Cross-border labor mobility

Author:Caf Dowlah
Position:Department of Social Sciences, Queensborough College, The City University of New York, New York, USA

Purpose – The purpose of the paper is to examine convergence of economic interests – both empirically and theoretically – among labor-abundant (labor-sending) and labor scarce (labor receiving) countries, in the context of Mode 4 of the General Agreement on Trade in Services (GATS) of the WTO. The paper also explores regional trade associations as an interim alternative forum for promoting temporary cross-border labor mobility in the backdrop of failure of multilateral trade negotiations under the Doha Round. Design/methodology/approach – The research methodology of the ... (see full summary)

I Introduction

Liberalization of merchandize trade has brought forth extraordinary gains to global economy over the course of last few decades1. Recent research findings, however, suggest that liberalization of services trade promises even greater benefits to the world economy2. Although services trade has been growing more rapidly than merchandize trade since the 1980s, currently only about 20 percent of services are traded globally despite this sector accounts more than half of global GDP and exceeds 75 percent of GDP in high-income countries ( UNCTAD, 2012 )3. Cross-border temporary movement of natural persons as service suppliers – as envisaged by Mode 4 of the General Agreement on Trade in Services (GATS) of the World Trade Organization (WTO) – also promises significant gains for the world economy. Currently, however, cross-border labor mobility remains mired in a complex quagmire of domestic as well as international trade restrictions and other non-trade barriers in both developed and developing countries. Based on an assessment of the patterns of remittances flows across the world and the economic rationale for liberalization of temporary movement of natural persons as service suppliers across borders, this paper argues that given rising anti-immigrant sentiments in the developed countries and the Doha Round's abysmal failure in liberalizing this sector, regional trading agreements (RTAs) may provide a credible interim vehicle for furthering liberalization of this sector.

The paper is structured as follows: Section II presents economic rationale for cross-border labor mobility by looking into recent trends of remittances flows, economic research findings, and political-cultural impediments to labor migration. Section III explores GATS Mode 4 as a credible compromise, as opposed to permanent or other forms of migration, to promote cross-border labor mobility. Section IV looks into the dynamics that led to the failure of multilateral trade negotiations under the Doha Round. Section V examines some of the leading RTAs as an interim vehicle for promoting global labor mobility. Section V1 concludes the paper.

II Economic rationale for cross-border labor mobility

The number of the world's migrants has increased nearly threefold between 1960 and 2009 – from 75 million to about 200 million – still only about 3.2 percent of the world's population currently lives in countries where they were not born, compared with almost 10 percent during 1874-1914 ( The World Bank, 2012, p. 23 )4. An overwhelming 85 percent of contemporary global migrant stock is economic migrants – migration is high and increasing in some regions, such as Northern America, Western Europe, Australia and New Zealand, it has been decreasing in some regions, such as South America, Central America, and Eastern Europe ( Czaika and Haas, 2013 ). The share of more developed nations in international migrants was 60 percent in 2005, while that of the less developed and the least developed countries (LDCs) were 33 and 7 percent, respectively, ( Lowell, 2007, pp. 7-8 ). Migrant workers and migration, however, can no more be viewed as a unique South-to-North phenomenon – in recent decades the South-South migration has also been rising remarkably ( The World Bank, 2012 ).

Recent trends in remittance flows

During 2002-2011, remittance flows increased almost threefold – from $170 billion to $468 billion in a decade, and more than 75 percent of the remittances accrued to developing countries (Table I). Strikingly, the top remittance recipient countries were more advanced and populous developing countries, such as India, China, Mexico, and the Philippines, although lesser developed and smaller developing countries, such as Tajikistan, Tonga, Moldova, Samoa, and Lebanon were among the top recipients of remittances in terms of share in their GDPs (Table II)5. Due to such a phenomenal growth, remittances have now emerged as a prime source of external finance for many developing countries, outpacing flows of foreign direct investment (FDI) as well as official development assistance (ODA) to those countries. In 2006, for example, remittances outpaced FDI and ODI flows, and merchandize trade in 36 and 12 developing countries, respectively. The same year, remittances exceeded 10 percent of GDP in 22 developing countries ( The World Bank, 2008 ).

Findings of economic research

Recent economic research makes a robust case in favor of cross-border labor mobility from less developed to developed countries on the basis of widening income and wage gaps between these countries, abundant supply of medium and less-skilled workers in developing countries, aging population and declining fertility rate in developed countries, and potential economic gains from more efficient allocation of labor resources across national borders.

In 2006, about 85 percent of world population lived in low or middle income developing countries with an average per capita income of $2,000, while only 15 percent lived in high income developed countries with average per capita income of $36,500 ( Martin, 2009 ). The wage gap between these countries had been astronomical as well – garments workers in Bangladesh make less than $40 a month, while unskilled workers in developed countries working at minimum wage make more than that in a day6.

Migration from South (developing, labor abundant countries) to North (developed, labor scarce countries) has also been driven by “pull factors”, such as a demographic shift in the North, by aging population and low birth rates. According to UN (2002), to maintain their 1995 labor forces, the Big 4 EU countries – France, Germany, Italy and the UK – needed to increase their immigration to 1.1 million a year, triple of their existing levels of immigration. With greater labor migration from South to North, not only efficiency in allocation of labor across countries will improve, it will also reduce chronic unemployment and poverty in developing countries and redress labor shortage and reduce cost of production in developed countries.

Labor-sending developing countries obviously have clear interest in boosting labor exports as migrants' savings and remittances provide an extraordinary source of almost completely risk-free external finance for their economic growth and development. Moreover, increasing population and poverty, lack of employment opportunities in domestic economy, and possible political instability provide “a heady cocktail of push factors” for labor-surplus developing countries to push labor exports ( Harris, 2005, pp. 4591-4595 ). Some of the developing countries, especially those in Asia and Africa, have also been facing increasing threats of environmental and ecological disasters – semiarid areas of North Africa's agriculture becoming vulnerable to provide livelihoods to the peoples (UN, 1991) and rising sea levels due to global warming creating “ecological refugees” in some others ( Falkenmark et al., 1989 ).

Available research thus suggests convergence of economic interests of labor-sending and receiving countries for promoting cross-border labor mobility7. Heckscher-Ohlin model as well as Stolper-Samuelson models of international trade, for example, suggests that trade and factor mobility such as capital flows via outsourcing or labor flows via migration can serve as substitutes for one another ( Medina and Sobel, 2009 ). Historically, migration played more important role in linking markets and spurring wage and commodity price convergence across national boundaries than the flow of goods, services or capital in 1800s through early 1900s8.

More recently several economic studies point out that potential gains from such labor mobility would be around 10 percent of world GDP ($3,390 billion in 1998 dollars) – ten times as large as the gains that can be derived from complete liberalization of merchandise trade, even when developing country workers are assumed to be less productive than those in developed countries ( Moses and Latnes, 2004 ; Cline, 2004, p. 180 ). Winters et al. (2003) show that even partial liberalization of cross-border labor mobility, involving a transfer of labor from developing countries to the OECD countries equivalent to 3 percent of OECD's existing labor force, will result in an annual gain of 0.6 percent of world income ($156 billion in 1997 prices), comparable to total benefits that will result from removal of all remaining restrictions on merchandise trade. Building on this study, The World Bank (2006) shows that this extra 3 percent gain in high-income countries' workforce represent a loss of merely 0.4 percent in the developing countries' workforce.

Impediments to cross-border labor mobility

Despite such a strong economic rationale for cross-border labor mobility, labor migration actually remains highly controversial in both parts of the world due to a plethora of reasons. Several studies point out that emigration of skilled labor causes “brain drain”9 for developing countries as they supply “instant adults”, reared at their expenses, to developed countries, and as the propensity to emigrate increases with “skills”, the phenomenon of “brain-drain” may adversely affect well-being of labor-sending countries10. Studies also suggest that skilled workers are generally among the richest taxpayers, with their migration, labor-sending economy loses a substantial source of income which could be taxed and redistributed ( Bhagwati, 1971 ), and labor sending economies, who bear the cost of formation of...

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