THE TEMPORARY MOVEMENT OF WORKERS TO PROVIDE SERVICES (GATS MODE 4)

Transcription

1 THE TEMPORARY MOVEMENT OF WORKERS TO PROVIDE SERVICES (GATS MODE 4) L. Alan Winters* Table of Contents I. The Nature and Extent of Temporary Mobility... 5 I.1 Temporary vs Permanent Migration... 5 I.2 The Extent of Temporary Mobility... 6 II. The Basic Economics of Temporary Labour Mobility II. 1 Temporary Mobility as International Trade II. 2 Temporary Mobility as Factor Mobility III. The Simple Gains from Temporary Movement New Estimates III.1 The model III. 2 The Experiments III. 3 Mobility Between Sectors IV Refining The Estimates IV. 1 Flows from more to less developed countries IV.2 Skilled labour from less to more developed counties IV.3 Unskilled mobility from less to more developed countries IV.4 Refining the estimates of the benefits of TM V. Issues for Negotiation V. 1 Templates for agreement existing schemes V. 2 Domestic employment V. 3 Sub-contracting V. 4 Implementing a TM agreement VI What Can Mode 4 Offer? VI. 1 Why use the GATS? VI.2 What can developing countries offer in negotiation? VII. Compensatory Policies Table of Exercises and Questions for Discussion Exercise 2 - Generalising the Estimated Benefits 83 Exercise 3 - The Costs of TM in Sector X 83 Exercise 4 - Wage Parity 83 Exercise 5 84 Questions for Discussion 1 - Labour Mobility between sectors 86 Question for Discussion 2 - National Quotas 86 Question for Discussion 3 - Allocating Quotas 86 Question for Discussion 4 - Pros and cons of TM for an industrial country 86 1

2 List of Tables: Table 1: The Temporary Movement of Unskilled and Skilled Workers: Estimated Stocks in 1997 ( 000s of people)...69 Table 2 Geographic Origin of Non-immigrants to the United States: Selected Visa Categories of Most Relevance for Mode 4, Table 3 Profile of H1B Beneficiaries by Top Ten Industries, United States, Fiscal Table 4: Overseas Service Workers from the Philippines, by Occupation and Country ( )...73 Table 4: Overseas Service Workers from the Philippines, by Occupation and Country ( )...74 Table 6. Accounting concepts for the Temporary Flow of Labour from Country A to Country B...76 Table 7: Economic Welfare by Region and Class of Worker a...76 Table 8: Percentage Changes a in the Real Wages of Skilled and Unskilled Workers.77 Table 9: Welfare Decomposed according to effects of increasing Skilled and Unskilled Quotas a...78 Table 10: Welfare a Results for Sensitivity Analysis...79 Figure 1: remittances form Overseas Workers as Percent of GDP and Exports ( )...80 Figure 2 The Costs of Labour Misallocation...81 Figure 3 The Benefits of a Small Relaxation of Mobility Restrictions

3 This module* considers the case and the means for liberalising the temporary flow of labour between countries for the purpose of providing services: Mode 4 of the GATS. Despite being until now a mere bit-player in the GATS drama, Mode 4 is at last starting to command some attention from negotiators and policy makers. This module, and the paper it draws on 1, argue that this is long overdue and that serious efforts to liberalise the temporary movement of natural persons (TM) from developing to developed member countries could generate very large mutual benefits. The very heart of international trade, be it in goods or in factors, lies in exploiting differences. The larger the differences, the larger the potential gains from opening up international trade. In the case of TM, potentially large returns would be feasible if medium and less skilled workers, who are relatively abundant in developing countries, were allowed to move and provide their services in developed countries. The review of existing empirical studies of factor mobility and the new estimates described in this paper agree that there are huge returns to even relatively small movements of labour. An increase in developed countries quotas on the inward movements of both skilled and unskilled temporary workers equivalent to 3% of their workforces would generate an estimated increase in world welfare of over $US150 billion p.a. The mass permanent migration of less skilled workers raises fears in developed countries over the erosion of their cultural identity, problems of assimilation and the drain on the public purse. These need be much less pressing with TM, providing that governments correctly inform their citizens and take steps to make temporary credible. Objectively speaking, the biggest concern about TM is its competitive challenge to local less skilled workers. This is neither more nor less than the challenge posed to such workers by imports of labour intensive goods from developing countries, which has been overcome by the weight of economic gain that trade could deliver and by policies to ease * This module was prepared while the author was Professor of Economics in the University of Sussex. UK. He has subsequently become Director of the Development Research Group of the World Bank. Neither of these institutions bears any responsibility for the views expressed herein. The author is grateful to Carsten Fink, Roman Grynberg, Aaditya Mattoo, Maurice Schiff, Terrie Walmsley, Zhen Kun Wang and Gianni Zanini for discussion on various aspects of the material in this module and to Pedro Martins, Audrey Kitson Walters and Natasha Ward for logistical and research support. 3

4 adjustment among local less skilled workers in developed countries. Applied with the same sensitivity and the same sorts of policies as trade policy reform in goods has received in the past, the temporary movement of less skilled workers between countries would offer the chance to reap some very large gains from trade. For the sake of concreteness, the module focuses on the multilateral liberalisation of TM via the GATS. Many of the arguments, however, generalise to unilateral, bilateral or regional liberalisations and some of the lessons are drawn from such arrangements. Similarly, the module also focuses on developing to developed country flows although nearly all of the analysis would equally apply to developing-developing country TM. The module comprises seven parts. First, in section I, it discusses the extent and nature of TM and the barriers to it. Then there is a discussion of ways in which we might think of and model the liberalisation of Mode 4. This is based on two polar alternatives treating it as perfectly akin to goods trade and treating it as perfectly akin to labour migration. Section II summarises an estimate of the benefits of Mode 4 liberalisation treating it as akin to migration. This is argued to be a reasonable assumption in the context of the sort of models that economists have to use for this sort of exercise, and it suggests the very large economic benefits already alluded to. Section IV, discusses ways in which the polar forms of thinking about TM may be relaxed in future empirical exercises to try to refine the estimates of the effects of liberalisation. Section V discusses practical issues that may be negotiated in the GATS to make TM a reality. It cautions not to stake everything on achieving a clean, elegant and comprehensive agreement on Mode 4. Many issues are still very complex and sensitive and the over-riding requirement an increase in actual mobility rather than an elegant solution. Section VI asks what benefits does GATS Mode 4 bring to countries wanting to liberalise TM. Finally, section VII considers briefly the arguments for and technicalities of compensating domestic workers who are disadvantaged by inflows of workers from abroad. 1 Winters et al (2003a, b), Walmsley and Winters (2002), and Winters (2003). 4

5 I. THE NATURE AND EXTENT OF TEMPORARY MOBILITY LEARNING OBJECTIVES Observe the magnitude of flows of temporary workers in the world economy, distinguishing skilled from unskilled labour, and between net suppliers and net demanders of labour. Understand the limitations of data and proxies that are used to measure the size of TM (why data on bilateral flows is important). Note the current low level of scheduled concessions in GATS Mode 4. Identify the main barriers to TM I.1 TEMPORARY VS PERMANENT MIGRATION The official statistical distinction between temporary and permanent migration is usually between stays of less than or more than one year. This is the threshold at which for many purposes residence is held to have changed. For economic and policy purposes, however, one would wish to be more subtle. Many permanent, or at least very long-lived, migrations start as ostensibly short-term temporary movements and some comprise solely a sequence of such contracts. On the other hand some migrations of over one year are nonetheless explicitly intended to be temporary, as, for example, when managers move to one of their firm s off-shore branches, with diplomatic postings and the USA s H1-B visa for highly skilled workers. Hence inevitably there is only a relatively weak association between what is reported (if temporary mobility is reported at all) and what one would really like to know. The distinction between temporary and permanent migration is potentially important economically in several ways. Temporary workers are less frequently accompanied by their families, and so usually make less call on public services per unit of their output than do permanent migrants. Temporary workers typically invest less in integrating themselves into local society, which may either increase tension, if they are more readily 5

6 perceived as outsiders, or reduce it, if they are seen as less demanding or threatening to local cultures as a result. They also invest less in acquiring host-country-specific skills. Thus a stream of, say, ten one-year migrants is likely to be less productive in the host country than a single ten-year migrant. It is not, of course, as likely back in the home country, because there will be ten somewhat skilled rather than one very skilled worker (if the long-term migrant returns at all). [We assume in this quite reasonably - that skills learned abroad will normally enhance home productivity as well.] Relatedly, temporary migrants tend to remit a higher percentage of their incomes to their home countries than do permanent ones. Local attitudes towards temporary and permanent migrants may differ, although not necessarily in the same way in all countries. The two principal fears of migration are the displacement of local workers from (premium) employment and the threat of cultural dilution. One interesting reflection due to Aaditya Mattoo is that the relative importance of cultural and displacement fears can influence host countries preferences between temporary and permanent migration. In Europe, intense cultural xenophobia coupled with relatively benign policies for displaced workers favour TM. In the USA, on the other hand, with a disposition towards migration and a relatively harsh labour market, the labour unions (and hence, to some extent, policy in general) favour permanent immigrants who can be unionised and incorporated into the system to potential hit-andrun competition from temporary migrants, especially if they are delivered by overseas firms which have the right to bring in their own workers. I.2 THE EXTENT OF TEMPORARY MOBILITY This section starts by defining temporary labour mobility or migration (TM) and asking how it differs economically from permanent migration. It then attempts to quantify the extent of TM. The main points are: 6

7 GATT traditions, as well as policy-makers and some economists, relate the importance of a liberalisation to the size of the existing trade flow that it affects. If you believe this, skip this session and get a coffee because current mobility is very low. Karsenty (2000) estimates that compensation of employees, the closest official measure that we can get to Mode 4, accounts for just 1.4% of total service earnings. Walmsley and Winters (2002) estimate that, very roughly, there were 7.2 million skilled and 34.2 million less-skilled temporary migrants in the world economy in These are pretty small numbers, but, as is argued below, they reflect the importance of the restrictions on the movement of labour rather than the lack of it. Table 1 reports Walmsley and Winters figures in more detail. Even in the kindest light they are very approximate and in some cases clearly wrong e.g. the absence of temporary migrants (i.e. residents temporarily working abroad) from the USA, Canada, the UK and Germany. Nonetheless they are probably the best estimates available. There is very little information on bilateral flows which workers end up where (although scholars are starting to work on it). Such data will be very important, and an important task for negotiators is to furnish themselves with such information for their own countries. This is especially so given that migratory flows tend to follow established routes because immigrants prefer to move to places where there are already compatriot communities and because existing communities are major providers of information about opportunities for people back home. Table 2 (from Nielson and Cattaneo, 2003) presents one of the few bilateral analyses available and one of the most important the USA. Two of the largest flows for specialty occupations and inter-corporate transferees are firmly at the skilled end of the range. Workers in both classes are substantially provided by other developed countries, although India and China are the largest providers of the specialty occupations (see Table 3). Exchange visitors include many cultural and educational exchanges but may also include workers. Europe is the predominant supplier here. The only potentially unskilled flow non-agricultural workers is small, dominated by North America and officially capped at 66,000 p.a. 7

8 Table 3 (also from Nielson and Cattaneo, 2003) gives a breakdown of H1B visa beneficiaries by occupation, age, qualification and wage. It makes clear the relatively high levels of skills involved, although the immense dominance of the ICT industries is somewhat idiosyncratic and has since eased somewhat. H1B visas cover much more than potential Mode 4 applications, however. Some are for manufacturing industry and many of them generate applications for green cards i.e. permanent migration. Indeed, the H1B visa is probably equally much a screening device for potential permanent migrants as a way of temporarily meeting skills shortages. A major and conscious supplier of temporary labour perhaps the world s largest relative to its population is the Philippines. Figure 1 shows the great importance of overseas employment to GDP, while table 4 reports the number of service providers deployed abroad for some skills and some markets. Note the prominence of the Gulf states, the main one of which (Saudi Arabia) is not yet a WTO member. The data are partial and Francisco estimates that over between 127 and 198 thousand workers were deployed abroad each year. In addition, the Philippines provided 230 thousand seafarers in 2000, way beyond the 83 thousand from Indonesia which is ranked second. The Philippines is interesting in that it encourages overseas work and helps to organise it through the Philippines Overseas Employment Administration. It believes itself to be a major victim of mobility restrictions in other countries. The contribution of the GATS Mode 4 to temporary mobility is very small so far. WTO (1998) reports the relatively small number of scheduled concessions in Mode 4 compared with other modes, while Carzaniga (2003) describes how mode 4 commitments are far shallower than elsewhere in the GATS. No individual country has scheduled none (i.e. no restrictions) and horizontal restrictions are relatively more important for Mode 4 than other modes of providing services. Of the 400 scheduled concessions recorded, 287 pertain to managers, executives and specialists and only 69 refer to lower-skilled occupations business seller or other. 8

9 This brief sketch of the figures suggests that there is a great deal to play for in the GATS Mode 4 negotiations, but they also raise a question as to whether mode 4 brings anything significant to the temporary mobility table. Section IV returns to the latter question below. I.3 BARRIERS TO LABOUR MOBILITY There are strong natural barriers to labour mobility. Most of us have strong attachments to our home regions as one can see within countries where large real income differences persist between regions even in the absence of legal, linguistic or cultural barriers. On top of this, international migrants face problems of language and culture as well as the loss of the functional social networks they have at home. Thus within the EU migration has remained low even in the face of huge income discrepancies between countries and in the absence of formal barriers. Beyond these natural barriers migrants, both permanent and temporary, face a host of official and regulatory restrictions. Most obvious are the migration regulations embodied in visa policies. Virtually all countries restrict the potential flow of immigrants very severely via this route by merely excluding migrants or, more likely, permitting only the most special of migrants access e.g., via scoring systems such as Canada s designed to pick up the most able migrants, or in terms of political asylum whereby only the most vulnerable of people are offered sanctuary. Temporary migrants are typically processed in exactly the same way as potential permanent migrants with very high levels of screening and delay. This is a strong discouragement to TM. In many countries visa regulations permit entry to foreign workers provided that their services are held to be necessary to the local economy via so-called economic-needs tests. In some cases these are operationalised by essentially arbitrary decisions by the immigration service. In most they entail the potential employers undertaking extensive bureaucratic processes to prove their needs. This makes TM unattractive except in case of the greatest need. 9

10 Even when visa regulations do not prevent mobility, other regulations can. For example, many professions are licensed and licenses are hard to acquire for people with foreign qualifications or foreign experience. In some cases nationality is a qualification, e.g. for the CEOs of financial institutions in some countries. Practical issues such as the transfer of pension rights or access to health facilities can make mobility expensive and unattractive. II. THE BASIC ECONOMICS OF TEMPORARY LABOUR MOBILITY LEARNING OBJECTIVES Appreciate the two polar approaches to modelling the liberalisation of Mode 4 as akin to trade in goods and as akin to permanent migration, and understand the rationale of the models and their assumptions. Recognise the potential gains from liberalising TM and also that some short and long-run adverse effects may emerge. Be able to distinguish TM from international migration (in terms of socialeconomic challenges) Clear understanding of the limitations of both models. The Temporary Movement of Natural Persons, as the GATS calls temporary mobility (TM), can be thought about under two existing analytical paradigms and in truth lies somewhere between them. At one extreme it can be viewed as no different from crossborder services trade (Mode 1), which, in turn, is often argued to be analytically no different from ordinary goods trade. For example, a consultant travelling to Washington to deliver a course module in person is analytically close to a paper being sent in hardcopy form, electronic form or even delivered by video-link. Hence one part of the Mode 4 story is the trade story with which we are perfectly familiar. At the other extreme, TM has much in common with traditional long-term migration, whereby workers actually relocate from one country to another. This is particularly true 10

11 where periods of stay are long or where a particular job in country B is filled by a circulating flow of temporary workers from country A, each being replaced by another as her contract expires. While such a revolving door provision differs from permanent migration in terms of its implications for social integration, network formation and the inter-generational spill-overs from education, the basic fact that country B gains a worker while country A loses one is common to both. The revolving door model could be particularly relevant to agency-provided flows of middle-level professional workers such as nurses and teachers. Hence a second strand of thought about TM is based on the economics of factor mobility, and since this is less familiar to trade negotiators than the trade literature, we devote some time to it here. Neither of the polar models - trade or migration - captures the full character of TM, however, so we also need to devote some time to refining those models which represent its peculiarities more satisfyingly. II. 1 TEMPORARY MOBILITY AS INTERNATIONAL TRADE At its simplest, trade in services is no different from trade in goods, for which there is now widespread acceptance of the benefits of a relatively liberal trading regime. For example, exchanging goods or services across international borders facilitates reaping economies of scale, the benefits of specialisation according to comparative advantage, learning by doing and developing expertise by concentrating on particular sectors, importing better technologies, and stronger competition. All of these benefits potentially apply equally or even more strongly to services as to goods because: services as a whole account for a greater share of income (and, usually, 11

12 employment) than industry and agriculture together, and trade barriers are generally higher in services than in goods - especially where TM is involved, many barriers explicitly and dramatically reduce competition in the service sector, which can be very costly in efficiency terms, and many services are necessary inputs to other sectors, so that their provision influences the efficiency and competition in other parts of the economy e.g. communications and transportation, or banking. Thus liberalisation in these sectors can have broad and deep indirect effects. For example, improved services can create completely new markets for other goods, which, as Romer (1994) shows, can induce dramatic welfare improvements: improved transport and communications can allow peripheral farmers to sell in the cities or to obtain previously unavailable credit which could dramatically increase their output. Thus, for example, using a simple static computable general equilibrium model Hertel et al (1999) suggest that, while reductions in the tariff equivalents of trade barriers of 40% in agriculture and manufacturing will each raise global welfare by about $70 billion p.a., a similar liberalisation in services could contribute over $300 billion. One should not take these modelling estimates too literally and TM is only part of service delivery, but the orders of magnitude are striking and even a small share of so large a benefit renders Mode 4 significant. The broad principles of international trade theory apply to both goods and services, but we should not take the equivalence too literally. Services are non-storable and often nontransportable; they are subject to greater problems of moral hazard and asymmetric information and, as a consequence, are much more frequently managed via regulation rather than, say, simple taxes; services frequently can not be produced in stages, frustrating intra-service intermediate trade. None of this argues for wholly unregulated international trade in services. Governments will always have a fiduciary role in regulating many services, to counter the problems that arise from market failures such as moral hazard or asymmetric information. Rather, services trade liberalisation - including 12

13 that of TM - calls for ensuring: that such regulations are geared to solving market failures rather than to protection, that they do so in trade efficient ways, and that, above all, they enhance rather than curtail competition (Mattoo, 2000). TM differs even further from goods trade than other service trade because it is impossible to separate the delivery of the service from the welfare of the provider, about whom we care. 2 This can make policy decisions more complex. For example, developed country labour may object to the importation of cheap labour-intensive goods (e.g. shirts) from the developing world, but once the goods are in the country, there is little that labour can do to prevent their sale and circulation within the economy. If they object to developing country service workers from entering the country, on the other hand, even if the government allows inflows, labour can, by discrimination and direct action, impose continuing costs on those workers. This example also illustrates the further difference that inflows of workers are potentially much more challenging to host societies than are inflows of goods or even of cross-border service flows or foreign-owned firms. They may appear to threaten cultural and social identities directly rather than just indirectly via the generation of income through economic activity. These contrasts do not invalidate the insights gained from the equivalence of services and goods trade, but they do add to them. The parallel with goods trade liberalisation also serves as a challenge to populist arguments that services require generalised infant industry protection or that they have national security dimensions. The analysis of these arguments for goods trade e.g. Baldwin (1969) and Winters (1991) respectively shows that they apply only in the presence of very specific market failures and thus that they will require detailed justification if they are to be applied to services. 2 The same is true of mode 2 (movement of consumers), but not of mode 3 (establishment i.e. movement of capital because capital does not experience welfare per se. 13

14 Before proceeding, we should recall that although goods trade liberalisation is now widely accepted as one of the key components of the policy cocktail required for growth and efficiency, it is not without its challenges. Neither will services liberalisation be. In particular, trade reform is strongly redistributional, both between producers, governments and consumers, and within those groups. While widespread reform seems likely to benefit nearly everyone eventually (what Max Cordon, 1984, called the Hicksian optimism ), there are likely to be short-term hardships and we can not rule out there being long-term casualties. There is a substantial political economy literature on the way in which these redistributions affect the prospects of reform e.g., Rodrik (1995) and a further literature discussing the need for, and design of, complementary and compensatory policies to counteract their adverse effects see, for example, DfID (2000) and Sapir (2001). McCulloch, Winters and Cirera (2001), Winters (2002) and Winters, McCulloch and McKay (2004) offer detailed discussions of the way in which trade liberalisation might affect poverty, while Winters (2003) considers explicitly the possible impacts of the Doha Development Agenda on poverty. All of these issues are likely to be as relevant to Mode 4 as to goods market liberalisation and we should consider the lessons learned from the latter. II. 2 TEMPORARY MOBILITY AS FACTOR MOBILITY The second analytical approach to TM is to treat it like migration. It is important to stress that TM is NOT international migration as usually understood although in administrative practice the two have tended to merge. As we shall see later, TM has fewer of the cultural, social or political challenges that are associated with international migration because it explicitly does not entail shifts in residence. However, its direct economic consequences can be thought of as those of migration: workers enter a country temporarily to carry out particular jobs and thus labour inputs in one economy are reduced while those in another are increased. At its simplest, the motive for a worker to work abroad is that her real wages are higher 14

15 there. Corresponding to these different wages are different productivities. In reasonably competitive labour markets, workers are paid the value of their marginal products firms pay workers the value that they generate and even where this is not true, the differences are not usually very large 3. Thus provided that productivity is at least partly a function of where the work is carried out and not just a characteristic of the individual workers, we can be confident that when a worker moves from a low wage to a high wage country, her productivity increases and world aggregate output rises, offering scope for economic gains. In the extreme case in which workers from different countries are identical and productivity is purely a function of location, the increment in output when a worker moves is equal to the difference in wages between the two countries involved. In an early computable general equilibrium (CGE) model of this case, Hamilton and Whalley (1984) suggest that if labour were able to move between regions sufficiently to equalise wages globally, world income could increase by 150% or more! Varying the assumptions e.g. to reflect higher dependency ratios in developing than developed countries, different costs of living in different countries, or incomplete wage equalisation moderates these results a bit but still allows gains far in excess of anything observed in the trade liberalisation literature. Figure 2 illustrates the economics of this case in a simple partial economic framework. Suppose the horizontal axis O B O A represents the world stock of labour and the vertical axis the wage and the value of the marginal product of labour. In country B labour is demanded until the wage (W B ) equals the marginal product (MPL B ), so plotting MPL B against employment in B relative to origin O B we have a demand curve for labour in B. (As employment increases, moving right from O B towards O A, the marginal product of labour falls, so that higher employment is only possible with lower wages.) Labour not employed in B is assumed to be employed in A and MPL A is measured relative to the 3 The main reason for differences between wages and (long-run) productivity is market power: if workers can restrict their supply to a firm and if that firm reaps excess profits from market power in the goods market, then workers can share the rents. Alternatively, if firms can control the number of jobs in a labour 15

16 right-hand origin O A and generates wages W A. Suppose that initially labour allocation is at L O : O B L O workers in B and L O O A in A. From MPL B, the wage in B has to be W B, while that in labour-abundant A is W A. Now suppose that labour can move until the wage is equal in A and B. This implies that the marginal products must be equal, so that the equilibrium allocation is at L I. What are the gains? Consider allocation L O again: at L O workers in B produce output worth W B and those in A output worth MPL A = W A. Thus if we shift one worker from A to B (i.e. made a tiny move to the right of L O ) we lose W A but gain W B a gain of (W B W A ). Now move another worker, MPL B has fallen ever so slightly and MPL A has risen ever so slightly, but we still gain very nearly (W B - W A ). If we carry on doing this until we get to L I we will always gain the difference between MPL B and MPL A appropriate to the labour allocation that we have reached on the way between L O and L I. That is, the whole shift from L O to L I will increase world output by the area of triangle bounded by L0, L1 and the two MPL curves. This is, in principle, the number that Hamilton and Whalley calculate. Note that to make the calculation we need to know the shape of the MPL functions in each country and the final allocation L I. In a multi-country world and all the frictions involved in migration and with no observations remotely close to the free migration point L I, this is very difficult. Such extreme mobility is not conceivable practically, but the same model underlies a much simpler back-of-the-envelope calculation. Winters (2001) suggests the possibility of global gains of over $300 billion p.a. from modest increases in labour mobility. Suppose, very conservatively, that when a worker moves from a low to a high income country, she could make up only one-quarter of the productivity or wage gap between the two countries. (That is, assume that three-quarters of observed wage gaps are due to differences in individual characteristics such as health, education or culture, and hence that they would persist even after developing country workers started to work in the rich market, they can drive wages below marginal products. Regulation could have either of these effects, depending on its form. 16

17 countries.) Suppose also that fifty million additional developing country workers worked abroad in any year, equivalent to an increase of about 5% in industrial countries populations. With a wage gap of, say $24,000 p.a., the gains would be $300 billion p.a.! 4 Figure 3 illustrates this case. It is basically the area of figure 2 around L O greatly magnified. For very small movements of labour along the labour axis we can ignore the slopes of MPL A and MPL B all that matters effectively is the distance between them. Exercise 1 invites you to replicate Winters calculation in other circumstances. II.3 TEMPORARY MOBILITY AND POVERTY Temporary mobility, or indeed any migration, has potentially mixed implications for poverty in developing countries. The mobile workers themselves are unlikely to be from the poorest segments of society, who are generally too disconnected from the world economy to know about opportunities and too unskilled to be able to take advantage of them. The poorest may gain by moving into the jobs vacated by the mobile workers or because, attracted by the possibility of migration, they choose to become more educated. On the other hand, if migration removes the more skilled and/or entrepreneurial of workers from the sectors employing the poor, their opportunities for economically advantageous work may decline. A second link between TM and poverty is via remittances. If these boost overall economic activity the poor are likely to gain in the long run. More directly, they may be recipients of remittances if they have relatives who have moved. The Inter-American Dialogue (2004) writes: There is no question that remittances reach low-income families and significantly increase their purchasing power and standard of living. In Honduras, 4 Labour costs per manufacturing worker, which are an indicator of productivity, were about $32,000 in the USA in , compared with $1,192 in India, $1,442 in Lesotho, $5,822 in China, and $6,138 in 17

18 Nicaragua, El Salvador, and a few other of Latin America s poorest nations, remittances may be more than doubling the incomes of the poorest 20 percent of the population. A large fraction of remittances is sent to rural areas, where incomes are far below national averages. In Mexico, for instance, communities with populations under 30,000 receive around 40 percent of remittances. Without them, many of these communities could not survive. They also note, however, that Remittances, however, are not a free good. Their cost is mostly borne by lowincome migrants and their families in the United States. The average Salvadoran immigrant, for example, transfers upwards of 10 percent of his or her income to relatives back home. These payments often require that migrants reduce already meagre expenditures on themselves, their families, and their children. They buy less housing, education, and health; save very little; and often work exceedingly long hours. These are mostly people who earn very little to begin with. According to the 2000 U.S. Census, more than 40 percent of Latinos earn less than $20,000 a year, and over 70 percent take home less than $35,000 a year. Central America is arguably special with respect to remittances. Most of its poor have at least some education and connection with the world economy and have, formally or informally, good access to the USA with its huge demand for unskilled labour. This view is supported by the conclusions in World Bank (2003) about remittances in Lesotho. This report documents the heavy reliance of the Lesothan economy on remittances from miners working in South Africa, the recent strong declines in this flow of income and the fact that the burden of the decline falls primarily on relatively better off and urban households. A third possible link is via aggregate income. Labour movements affect countries relative outputs and hence their terms of trade, with the country of emigration typically Mexico; high-income countries population was 927 million in 1997 (World Bank, 1999). 18

19 experiencing an improvement. The country of immigration may show a growth in productivity either because it receives better than average labour from migration (migrants are typically above average in ability, dynamism, etc) or because the inflows increase the returns to capital and the new investment that that induces is more productive than average. II.4 TEMPORARY MOBILITY AND INTERNATIONAL INVESTMENT In the original negotiation of the GATS the intention was that there would be a rough reciprocity between liberalisation in mode 3 the establishment of service outlets (FDI), which, in the mercantilist calculus of the GATT and GATS, was of most interest to developed countries - and that of mode 4 which was expected to be of more interest to developing countries. In the event this reciprocity was never achieved despite (or perhaps because of) the decision to allow mode 4 negotiations to extend beyond the completion date for most elements of the Uruguay Round. Few concessions were scheduled in mode 4 and those that were mostly referred to skilled labour and intra-corporate employees, i.e. to mainly developed rather than developing country interests. There is a related question of positive economics: are modes 3 and 4 complements or substitutes? There are certainly complementary aspects, such as intra-corporate transferees, and there is plenty of economic theory that suggests that migration and international trade are complements see, for example, Markusen (1983). Moreover both modes 3 and 4 refer to services for which producers (or factors of production) move to where the service is delivered and consumed. Thus in most cases it will be important whether capital moves from A to B or labour from B to A, because, unlike with goods or cross-border services where the final product can be traded through space, it matters here whether output of these services is produced in A or B. Overall, therefore, there is probably not much case for expecting modes 3 and 4 to be substitutable, and some case for expecting complementarity. 19

20 III. THE SIMPLE GAINS FROM TEMPORARY MOVEMENT NEW ESTIMATES 5 LEARNING OBJECTIVES Understand the logic of the computable model of the gains form TM and its assumptions (modifications to the GTAP model). Realise the likely gains from Mode 4 liberalisation. Identify potential winners and losers and the reasons for their different experiences. Note the differences between skilled and less skilled TM flows. Explore the importance of the assumptions of the model and their likely impact on the results. Derive implications for the Mode 4 liberalisation process. Which countries would benefit from liberalising the restrictions on the temporary movement of natural persons (TM) and by how much? This section summarizes some recent modelling results derived from a global applied general equilibrium model of South-North temporary movement of labour. The method is to fit a computable model to data from a base year (1997) and then ask how the outcome would have differed if there had been freer labour mobility in that year. Thus the results are not predictions of the actual future effects of a policy change, but rather quantitative thought experiments to suggest possible orders of magnitude in a realistic but hypothetical world. In the absence of quantifiable data on restrictions to services trade per se, Walmsley and Winters (2002) WW - model TM as the movement of workers from one country to another. This clearly overlooks a huge array of institutional details in actual and potential schemes for the temporary mobility of labour some of which we turn to below. However, as argued above, in terms of the effects on narrowly economic variables, the approach is not seriously misleading, especially in the sort of model that is used: ultimately, TM means that fewer workers produce at home and more do so in the host country. The method is a generalisation of the exercise you conducted in exercise 1, but 5 This section is based on Winters et al (2002) and Walmsley and Winters (2002), from which more details of the modelling and results may be obtained. 20

21 with more countries, two sorts of workers, and allowing for the economic impacts of TM to spread out into supply and demand behaviour in all sectors in all countries. We do not expect you to be able to build these sorts of models yourselves, but understanding their basis is useful both for comprehending the estimates of others and for commissioning work of your own. The bottom line of the modelling exercise is that increased mobility equivalent to 3% of the receiving countries work forces would generate $156 billion per year in extra economic welfare in 1997 prices. These gains are shared between developing and developed countries and owe more to less-skilled than to skilled labour mobility. The results from numerical models such as we are about to explore are informative, but one can not possibly rely on the specific numbers. Never do so! III.1 THE MODEL The model and data used in Walmsley and Winters (2002) (WW) are described in more details in the Appendix. They are based on the GTAP model and database developed by Hertel (1997). The version of GTAP that is used is a standard applied general equilibrium model which assumes perfect competition; consequentially the exercise contains none of the scale or clustering effects which often figure in the skilled migration literature see below. In each of several regions, a single household is assumed to allocate income across private and government consumption, and saving in fixed proportions. Demand for domestic and imported goods then depends on income and relative prices. Firms minimise the costs of production. They combine intermediate inputs, from domestic and imported sources, with primary factors to produce commodities for the domestic and export markets. Demand for factors of production (land, skilled and unskilled labour, capital and natural resources) depends on output and relative prices. Prices adjust to ensure that demand equals supply in every market. WW modify the standard GTAP model to incorporate the movement of natural persons.. 21

22 We start by distinguishing the terms temporary migrant and temporary worker : A temporary migrant leaves his or her home region to become a temporary worker in a host region. Changes in the economic welfare of permanent and temporary workers are related to their income flows deflated by prices in their place of work. The welfare of temporary migrants is found by summing the welfare changes of temporary workers across host countries and sharing it out over the various home countries, according to their shares in total TM. Once the welfare changes of temporary migrants are determined, welfare by home region, regardless of temporary residence, can also be calculated by simply summing the relevant changes. III. 2 THE EXPERIMENTS The experiments assume that skilled and unskilled quotas on the movement of natural persons increase in traditionally labour importing regions, supplied by temporary migrants from a number of traditionally labour exporting countries according to their labour force shares. The quotas are increased by an amount which would allow the quantity of labour in the host (or labour importing) countries to increase by 3% equivalent to 8 million skilled workers and 8.5 million unskilled 6. For example, in the case of the USA, the increase in the quota would amount to 2.7 million unskilled temporary workers and 2.4 million skilled temporary workers. China as a supplier of temporary workers, would then supply 2.4 million of the total 8.5 million unskilled workers required and 0.49 million of the total 8 million skilled workers required worldwide. Increasing developed countries quotas on both skilled and unskilled temporary workers increases world welfare by an estimated $US156 billion in 1997 prices about 0.6% of 6 By this we mean the number of workers (actual bodies) increases by 3% of the labour force. Because relative productivities differ this does not means that the effective labour force increases by 3%, since the labour force is increased by the number of equivalent workers. 22

23 initial world income. Tables 6 and 7 give some geographical details, but, for these, care must be taken to distinguish home country residents those who start off in a country but some of whom move temporarily from host country residents the set of people who end up there after movement has occurred. Treating a country as a home country refers to its permanent workers who never leave plus its temporary migrants who work abroad - loosely speaking a nationality-based concept. Treating it as a host country refers to the permanent workers plus the temporary workers from elsewhere who work there a residence-based concept 7. In aggregate terms the main gainers for liberalizing TM are the initial residents of the developing (labour exporting) economies, as we can see from Column V in Table 6 - developing countries as home countries. Most of this increase is the result of the higher incomes earned by the people who actually move (Column III). They are now able to earn higher wages in the developed countries, as shown in Column II of Table 6 under welfare of temporary workers. [Recall that each mobile worker is both a temporary worker and a temporary migrant, so columns II and III report the welfare of the same set of people allocated once by residence and once by nationality.] Despite the remittances they receive, permanent residents in the developing countries generally lose from the outflow of temporary migrants (Column IV in Table 6). The decrease in labour supply reduces the returns to capital and other factors of production (Column IV in Table 7) because those factors have less labour to work with. 8 Combining the results for permanent residents and (the few) temporary workers already located there gives the outcomes for developing countries as host countries (Column VI of Table 6); in general these economies record losses, but recall that this excludes the 7 Note, however, that in Table 6 even labour exporters record effects on temporary workers. The reason is that, although WW do not vary their number in the experiments, most labour exporters have a number of temporary workers in their base data, and as wages change, so does the economic welfare of these workers. The changes parallel those of permanent residents in these countries. A similar explanation applies for labour importers and temporary workers. 8 In South Asia the welfare of permanent residents increases because the increase in remittances outweighs the decline in labour and capital income. This increase in income increases the demand for domestic goods and attenuates the decline in production in the economy. It allows the real wages of both skills and unskilled workers to rise. 23

24 benefits experienced by the temporary migrants who are working abroad. The loss of these factor inputs reduces aggregate output in the developing countries, real GDP, in the labour exporting countries (Column V in Table 7), and because the outflow of labour is biased towards skilled labour, skilled workers real wages rise in developing countries (Column II in Table 7) 9. Developing economies generally experience improvements in their terms of trade as the fall in their GDP reduces the supply of the varieties of goods that they produce and so drives up their prices. Developed countries experience a corresponding decline 10. While the developing countries are the main beneficiaries of the increase in quotas, the initial residents of most of the developed countries also experience increases in welfare from the higher returns to capital and the increase in taxes collected. [In fact, for technical reasons spelt out in WW, the estimates in table 6 for developed countries permanent residents welfare are understated.] Real GDP increases substantially in the developed economies, but in most cases the terms of trade decline as higher output drives down the prices of exports relative to imports. Also note the strong positive effects on developed countries temporary migrants in table 6 i.e. those who have left a developed country to work abroad. This reflects the fact that over half of the stock of skilled temporary migrants identified in WW s database comes from the Rest of the EU region (EU less than UK and Germany). With their unavoidably crude pro-rata way of allocating these over destinations, many of them are allocated to developing countries (mostly in the Middle East), where they benefit from the strong increase in skilled wages. Table 8 considers the effects of relaxing the skilled and unskilled quotas separately. Notably, both the developed and developing countries would benefit more from the liberalisation of restrictions on unskilled labour than on skilled labour. For developing (labour exporting) countries, the reason is that, while skilled temporary migrants can greatly increase their earnings by moving, the negative effect of their loss on their home 9 By assumption, the relaxation of quotas reflects the skills mix of developing countries and so is substantially more skill-intensive than the typical developing country s labour force endowment. 24