. immigration system is deeply flawed, but I’m troubled when we allow wealthy people to then skip/avoid/circumvent that system while less well-resourced applicants have to wait. (Understanding that those who can hire an immigration lawyer already have a sizable advantage over those who cannot… but this seems more of a different of degree rather than of type). Our immigration system is desperately in need of reform, but my choice would be to make it easier for folks to get a greencard in other ways, and eliminate explicit discrimination in favor of high net worth individuals. Lastly, very curious to hear what you think about GV/GP programs in smaller countries like, for example, the Caribbean nations that have these programs. My sense would be that the arguments about a lack of other realistic opportunities to obtain permanent residency in the U.S. don’t apply with equal force to, say, St. Kitts and Nevis, but very curious to hear if you think otherwise, or think there’s still sufficient justification to have these programs, if properly tailored. Does that make sense? Thanks!

  2. Thank you for this post, and I ultimately agree with you on the suspect nature of these programs. I think you bring up an interesting point on the demand side regarding the well-studied resource curse and “Dutch Disease” effects that countries experience with massive capital inflows, as GV/GP programs would seem to have similar consequences on governance quality.

    To round out your critique, if a bit pessimistically, on the presence of increased foreign investment, I’d point you to checking out the article at this link (Remittances and Institutions: Are Remittances a Curse?, https://doi.org/10.1016/j.worlddev.2011.09.014). While natural resources, foreign aid, and apparently golden visa programs all provide direct government revenue that disincentivizes addressing institutional weakness, this article provides some hard econometric evidence that even large inflows of migrant remittances going directly to households via private transfers can make government corruption less costly to bear. That is, because households can use privately-transferred money to finance themselves, the government has less of a need to properly use funds allocated for socially beneficial public services, assuming they would have even used said funds for such reasons in the first place.

    All this to say, even if GV/GP programs could somehow provide a direct social good, there is economic evidence that says large inflows of money of any kind into a country with ineffective and unaccountable institutions has dubious results. So perhaps abolishing such programs altogether is the right move.

  3. I think you’ve made some interesting points here about GV/GP, and while I’m also no macroeconomist (rather, an applied microeconomist), I think your intuition on the economic issues here has merit. The problem is that in economics (especially macroeconomics), there is so often countervailing intuition that may take things the other way. The cash infusion of these programs may well be worth the corruption risk for many small and developing countries.

    With that, calling for the abolition of such programs seems like a bit premature before we have some empirical evidence. I did a cursory google scholar search and like you, I didn’t find much. While I don’t quite agree that the beginning and ending of these programs may be quasi-exogenous (prima facie, it seems like beginning or ending a program like this could be correlated with the investment climate of the country, but this could be somewhat overcome if one had access to very granular investment data, at the month-by-month level at the very least), some sort of observational study to start out with could at least be somewhat instructive.

  4. Although I am also not a macroeconomist, I tend to agree with you on the argument that these programs do not bring enough benefits to society to justify the burden of the risks, be it security or corruption/money laundering.
    That said, I would like to mention Portugal, which might be a good example of how Golden Visas bring little advantages to the overall population.
    Golden visas incentives business creation. However, it demands the visa applicant to create just a few job positions. Portugal, for example, demands the creation of a business that employs the minimum of only 10 people.
    It also encourages investment in real estate, which leads to boom property, increasing rents and property prices. To use the same example, in 2019 Lisbon, Portugal, topped the property shopping list according to a PwC report. This might be great news for the speculative market, but not to the ordinary citizen.

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