Migration and development – Economics focus

IN AN ideal world, the migration of workers from poor countries to rich countries would be a principal channel of material progress—something that governments everywhere would seek to exploit and encourage. The economic logic is clear, provided one regards the welfare of each individual, regardless of nationality, as being of equal importance. The crux of the matter is that, if people are free to move or stay put, they will move only if doing so is to their advantage. Unfortunately, migration arouses great political controversy, especially (but not exclusively) in the rich countries that are the biggest net recipients of migrants. Migration undoubtedly presents a marvellous opportunity for advancing human welfare, but this clash of economics and politics makes weighing its costs and benefits very difficult: effects that look like benefits from a liberal economic point of view become costs when viewed with politics in mind.

Migration is one of the development challenges under review as part of the Copenhagen Consensus project*. A new paper on the subject, commissioned from Philip Martin of the University of California, Davis, has been published this week. As Mr Martin explains, the welfare economics of migration is straightforward. “If people were goods, the solution to different wage and employment levels would be obvious: encourage the transfer of ‘surplus’ people from poorer to richer nation states, which should benefit individuals whose incomes rise, increase global GDP, and promote convergence in wages and opportunities between sending and receiving areas that eventually reduces migration pressures.”

The main uncertainty, so far as the economics goes, is whether the transfer of workers from poor to rich countries might deprive the poor countries of their most skilled people, depleting their human capital so severely that the upward pressure on wages caused by emigration (a shrinking of the sending country’s labour supply) is more than offset. In that case, a kind of externality might come into play, causing incomes in the sending countries to fall even further behind incomes in the receiving countries—and, in a vicious cycle, the incentive to migrate would then be even larger.

In political terms, the problem with migration is that, although it raises incomes in the aggregate, it does tend to reduce, other things being equal, the wages of some of the receiving countries’ workers. One can take for granted that migration raises the incomes of the migrants—otherwise they would not choose to migrate. Migration also raises the return to capital, hence profits, in the receiving country. But the increase in the receiving country’s labour pool, by the ordinary laws of supply and demand, does tend to reduce the wages of incumbent workers in affected industries. The net result is an increase in the receiving country’s aggregate income (now measured to include immigrants’ wages) and an expansion in its tax base; but some incumbent workers will be left worse off.

Out of the overall gain, it would be possible in principle to compensate the victims and still leave everybody better off. Victims will suspect that, in practice, they will not be compensated. That being so, they can hardly be expected to vote for more liberal policies on migration.

The challenge, then, is to exploit the development opportunities that migration offers, but in such a way as to satisfy incumbent workers that their interests are not being jeopardised, while taking care to avoid making the sending countries worse off. The opportunity is certainly valuable enough for this task to be worth undertaking. An admittedly extreme scenario cited by Mr Martin, worked out using some very heroic assumptions, is nonetheless worth pondering. It has been estimated that entirely unrestricted migration, sufficient to equalise wages and the marginal productivity of labour across the 179 countries considered, could more than double global GDP: the change would have added between $5 trillion and $16 trillion to global income of $8 trillion (in 1977).

Summing up a more recent exercise, also cited by Mr Martin, Harvard’s Dani Rodrik has argued that even a modest freeing up of migration would create gains for the world economy greater than those that would follow the likely gains from liberalising trade. Moving 100m migrants from poor to rich countries, other things being equal, would raise global GDP by 8%. At present, to put that figure in context, some 175m people, or roughly 3% of the world’s population, were migrants who have lived outside their countries of birth or citizenship for a year or more. This number roughly doubled between 1975 and 2000.

To tap some of the possible gains, Mr Martin suggests three basic approaches. The aim of the first two is at least partly to reduce opposition to migration in the rich countries. The aim of the third is to guard against making sending countries worse off.

First, select immigrants more carefully with a view to their economic value in the receiving country. If immigrants immediately go to jobs in parts of the economy where their skills are in short supply, they will be regarded as a good thing. They will not be seen that way if, instead, they compete for work in industries where jobs are declining and wages falling in any case or, worse, if they have no jobs at all. Second, revive or strengthen guest-worker programmes, which allow less-skilled workers to be temporary migrants. Again, incumbents are likely to be less troubled by temporary immigration. Do this by giving employers and workers alike stronger incentives to make guest-worker status mean something. For instance, temporary migrants could be refunded some of their taxes (social-security contributions, say) when they leave.

The third idea underlined by Mr Martin is to compensate sending countries for their loss of manpower by encouraging the flow of migrants’ remittances back home, and/or by transfers from rich-country governments to poor-country governments (perhaps based on some share of the migrants’ tax payments). Remittances are already an important factor in economic development. They overtook government-to-government aid for the first time in 1997 and continue to grow fast. India receives more than $10 billion a year in remittances, Mexico about the same. In the smallest poor countries, remittances can amount to between 20% and 40% of GDP. Policies to promote remittances in the migrant-sending countries would include sensible exchange rates that avoid levying an implicit tax on the recipient, and friendly banking rules; in the migrant-receiving countries, they could include favourable tax treatment. A return flow of money, and a return flow of workers with newly acquired skills and wealth as well, would go some way to assuage fears about draining the developing countries of their most productive people.

Yet the fact remains that popular perceptions of the costs of immigration are difficult if not impossible to dislodge—the more so when economic frictions between natives and migrants are exacerbated (as at present in some countries) by non-economic factors, such as fears of terrorism and clashes of culture. Quite how far such wider “costs” should figure in a cost-benefit analysis of the tempting development opportunity offered by migration remains an open question.


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