In the past few months, there has been a healthy debate on this blog about “golden visa” and “golden passport” (GV/GP) programs, following reports by Transparency International-Global Witness and the European Commission on the corruption risk associated with these programs. In his post a few weeks ago, Professor Stephenson goes even further, contending that such programs carry no economic benefit and should therefore be abolished. I respectfully disagree. Even taking the status quo as is, the $28 billion these programs have brought in over the past decade make them a savvy tool for nations seeking to attract investment. All GV/GP programs are not equal, and there are vast differences in the transparency and potential for abuse across countries. Reforming GV/GP programs with high degrees of risk, as discussed previously on this blog, is a better answer than abolishing them, since the concerns raised are straightforward and addressable.

Professor Stephenson’s post focused only on the economic aspect of GV/GP programs, so my response will do the same, but it is worth noting that a lot of the criticism of these programs comes from the ethical questions they raise over whether one should have the “right to buy citizenship.” Though this objection is not my main focus here, I can’t help but point out the irony of worrying about the unfairness of a system that allows the wealthy to buy citizenship against the background of a system that confers the privileges of citizenship simply by an accident of birth, and in which immigration systems are so badly broken that, for example, immigrants to the US face a 150 year-long waiting time for a green cardthrough routine channels. But my main focus here is on Professor Stephenson’s argument that GV/GP programs lack a sufficient economicbenefit to justify the corruption risk, and on this question, I believe he is mistaken. 

Let’s start with some top-line numbers: The sale of EU passports accounted for as much as 5.2% of Cyprus’s GDP in 2017. Portugal’s scheme has delivered close to €4 billion to the economy. Malta enjoys a budget surplus because of its growing trade in residency and citizenship. Over in the Caribbean, income from GV/GP programs has contributed up to 25% of the GDP, and even the majority of government revenue. The outsized impact of these programs is hard to deny. Professor Stephenson does not contest the accuracy of these or similar statistics, but he denies their significance for several reasons, each of which is flawed:

• First, Professor Stephenson contends that it is the marginal impact of these programs that we should be focusing on, suggesting it may be fairly limited in large or mid-sized economies. Admittedly, it is impossible to measure the counterfactual, and since GV/GP programs are often accompanied by other incentives, it is particularly difficult to pinpoint their impact. However, the demographics and motivations of purchasers suggest the marginal impact is high. The majority of investors who make use of GV/GP programs (~70% in the global market and over 90% in the US) are wealthy Chinese citizens with sound economic opportunities at home in one of the world’s fastest-growing economies. So why buy real estate abroad, if not for the promise of residency or citizenship—for a group that is understandably concerned about pollution, education, and insecurity at home. In addition, governments that have created GV/GP programs, such as in Portugal and Malaysia, have published information indicating increased investment inflows immediately following the creation of such programs. Golden visas have funded ports, hotels and other commercial properties, including the $20B Hudson Yards in New York.
• Second, Professor Stephenson argues that increased FDI might not be a good thing in advanced economies, and might mask a country’s underlying political and economic problems. This argument overlooks several factors. First, the benefits of FDI are particularly significant in countries with well-developed financial markets, and ambiguous in those without, suggesting advanced economics such as the US with well-developed financial systems benefit more than developing countries. Second, and relatedly, some of the legitimate concerns around increased FDI relate to the stock market, because of its high liquidity and the possibility of collapse as foreign money flows out. However, this risk is limited since most GV/GP programs focus on real estate rather than stock market investment, and several GV/GP programs, including the US program, have an element of job creation as well. In fact, over 4% of US job growth has come from its golden visa program. Finally, while GV programs might not directly address underlying political or economic reform, foreign investors can become a powerful stakeholder group lobbying for such reform.
• Third, Professor Stephenson asserts that a large cash infusion is not a good thing, leading to bubbles, resource booms, and more expensive exports. But cash infusions can be very useful for the receiving country, funding key government priorities, supporting development projects and helping to kickstart the economy. The history of resource booms and the impact of foreign aid in poor countries is not positive, but the big GV/GP earners are not in fact poor countries or traditional recipients of foreign aid with weak institutions. Moreover, more recent research has rebutted the traditional ‘crowding out’ theory of resource booms, suggesting instead that such booms can benefit the wider economy. Yes, real estate prices could increase, but as in Lisbon, that can be helpful in revitalizing a market, and have positive secondary effects on other sectors (including construction, consumption, and tourism to name a few).
• Finally, Professor Stephenson suggests that the aggregate effect of such programs through a global lens is only to distort investment and reduce consumption. But facilitating movement to investment-starved regions could have large positive externalities. GV/GPs provide cheaper sources of financing, which can be seen as distorted investment, but could also be growth-inducing. Such programs can also increase, not decrease, consumption through their spillover effects on other sectors. It is impossible to measure the aggregate effect of such resource reallocation, but even assuming the aggregate effect is negative, it does not mean any given country should abandon its program. The reality is that nations compete for FDI, and some do better than others; GV/GPs are a powerful tool that should not lightly be given up.  

GV/GP programs have brought in billions of dollars and proved a valuable source of government revenue. There is undoubtedly a risk of corruption, but risk levels vary hugely across countries. Some countries, like Malta and Cyprus, have been called out by the EU for particularly poor policies, and in response both countries have already enhanced their due diligence process, as have a host of other countries like the United Kingdom. The recent attention to GV/GP programs, evidenced in the TI-GW and EC reports, is building pressure for further risk mitigation, and lays out clear pathways to do so. This is the right approach. Rather than abolishing these programs, the push should be for clear standards across countries, appropriate risk pricing, and the development of best practices. While more research might shed more light on these programs’ costs and benefits, the evidence we have now indicates that abolishing these programs would be an extremely costly mistake.