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Best Practices to Foster Economic Growth -- Philip Martin, Thomas Straubhaar

Best Practices to Foster Economic Growth

Cooperative Efforts to Manage Emigration (CEME)

Philip Martin and Thomas Straubhaar

May 7, 2001

Summary....................................................................................................................................................... 1

1. Maximizing Migration Payoffs: the 3 R's......................................................................... 2

Recruitment............................................................................................................................................... 2

Remittances............................................................................................................................................... 3

Returns.......................................................................................................................................................... 3

2. Making Emigration Unnecessary: Trade, Investment and Aid............................ 4

Four Options—Trade, Investment, Aid, Intervention.................................................... 4

Trade............................................................................................................................................................... 5

Investment.................................................................................................................................................. 6

Aid..................................................................................................................................................................... 6

Intervention............................................................................................................................................... 7

Turkey............................................................................................................................................................ 8

Labor Market............................................................................................................................................ 9

Migration and the EU........................................................................................................................... 9

Migration and Development......................................................................................................... 10

Human Rights........................................................................................................................................... 11

Immigration and Transit Migrants......................................................................................... 11

Romania...................................................................................................................................................... 11

People and Politics............................................................................................................................... 12

Economy and Labor Market.......................................................................................................... 12

Migration................................................................................................................................................... 14

EU Accession............................................................................................................................................. 14

Bibliography.......................................................................................................................................... 15

Summary
This memo outlines potential best practices to foster economic development, reduce population growth and preserve the environment in a manner that reduces emigration flows and emigration pressures. The focus is on two countries: Turkey and Romania in which CEME plans site visits, and the potential best practices include:

· Providing wage-earning opportunities to internal female migrants. In Kadikoy, an Istanbul municipality with 700,000 residents, the Center for Female Labor helps internal migrants from the southeast turn their cooking skills into viable restaurant businesses.[1] By giving women their first wage-earning opportunities, families are more reluctant to migrate, children can stay in school longer, and the family is more likely to be anchored to Turkey, even when husbands have trouble finding anything other than casual day labor jobs in Istanbul.

· Sound economic policies and growth potential maximize remittances. Turkey has experimented with various schemes to maximize remittances, which reached $5.4 billion in 1998.[2] Most of the Turkish government's efforts to maximize and channel remittances failed, including subsidies to Turkish Workers Companies that were founded with remittances. The Turkish experience bolsters the conclusion that the best way to maximize remittances and their stay-at-home development potential is to have a credible exchange rate, low inflation, and good prospects for stable economic growth.

· Attracting FDI to create jobs can reduce emigration and discrimination. Western Romania is the richest area of Romania, and is adjacent to eastern Hungary, the poorest part of Hungary. Making the transition to a market economy, and fulfilling the criteria for EU accession, has been very difficult for Romania, which is near the back of the queue for EU entry. The hope for western Romania is that low wages can attract FDI that creates manufacturing jobs, as at the Continental Tire plant in Timisoara and in clothing and footwear created by Italian investment. FDI-created jobs can spur economic and job growth, reducing emigration pressures and lessening discrimination.

There are two broad approaches to foster wanted migration and reduce unwanted migration in the 21st century. Wanted migration can be fostered through immigration policies that are transparent and widely advertised, and programs that facilitate selective migration for everything from study abroad to selective migration to fill jobs in particular sectors, from IT to nursing. More broadly, migration can be encouraged by facilitating trade in services; encouraging contracting between firms in different countries in which the poorer country supplies goods, services, and workers; and by the harmonization of licenses and standards to facilitate the movement of professionals.

Unwanted migration can be reduced by accelerating economic and job growth so that people are not encouraged to migrate across borders for economic reasons. There are two major approaches:

1. Maximizing Migration Payoffs: policies and programs that maximize the development payoff of migration by ensuring that the 3 R's of recruitment, remittances, and returns create the maximum number of jobs, and

2. Making Emigration Unnecessary. trade, investment and aid policies and programs that make emigration from a region unnecessary.

In this memo, we outline both approaches in order to contrast them with intervention, or using non-economic means to prevent unwanted emigration.

1. Maximizing Migration Payoffs: the 3 R's


Exporting labor is a major source of foreign exchange from Albania to Zimbabwe. Countries that export labor have three major channels through which they can influence recruitment or who emigrates, the amount and use of remittances, and the activities of returned migrants.

There has been a revolution in how researchers think about migration decision making. Most people live in family units, and family considerations can play important roles in migration decisions, an insight that is at the core of the so-called new economics of labor migration (NELM). The "new economics of migration" recognizes a variety of reasons for migration:

· migration may represent an effort to "keep up with the neighbors"--if migrant families have better homes and TVs, then non-migrant families may be motivated to send a migrant abroad to earn money to overcome their relative deprivation (Stark and Taylor, 1989, 1991).

· missing services and markets. Many Mexican migrants to the US are from farm families that depend on the rain to produce a crop. There is typically no crop insurance available to provide an income if the rains do not come and crops fail, so the US labor market can serve as a means of reducing the risk of having no income when there is no rain in Mexico (Taylor, 1986).

· migration can overcome a local credit obstacle to development, as when banks are reluctant to lend money to farmers who own land communally rather than individually. In some cases, farmers who want to buy new machines migrate to obtain the capital they need to purchase these items.

Recruitment
Labor markets in host or receiving countries largely determine who migrates, whether professionals or unskilled workers, but if labor migration is largely legal and done so that the sending country government plays a role in migrant selection, the sending country can influence who emigrates. Private recruitment often selects the best workers from an area, that is, younger, often employed, and ambitious workers, often from areas with the best access to transportation abroad. Turkey tried to work against the incentives of German employers to recruit in the western part of the country—the Turkish government favored the emigration of workers from the center and eastern parts of the country, and attempted to prevent Black Sea miners from emigrating.

Once a migration flow is established, a network can be created that links cities or villages in the sending nation to labor markets in the receiving nation. These networks can become valuable assets for families and areas because they control access to jobs abroad that pay 5 to 10 times prevailing local wages. As networks mature, the cost of migration falls, and potential migrant workers often offer to pay for the privilege of working abroad at these higher wages, which can lead to fees and bribes.

If official recruitment is centralized in major cities, recruitment offices may attract internal migrants. There is typically a surplus of migrant job seekers, and the presence of a foreign labor recruitment office may generate a local day-labor market offering jobs to workers who are waiting to become migrants. If recruitment is "unofficial," i.e., the migration is private and often illegal, then the job network becomes a semi-public asset of the village whose "pioneers" are or have been working abroad. Such networks are semi-public in the sense that migration information spreads throughout the village, so that villages in very similar economic circumstances can send very different proportions of their able-bodied male workers abroad because of their differential access to such a network.

There is no consensus on the optimal migrant recruitment mechanism because there is little agreement on the proper roles of the various parties: governments, employers, and migrants. At one extreme are those who argue that international labor migration should be regulated by government-to-government agreements, and that labor-receiving nations sensitive to the needs of sending nations should permit the sending nations to regulate recruitment as it sees fit.

At the other extreme are foreign employers who prefer to hire the "best migrant workers," even if this means "creaming" the sending nation's work force and leaving behind "shortages" of key personnel that lead to production bottlenecks. Much of the in-between discussion focuses on whether and how to regulate public and private migrant recruitment agencies, what fees or taxes should be levied on migrants and for what purpose the monies raised are used, and what selection mechanism should be used to pick migrants (e.g., should the government use a point system that favors an unemployed person from a poor area or take points away from potential migrants with "critically needed" skills). In practice, few sending nations have enough labor market information to operate a sophisticated migrant queuing system.

Remittances


Remittances are the raison d tre of temporary labor migration. At the macro level, remittances are a source of hard currency for emigration countries than can be used to purchase needed foreign components and supplies, spent locally to generate jobs, or taxed by the sending country government. At the micro level, remittances improve the economic welfare of individual migrants and their families, providing extra money for daily living, the purchase of consumer durables, and investments in better housing, farm land or machinery, and/or a small business. Remittance levels are often maintained over time because the settlement abroad that encourages migrants to remit less may be offset by higher earnings that enable migrants to remit more.

During the 1960s, it was often assumed that remittances and the return of workers with skills acquired abroad would turn emigration areas into boom areas that no longer exported workers. Remittances and returns rarely led to an economic take off, and the remittance-development literature of the 1970s that hoped for such an outcome has a negative tone. There is, for example, discussion of migrants spending remittances nonproductively, on imported consumer durables and cars rather than local goods, so that the job-creation multiplier effect of spending remittances was minimal. Remittances were sometimes used to speculate on and thus inflate land and housing as well as bride prices, bride prices, which critics said simply shuffled funds from one person to another without creating jobs. Indeed, there was much discussion of remittances unsettling previously non-migrant areas, as when non-migrants became worse off because they could not afford to buy land or pay bride prices.

The major lesson from the literature is that remittances are not an external pump that primes an area for an economic take-off. Indeed, remittances flowing to emigration areas often wind up producing what John Kenneth Galbraith called "private affluence and public squalor," or new homes reachable only over dirt roads. What is clearly needed is some way of harnessing some fraction of the remittances in order to develop the infrastructure that can help a region develop economically.

Returns
Returns are the third major parameter of labor migration. Many sending and receiving governments expect "100 percent" returns—the aim of guest worker programs is to add workers temporarily to the labor force, not settlers to the population. Many migrants return as expected, and the question is how to maximize the development impacts of returned migrants.

Migrants going abroad for the first time are typically in the 18-35 age range, often with skills and often employed. In the case of Turks recruited to work in Germany, a typical migrant in 1970 was a 25 years old skilled worker (carpenter etc) or a farmer with less than six years education, but who was often more ambitious than farmers who did not migrate. Many of these Turkish migrants stayed abroad only 1 to 3 years, but many stayed for 10 to 20 years, and returned with savings of $10,000 to $30,000.

One expectation was that returned migrants with experience in German factories would become highly productive workers in Turkish factories. This rarely happened, as returned Turkish workers reported that they were "tired" after working 10 or more years in Germany, or returned migrants opened retail shops or operated trucks or taxis with vehicles purchased from earnings abroad. In rural villages in the 1960s and early 1970s, emigration was a surer path to upward mobility than education, which was often not readily available. If they returned to their villages of origin, almost all returned migrants built modern (concrete) houses; instead of returning to villages, some returned to nearby cities, accelerating urbanization.

The overall impression left by studies and interviews with returned migrants is that a person should work in Germany and live or take leisure in Turkey, that is, many migrants were not interested in jobs in Turkey that were similar to what they had in Germany.

2. Making Emigration Unnecessary: Trade, Investment and Aid
Immigration countries have three major economic instruments available to cooperatively work with transit and labor sending nations to reduce unwanted migration: trade, investment, and aid:

· Trade policies affect the competitiveness of an emigration and immigration country products, and employment in the export and import sectors of both sending and receiving countries.

· Foreign direct investment (FDI) can provide the funds, technology, and management expertise that can increase the number of jobs in emigration countries.

· Aid can enable transit emigration countries to undertake economic and investment policies that would otherwise be unattainable.

There is also a fourth policy--political and military intervention --that helps to put the economic instruments in perspective.

The policies with the best track record to accelerate so-called stay-at-home economic and job growth involve freeing up trade and facilitating FDI; aid has a very mixed track record. However, the actual effects of trade and investment on emigration depend on several factors, including the size of wage and job opportunity differences between the economies being integrated by freer trade and investment, the dimensions of the pre-existing migration relationship, and the extent to which economic integration restructures the economy and displaces workers. Thus, the size and duration of the migration hump will be larger:

· if the economies being integrated have income gaps of five or more, that is, average per capita income in one country is four or five times higher than in the other,

· if there are established migration networks between them, and

· if supply-push emigration pressures increase as a result of economic restructuring.

In the worst case scenario, migration can increase temporarily with closer economic integration, producing a migration hump, that is, the same policies that reduce migration pressures in the longer-term can increase migration in the short term. There was probably a migration hump between Mexico and the US in the 1990s, a result of all three factors facilitating migration being present:

· Mexico-US wage gaps were 1 to 8, and widened in the mid-1990s

· Migration networks were strengthened in the 1980s and 1990s by legalization and the evolution of migrant smuggling infrastructure

· Economic restructuring increased displacement from agriculture and layoffs

There is no generally agreed upon measure of the "emigration pressure" or number of migrants from a particular country. Efforts to measure emigration pressure generally suggest it is higher in e.g. Dominican Republic then Costa Rica, and higher in Turkey and Romania then Hungary.

Reducing emigration pressure depends on policies adopted in emigration, transit and immigration countries, with the most important actor being the emigration country—it s policies largely determine how fast the country grows, and thus how quickly economic and job growth reduce emigration pressures. Policies of immigration countries can, at the margin, accelerate or retard the adoption and effectiveness of "correct" economic policies, but the solutions to emigration pressure lie mostly within emigration countries.[3] In thinking about how to reduce emigration pressures, it is important to remember:

· Establishing credibility--developing countries that change their economic polices often have a credibility gap, so that simply announcing new policies may not convince local and foreign investors that the new trade and investment policies will continue to be followed.

· Establishing certainty--investors crave certainty, which is why they want new trade and investment regimes such as NAFTA locked into place with international agreements so they cannot easily be undone.

· Patience—development is a slow process, and economic policies that indirectly reduce emigration pressures need time to work.

Four Options—Trade, Investment, Aid, Intervention
Governments trying to reduce emigration pressures have four types of control instruments at their disposal: trade, investment, aid, and intervention. Trade and investment tend to be undertaken by private actors rather than governments, and their migration-reducing effects are sometimes not noticeable for decades. Aid and intervention, on the other hand, are typically under the direct control of governments, and can have significant short-term effects.

Trade


Trade is the production of a good in one country for sale or use in another. Trade is the closest thing to a free lunch in economics--if goods are produced where it is cheapest to make them, and then traded for other goods that can be produced cheaper in other locations, most people in both areas are better off. Trade affects the location and cost of producing goods-- trade policies affect the competitiveness of an emigration country's products, and employment in the export and import sectors of both sending and receiving countries.

The world's exports ($5.2 trillion) and imports ($5.4 trillion) of goods in 1998 totaled $11.5 trillion, equivalent to over one-third of the world's GDP.[4] In addition, exports ($1.3 trillion) and imports ($1.3 trillion) of commercial services totaled $2.6 trillion. The US runs a deficit in goods trade, exports were $943 billion in 1998, imports were $642 billion, leaving a goods deficit of $261 billion, and a surplus in services trade, exports were $240 billion in 1998, imports were $166 billion, leaving a surplus of $74 billion. Turkey has a similar trade picture: the goods trade deficit is $19 billion, reflecting $46 billion in imports and $27 billion in exports. Turkey exported services worth $23 in 1998, and imported services worth $9 billion, for a $14 billion services surplus.

Economically-motivated migration should decrease in a free trade world because of factor price equalization, the tendency of wages to equalize as workers move from poorer to richer countries. In the terms of economic theory, this means that trade and migration are substitutes--countries that have relatively cheaper labor can export labor-intensive goods or workers. Over time, differences in the prices of goods and the wages of workers should be reduced with freer trade, reducing emigration pressures.

The truth of this common sense proposition has been borne out over the past 150 years on both sides of the Atlantic. For over a century, Europeans migrated to North America, until restrictive legislation in the 1920s almost stopped the flow. When European growth rates in the 1950s and 1960s rose above US growth rates, the gaps in wages and incomes across the Atlantic narrowed, and migration across the Atlantic slowed even when the United States reopened opportunities for migration. A similar story of narrowing wage and income gaps helps to explain why labor migration between southern European nations such as Italy and Spain and northern Europe has virtually stopped despite the right of Italians and Spaniards to live and work anywhere in the European Union.

Trade theory emphasizes what economists term comparative statics, before and after snapshots of the economy. Economists typically compare comparative static equilibria, and devote less attention to the processes of adjustment, to studying what happens during the years or decades between economic integration and the slowing or stopping of economically-motivated migration stops. It is during this adjustment period that there can be a migration hump, or a temporary increase in emigration. The migration hump reflects the fact that economic restructuring often displaces workers and promotes rural-urban migration, so that a country on the move economically may also be awash with internal migrants, some of whom spill over its borders if there is already an established international migration pattern exists.

Thus, comparative static or snapshot analysis promises less migration after closer economic integration, despite the possibility of a migration hump during the period of adjustment. Most analysts conclude that the promise of less migration in the longer term offsets any short-term increase in migration; they thus endorse freer trade policies. The final report of the Commission for the Study of International Migration and Cooperative Economic Development reached the same conclusion, arguing that "expanded trade between the sending countries and the United States is the single most important remedy" for unauthorized Mexico-to-US. migration" despite the likelihood that "the economic development process itself tends in the short to medium term to stimulate migration." (1990, p. xv-xvi, emphasis added).

The migration hump can be relatively smaller and shorter-lived if immigration and emigration countries cooperate to accelerate the pace of job creation in emigration countries. However, this is rarely the case. Many immigration countries maintain trade barriers to the products in which emigration countries have a comparative advantage, including labor-intensive fruits and vegetables and garments and footwear, leading to aphorisms such as "the EU makes it far easier for Polish workers than for Polish pork to enter." Many countries impose tariff and non-tariff barriers on commodities that could employ many potential migrants at home, from sugar and tobacco to fruits and vegetables, and from clothing to footwear, in order to protect domestic industries that in many cases cannot find local workers to fill often seasonal and low-wage jobs. Freeing up trade in such labor-intensive commodities would simultaneously increase the demand for labor in migrants' areas of origin, and reduce the demand for labor in immigration destinations.

Investment
An economy can grow faster if there is investment in machinery, education, and infrastructure that makes workers more productive; an investment is thus a commitment of monies today that are expected to generate a return in the future. The monies for investment can come from domestic savings, or from savers in other countries whose savings are invested abroad, i.e., foreign investment. There are many types of investments, but the investment most likely to spur economic and productivity growth is "direct investment--the commitment of local private savings to build factories and other enterprises in emigration countries. The "East Asian miracle" was built on largely on the investment of domestic savings; foreign direct investment played a critical but only supporting role in the Asian "miracle" of rapid economic growth.

There are two major types of private investment in emigration countries: foreign direct investment (FDI) and portfolio investment. FDI is a private investment that usually results in the building of a factory or work place in a country outside that that generated the savings; imported savings in the form of FDI are often accompanies by the importation of both managers and equipment. Foreign portfolio investment, by contrast, is typically the use of savings in one country to purchase stock in a company based in another country. Firms can use the proceeds of stock sales to modernize and expand, thus creating jobs.

Private capital flows to developing countries around the world became much more important in the 1990s, leading the World Bank to conclude that they are "single-largest and most stable source of long-term development finance for developing countries." The World Bank estimates that net private capital flows to low- and middle-income countries rose from $43 billion in 1990 to $268 billion in 1998, with almost half these private capital flows in 1998 going to Latin America. Most net private capital flows were FDI—FDI was $171 billion world wide in 1998, including $69 billion in Latin America.

FDI is driven by expected profits, not reducing emigration pressure, and much of the world's FDI goes to countries that are net immigration rather than emigration areas, such as Singapore and Malaysia. Indeed, if FDI as a percent of GDP is measured vertically on the Y-axis, and per capita GDP is measured horizontally on the X-axis, countries form a C-shaped distribution, with Singapore ($19,900 per capita GDP in 1993) and Malaysia ($3,100) attracting FDI equivalent to 6 to 10 percent of GDP,[5] while Sweden ($24,700 per capita GDP in 1993) exports FDI equivalent to 6 percent of its GDP (Lucas, 1995, 21).[6] Countries such as Mozambique ($90 per person per year in 1993), Pakistan ($400), or the Philippines ($850) attracted relatively little FDI as a percent of their GDPs in the early 1990s.

There is often a clustering or economies of scale effect of FDI. Contrary to the usual analysis in which an increase in the supply of something (capital) lowers its price, there may be increasing returns to additional FDI, at least over a certain range. For example, the availability of a pool of electronics engineers and assembly workers in a country such as Malaysia can make the return on an electronics investment there higher than in Bangladesh, which has much lower wages, but also fewer positive spill over effects from past investments in electronics manufacture and fewer skilled workers. This is the reason why many analysts conclude that FDI tends to flow to countries that have or are turning the corner toward being net immigration areas rather than emigration areas, e.g. the Czech Republic and Hungary in 2001.

Multinationals play a special role in both FDI and trade. Two-thirds of the world's trade is between affiliates of the world's 40,000 multinational businesses, and half of the trade engaged in by multinationals is between affiliates of the same company.

Aid
Official Development Assistance (ODA) are monies granted by one country to assist the development of another. In 1998, the OECD nations that are members of the Development Assistance Committee provided $52 billion in ODA, down from $59 billion in 1995, and $53 billion in 1990.[7] Almost 70 percent of ODA was provided by four countries in 1998: Japan ($11 billion), the US ($9 billion in 1993), Germany ($6 billion), France ($6 billion), and UK ($4 billion).[8] The OPEC nations have sharply reduced their ODA--they provided $6.9 billion in 1990, with Saudi Arabia providing over 2/3 of OPEC aid, but less than $1.5 billion in 1993.

Many industrial democracies have pledged to provide ODA equivalent to 0.7 percent of GDP, but in 2000, ODA was 0.24 percent of industrial countries' GDP.

The ILO and UNHCR in 1992 undertook a major project to investigate the capacity of ODA to minimize unwanted emigration (Böhning and Schloeter-Paredes, 1993). The premise of the research was that donor nations already condition ODA on recipient country behavior, encouraging recipient nations to adopt the "right" policies in areas that range from environmental protection to respect for human rights. The ILO-UNHCR thus asked this question: if donor nations wanted to use ODA to reduce unwanted emigration pressures, both refugees, and economically motivated migrants, how should they change the volume, form, and aims of their aid?

The conclusions of experts consulted by the ILO and UNHCR depended on whether they were studying refugees or economic migrants. Those who focused on the conflicts that produced refugees in the 1970s emphasized that aid often intensified and sustained the conflict under review and thus led to more rather than fewer refugees, that is, aid was as likely to increase as to reduce ref