Overseas migration has been touted as the ultimate fix for all of life’s problems, especially financial problems. Sri Lankans seem to have bought this story at face value and voted with their feet by using any method at their disposal to try and get to countries where, apparently no problems exist and millionaires are born overnight. If only it was that simple.
It is true that immigrants from the previous two decades have done economically well in their new host countries. But as with all things the global financial crisis of 2008 has turned many previous assumptions on its head. In fact in many of the destination countries the economic landscape began to change earlier in the last decade, right after the collapse of the technology bubble.
The economic performance of migrants in the main destination countries which has a skilled migration intake (Australia, Canada, New Zealand and the United Kingdom) makes for an interesting study. While data from the United States of America was considered, their lottery based migration system skews the comparison.
As with higher education, the story has two distinct halves to it. Those who migrated prior to 2000 have on average had a better financial outcome as opposed to those who made the decision later. The economic outcomes of those who are planning of coming in the future may be the worst of all groups.
Perhaps the single issue that has made overseas migration unattractive are highly elevated house prices in many countries.
Elevated house prices always follow higher rents, which have made the total financial return for new immigrants to be significantly less than those of their compatriots of the early 90’s in particular. Financial stability (defined as the ability to save 15% of disposable household income) took on average 6 years (best case, with assumption that wages are 25% higher for skilled immigrants than those for the whole country) to achieve for immigrants in the early 90’s.
This has now blown out to more than 11 years. Removing the rosier assumption and assuming median wages, the 11 years goes to a wider 16 years. The main culprit here is elevated house prices, which require a larger savings amount in the first few years, in order to secure a mortgage. Declining real wages have made the task harder still.
The most common strategy employed by new immigrants who face financial stress, or even those well settled when their consumption needs increase is to dispose fixed assets in their home countries. While sensible during an emergency, this may be a wealth destructive strategy in the long run, especially if the market they sell out of substantially outperforms the market in which they buy the new asset. Consider the plight of someone who sold property around Colombo in 1995, to buy a house in a destination country.
The value of the property in Colombo increased by 8.5% per annum over this period (in $US terms), compared with 6.5% overseas. On one hundred thousand dollars that is a difference of over seventy thousand over that period. The return from overseas halves if the property in Colombo was owned outright, and the overseas property was on a mortgage, thus magnifying the loss.
Migration like any other investment decision needs to be one built on sound due diligence. While predicting the future is an inexact science, not doing proper homework in this “Google” age is unforgivable. The current frenzy to migrate overseas has all the ingredients of a bubble; a plausible story using historical data, media hype by those with a vested interest encouraging participants further and finally a feedback loop made complete by selective “success stories”. There are some important financial considerations that are best understood before you decide to dispose all your local assets and say goodbye to Sri Lanka, for good.
- Don’t forget the sample size. Most stories about going overseas will highlight successes and tend to underplay difficulties. This works both when it comes to media representation as well as personal examples from friends and family. Thus it may seem that all the people you know claim to be “financially successful” after migrating. The chances however are that they represent less than 0.01% of the total migrants to these countries in any given year.
- Understand the difference between being asset rich and having significant cash flow. Most migrants are asset rich as more than 90% of all their wealth is accumulated via housing, mostly just the one residential property. And if they have a mortgage on the same, it actually belongs to the financial institution providing the loan, and not those who occupy the property. Many have been tapping into their increasing home prices to sustain their lifestyles. This is a liability not an asset.
- Purchasing power is everything. Purchasing power parity or the “law of one price” is perhaps the most important economic variable that prospective immigrants need to understand. Very simply put, the purchasing power parity shows the value of a bundle of goods in two countries, adjusting for exchange rate differences. Using this definition one $US goes (or buys) 2 to 3 times more goods and services in Sri Lanka, compared with many of the destination countries. This is crucial to keep in mind as many calculate their lifestyle by converting potential dollar income, and imagining life in Rupee terms. On the flip side, many underestimate the true power of their earnings in Sri Lanka. For example a hundred thousand rupee monthly income would actually translate to approximately $US 2,200 in the purchasing power of goods and services that could be bought in the destination countries, and not simply $US 877 (using an exchange rate of 114).
- Understand the risk of making assumptions around meritocracy. The migration myth with the most severe financial consequences is based on talent being rewarded on performance as opposed to politics and personalities. Who you know matters more than what you know. This is a universal truth. The “glass ceiling” is alive and well in every democracy around the world, and is not limited to Sri Lanka. It would be extremely unwise to build an investment strategy pinning all your hopes on “what” you know (i.e. technical skills). Recent surveys across many countries with large migrant intakes have shown that over 95% of all senior level positions are filled without being advertised to the general public, and with the candidate coming from those already known to senior managers.
- Compare lemons with lemons, not melons. Unaffordable housing has led most new immigrants to live on the fringes of many cities. This is the case for those who wish to have some savings at the end of each month.
Except for small pockets, most of these fringes are 30-50 kilometres away from the main city. Most countries have made no major investments in core infrastructure over the last 15 years, making the commutes from these neighbourhoods approximately 45 minutes to 1.5 hours. Time wise this is the equivalent of Negombo, Gampaha, Homagama or Panadura. Distance wise, this would amount to Chilaw, Nittambuwa, Hanwella and Kalutara. For someone based in and around Colombo, the question is the desirability of lifestyle moving from Colombo to the previously mentioned cities. This would approximate the lifestyle in the “fringe” suburbs of the destination countries. A comparison of Colombo, with whatever her shortcomings, with a fringe city overseas is thus void.
- Flowing on from the point above is the myth about education. A public education is a public education, anywhere in the world. The public education system in a fringe suburb overseas is equivalent (if not worse) to that of similar areas of Sri Lanka. The perverse logic is to compare the cost of a private education in Sri Lanka with the “free” education in the public system overseas, simply because the medium of instruction may be English. Thus a sensitive emotional sale is made to many parents by the promised riches of a “free” English education. Again, lemons need to be compared with lemons. Cost, value and outcomes of the non-religiously affiliated private education system in Sri Lanka needs to be compared with similar institutions overseas. If you think Rs 500,000 a year for an international school is expensive, try forking out on average $US 20,000 for a similar education in the destination countries.
- The very same logic applied to education is also valid to some extent in health care.
Although medical care may be touted as “subsidised” or worse “free”, there still remains hidden costs. Many confuse health care with palliative care. The former may come under universal coverage in most countries, but the latter has costs, which can at times be prohibitive. Simply put, it’s much cheaper to hire a private nurse and qualified health attendant in Sri Lanka, if such an unfortunate case arises, than in many destination countries.
- Overlook the rise of India and China over the next 20 years at your own risk. It would be an extremely brave person who would bet against the benefits that can accrue to Sri Lanka as a result of the changing geo-political landscape of the world. Overall, the analysis shows that temporary overseas migration, without asset disposal in Sri Lanka still has an attractive financial outcome.
For temporary migrants, using a base case median wage assumption, the optimum length approximates to six years for dual income couples without children, going to 8-10 years for those on a single income or families with children. Permanent migration is economically looking more unattractive for the masses with the exception of a handful of professionals on the extreme right tail of the distribution. The most optimal financial outcome from temporary migration is still found in high skilled roles in the Middle East.
Democracy allows people to freely move and live in geographies of their choice, subject to administrative laws. The decision to migrate is thus one left solely to the individual, should they choose to exercise that choice. Hence the reason this article is limited purely to the economic and personal financial case of immigrants. Sometimes migration is unavoidable on non-economic grounds including but not limited to fleeing persecution, family politics, or an unfortunate alignment of planets at the time of one’s birth. These people have my sympathies.
Others who take the plunge from a comfortable financial situation in Sri Lanka, to a world of uncertainty have no one to blame but themselves. As with any investment decision, think twice, independently, to avoid the cognitive pitfalls of the herding crowds.
(The writer is an Investment Specialist based in Sydney, Australia. You can write to him at kajangak@gmail.com).
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