Exodus: Costs and Benefits of Mass Migration

exodusExodus discusses the costs and benefits of mass migration.  Paul Collier (author of “The Bottom Billion”) looks at migration from the viewpoint of the migrants, the population of the receiving country and the population of the country of origin.  Most people about migration argue either that it is good or bad. They address the wrong question, says Mr Collier. The right one is: how much more migration would be beneficial, and to whom?

Collier identifies 3 factors that determine the migration rate: the width of the income gap (which he sees as a temporay distortion during which prosperity is not yet globalised), the income level in the country of origin and the size of the diaspora (and the absorption rate).  The second factor implies that migration might increase when a country of origin becomes richer, as more people are able to afford the trip.  The absorption rate is the speed with which migrations adopt the norms of the host society.  The rate tends to decrease with the size of the migrant community in a country, as new arrivals have fewer incentives to adopt norms of the host country when there is already a large diaspora network.  Therefore, initiatives (language programmes, geographical spreading, apprenticeship programmes) that help to increase the absorption rate are useful, as they can sustain a higher migration rate.  Such policies explain why the US has a higher absorption rate than France.
Migration makes migrants better off. If it did not, they would go home. Those who move from poor countries to rich ones quickly start earning rich-country wages, which may be ten times more than they could have earned back home. “Their productivity rockets upwards,” says Mr Collier, because they are “escaping from countries with dysfunctional social models”.  This is crucial. Most rich countries are rich because they are well organised, and poor countries are poor because they are not. Nationalism has positive aspects as it enables people to cooperate beyond the family or clan level and to redistribute resources.  Cooperation requires trust and easily breaks down (e.g. free riders) .  As other did (Acemoglu and Robinson), he points to the importance of inclusive (rather than extractive) institutions and trust in the development of a country.  High-trust societies have the institutions and norms that enable development.  France is richer than Nigeria because its social model is superior.  A factory worker in Nigeria produces less than he would in France because the society around him is dysfunctional: the power keeps failing, spare parts do not arrive on time and managers “are busy battling bribe-hungry bureaucrats”. When a rich country lets in immigrants, it is extending to them the benefits of good governance and the rule of law.
What of the countries that receive immigrants? Mr Collier argues that they have benefited from past immigration, but will probably suffer if it continues unchecked.  Continued mass immigration threatens the cultural cohesion of rich countries.  There is a trade-off between positive effects of cultural variety (no real demographic positive effects) and negative effects on social cohesion, but these effects play with different groups in society.  The young, affluent middle classes are the big beneficiaries of variety. In contrast, those people on benefits like social housing or welfare, whether because they are unemployed or pensioners, experience most competition from immigrants and are the most vulnerable to the weakening of cohesion.  Collier refers to the work of Robert Putnam in the US who showed how immigration lead to a decrease of trust, not only between indigenous population and immigrants, but also among the indigenous population (“hunkering down”).  This has effects on people’s willingness to support welfare policies.  A shared sense of identity is a condition for social redistribution.  People need to see people who need state welfare as themselves minus the good luck.
Finally, Mr Collier looks at the effect of emigration on poor countries. Up to a point, it makes them better off, dispelling notions of “brain drains”. Emigrants send good ideas and hard currency home. The prospect of emigration prompts locals to study hard and learn useful skills; many then stay behind and enrich the domestic talent pool instead. But if too many educated people leave, poor countries are worse off. Big emerging markets such as China, India and Brazil benefit from emigration, but the smallest and poorest nations do not: Haiti, for example, has lost 85% of its educated people.

 Collier is quite pessimistic, but it is hard not to see the recent surge in populism and anti-immigration policies as a vindication of his warnings.  As Milanovic did, he suggests looking into ways to give immigrants a special statute (e.g. higher taxes, temporary residency, limited access to social welfare).  These policies might seem discriminatory or harsh, Collier writes, they might be better than the current situation, both for the countries of origin and for the countries of destination.

Global Inequality – Branko Milanovic

Global inequality is composed of inequality between countries and inequality within countries.  We can describe inequality within countries by “Kuznets waves”.  Inequality first rises as a country grows richer and when it has achieved a certain income level, inequality gradually decreases.  The theory fails to explain though why inequality has risen in developed countries since 1990, notably in the US, but also in Europe.  Milanovic introduces the concept of Kuznets cycles, rather than waves.  Benign and malign forces drive inequality up or down. High inequality is unsustainable and creates the seeds for destructive events that reduce it, but in their wake also destroy much else.
Forces that push inequality up are:
  • higher returns on capital than labour (Piketty factor)
  • high incomes from labour and capital are increasingly concentrated in the same peoplez
  • technological innovation that favours the rich (capital rents, higher wage dispersion)
  • decreasing power of unions (due to changing labour markets)
  • high availability of labour (opening up of China, India and USSR in 1990s)
  • increasing scalability and emergence of more winner-takes-all markets (e.g. education)
  • capture of political process (democracy) and media by the rich
  • monopolisation of sectors
Forces that reduce inequality are (malign or benign)
  • investment in public education
  • redistribution of wealth through progressive taxes or social programmes
  • wars, epidemics and natural disasters (World Wars or the Plague in medieval times)
  • scarcity of labour (can be reduced by immigration)
  • technological innovation that favours the poor (speculative)
Although inequality has been rising in developed countries, at the global level it has been decreasing for quite some time.  This is mainly due to the rise of China and, to a lesser extent, other Asian countries (India, Indonesia, Vietnam, Thailand).  This has come mainly at the expense of the lower middle class in Western countries.  The figure below shows how the 99th percentile (global plutocrats) and 50th-60th percentile (upper middle class in Asia) has done well during the last 20 years, whereas the 80th-90th percentile saw its income stagnating.  He notes that, as China grows richer, it will in the near future contribute to global inequality, rather than being a reducing force.

Lower inequality between countries reduces the “citizenship rent”, the importance of where one is born for whether will be rich or not. This does not mean that the “lottery of birth” becomes less important, as social mobility within countries has been decreasing.  However, in our (Western) discourse about rising inequality, it is important to note that on a global level, inequality is actually going down.  The decrease is mainly due to the rise of Asia, Africa is not contributing at all.
Milanovic discusses some of the consequences of high inequality.  On migration, which he sees as an inevitable consequence of globalization, he advocates (as Collier does) for limited access to citizenship rights (temporary worker status, higher taxes) to compensate for their higher productivity as a result of migration and access to a superior social model.  On politics, he sees plutocracy (the US option) and populism (the EU option) as consequences of high inequality and the reduced size of the middle class. A smaller middle class results in lower support for public services such as health and education and more attention for internal security and defense.  The slide away from democracy is masked by shifting attention to issues such as nationalism and identity and by overestimating social mobility.  He refers to the work of Jan Tinbergen who showed how returns on education are highest in poor countries, where few people have access to higher education.  In developed countries, access to education is widespread, the return decreases, but connections and sheer luck determine who gets access to well-paying jobs.
Milanovic present an impressive range of data and charts to make his case.  It is not an optimistic book, as he doesn’t see many benign forces that are strong enough to reduce inequality, especially in the US.

Kicking Away The Ladder

ladderDeveloped countries stimulate developing countries to adopt the “good” institutions and “good” policies which will bring them economic growth and prosperity.   These are promoted by institutions such as the WTO, the IMF and the World Bank.  Recipes such as abolishing trade tariffs, an independent central bank and adhering to intellectual property rights feature high on their agendas.

In his book “Kicking away the ladder” Ha-Joon Chang shows that these policies are not so beneficial for developing countries.  Through historical analysis he shows that developed countries actively pursued all types of interventionist policies to achieve economic growth, contradicting the recipes they are now prescribing.  A case of poachers turning into gatekeepers.

Policies that were intensively used by the USA and European countries include tariff protection, import and export bans, direct state involvement in key industries, refusal to adopt patent laws, R&D support, granting monopoly rights, smuggling and poaching expert workers.  Chang points out that alleged free trade champions, the UK and USA, were the most protective of all and only switched to liberalisation after World War II when and as long as their hegemony was safe (see table below).  Asian tigers such as South Korea and Taiwan did the same, which explains their success.  Ha-Joon Chang shows that, in comparison, current developing countries offer relatively limited protection to their economies.

chang_tariffs

What does it imply for development cooperation? Developed countries often expect developing countries to adopt world-class institutions and policies in a nick of time.  However, the path to these kinds of institutions for developed countries was a long and winding path, a slow process that took decades, with frequent reversals.  We sometimes forget that universal suffrage was only achieved as recently as 1970 (in Canada) or 1971 (Switzerland). It took the USA until 1938 to ban child labour. Switzerland was notoriously late to adopt patent laws (explaining its success with pharmaceutical companies).  Imposing world-class institutions or policies on developing countries can be harmful because they take a lot of human and financial resources, which may be better spent elsewhere.  In fact, adopting such institutions and policies mainly benefits the developed countries, not the developing ones.

Ha Joon-Chang calls this practice of using successful strategies for economic development and then preventing other countries from applying the same strategy “kicking away the ladder”.  The WTO negotiation rounds or regional trade agreements have a lot in common with the “unequal” treaties between colonisers and colonised countries.

Why is institutional development so slow? Are there no last-mover benefits?  Chang gives following reasons:

  1. Institutional development is firmly linked with the state’s capacity to collect taxes. This capacity is linked to its ability to command political legitimacy and its capacity to organize the state (see blog post on Thinking like a State).  That’s also another reason why tariffs are so important for developing countries: they are some of the taxes that are easiest to collect. Institutional development is linked to the development of human capacity within a country by its education system. Setting up “good” institutions in countries that don’t have the human capital for it will lead to undermining, bad functioning or draw away scarce resources from other sectors.
  2. Well-functioning institutions and policies need to fight initial resistance and prejudice. Chang points to the resistance to introducing an income tax at the beginning of the 20th century in western countries.  It can take years and gradual policy changes to overcome this. The struggle to raise the retirement age in western countries is another illustration of the sometimes double standards we use toward developing countries.
  3. Many institutions are more the result of economic development rather than a condition for it. This is contentious, but Chang points to democracy as an example.

Chang advocates for developing countries to pursue an active interventionist economic policy.  His thesis confirms the importance of supporting developing countries in the strengthening of their education systems.  However, it also illustrates that the financial harm to developing countries as a result of unequal trade policies can be much higher than the aid flows to these countries.

Computers in Schools: Why Governments Should Do Their Homework

Time and time again, governments and NGOs herald the purchase of ICT as a panacea for improving the quality of education. The recent plans of Gauteng in South Africa are a good example. This study from the Inter-American Development Bank (IDB) provides an useful summary of the research done on the impact of ICT in primary level classrooms.  Latin America and the IDB have been at the forefront om some high-profile “One Laptop per Child” projects such as the Plan Ceibal (Uruguay), Enlaces (Chile) and the OLPC Programme in Peru, on which I blogged before.

Some extracts:

The evidence so far is quite persuasive that programs that overlook teacher training and the development of software may yield low returns.

One promising avenue lies in the use of ICT to realise productivity gains in school management:

The collection, transmission, and analysis of data on enrollment, absenteeism, test scores, and infrastructure can help principals spot a problem in a given classroom, administrators spot an exemplary school, and policymakers track the performance of the educational system and the resources available. However, the gains in productivity seen in the business sector are rarely seen in the educational system, some have argued, because most education managers are not knowledgeable in the use of information management tools.

Studies that measured the impact of ICT, both of the access to computers and the use of computers, found more often than not no significant impact on learning outcomes – an overview is included in the report.  The authors note that it’s not sufficient for ICT investments to produce a positive impact, they should produce a positive impact compared to traditional instruction and, even better, to similar investments in other areas such as teacher training, smaller classes or libraries.

All other things being equal, the impact of ICT investments will be higher when the quality of teaching is low, as the potential for learning gains is higher. This underlines the risk of extrapolating findings from developed to developing country context.

Some recommendations from the report:

  • Given the high investments, the low number of decent impact studies is surprising.  The impact of ICT investments heavily depends on the context and on the implementation.  As such, results from impact studies cannot be generalized over different programmes.  Start on a limited scale and build impact evaluation into the programme design is important.
  • Important to keep the Total Cost of Operation (TOC) of ICT investment into account rather than the purchase price. This includes maintenance, training, connectivity and electricity costs.  Recurrent costs typically take up about 40-50% of the initial investment (in Latin America).  These are permanent costs, which imply savings elsewhere in the education system or an overall increase in expenditure. A large share of rural schools, high electricity and connectivity costs and high wages (as in South Africa) thus increase the share of recurrent costs.
  • Most successful ICT project implementation focus on honing ICT skills of learners and pursuing Computer-Aided Instruction (CAI), for example for maths.

Income Inequality in the Developing World

Science recently published a theme issue on income inequality in the developing world (free access, with registration).  It includes contributions from, among others, Thomas Piketty, Martin Ravallion and Angus Deaton.

The main idea from Piketty’s bestseller, Capital, is that inequality has been rising since the 19th century because yields on wealth are higher than those on income.  This trend was only interrupted by the 2 world wars.  Piketty’s thesis rests on historical data from the US and Europe.  This theme issue looks whether the conclusions are valid for developing countries as well.

Has the strong economic growth in developing countries since 2000 resulted in falling levels of inequality?  And what has been the effect on poverty?  The main findings from the article of Ravallion:

Science 2014 May 344(6186) 851-5, Fig. 1

Science 2014 May 344(6186) 851-5, Fig. 4

 

 

 

 

 

 

Inequality has fallen between 1981 and 2010.  However, the period between 2005 and 2010 shows an increase.  The variance over time is mainly attributable to inequality between countries.  Again, most recent data indicate that the component between countries has fallen, whereas the component within countries has risen.

  • Economic growth has lead to increasing inequality between countries, but to falling inequality within countries (although the latter trend has weakened in recent years).
  • The effect of economic growth on poverty depends on the initial level of inequality.  The higher that level, the lower the share of economic growth that flows to the poor and the lower the poverty reduction resulting from that growth.
  • Even if inequality has not been rising overall, there are still worries about high levels on inequality in developing countries:
    • capital tends to have diminishing returns, implying it’s more ‘useful’ when more equally spread;
    • high inequality means that many poor, talented people cannot reach their full potential;
    • high inequality tends to erode democracy, as a small group of people may hijack the democratic process and turn ‘inclusive institutions’ into ‘extractive ones’ (see Acemoglu’s and Anderson’s work);
    • low inequality and a strong middle class tend to create a more diversified and robust economy, as a result of a stronger focus on consumption goods and support for pro-growth policies.
  • Three cautionary remarks on the data:
    • The data, using the Gini or related MLD indicators, represent relative inequality. This means that inequality is the same whether incomes are 1$ and 2$ or 1000$ and 2000$.  This implies that even with constant relative inequality, the absolute differences in income and wealth can grow much larger.
    • Data on inequality in developing countries are notoriously unreliable.  The main data sources are the national accounts (household consumption item) and household surveys.  In the latter, the rich either don’t participate or tend to under-report their income and wealth.
    • Developing countries are a mixed bag.  Countries with rising inequality from a low base (India, China), countries with rising inequalities from a high base (South Africa, with Gini = 0.7!!!) and countries with decreasing inequality (most countries in Latin America).
  • Falling inequality is not something which happens ‘automatically’ as countries grow rich, as was postulated by Simon Kuznets.  It’s the result of pro-equity policies, such as investments in health and education (Bolsa Familia in Brazil) and job creation.

 

Eradication of Poverty on Hold?

A long piece in The Economist recently on the evolution in purchasing power parity between economies of developed and emerging countries. Up until a few years ago, it looked as if convergence would be reached within 30 years, even if excluding Chinese growth.  Hundreds of millions of people were drawn out of poverty.  Voices have been calling for the post-2015 global development goals to include the eradication of poverty by 2030.

However, the pace of economic growth has been slowing in emerging economies, not just in China, which is managing a difficult transition from low-wage, export-based manufacturing towards an economy dominated by services and internal consumption.  However, at the current pace, it will take 150 years to catch up (using as indicator GDP/ person in PPP as % of US GDP).

em_cathcing up_1

 

 

 

 

 

 

 

Convergence was foreseen by economists like Robert Solow.   As the main drivers he identified capital influx (as a result of higher interest rates offered by developing countries) and technological progress (enabling emerging economies to leapfrog development stages).  Pietra Rivoli saw a ‘race to the bottom’ by poor countries as a way to attract labour-intensive industries, allowing people to abandon agriculture, get access to better services, creating a virtuous spiral.

The main reasons why the convergence has grinded to a near standstill are:

  1. The peak of manufacturing in a country’s development occurs earlier and is lower than previously. Dani Rodrik attributes this to the growing role of technology, reducing demand for low-wage manufacturing jobs, lowering the incentive for companies to seek out regions with low wages and lowering the share of manufacturing in the total value chain of a product.
  2. The previous decade was a period of exceptional hyperglobalisation, spurred by strong demand for natural resources, China’s accession to the WTO and strong growth in trade (also outside China).

Rather than the optimistic scenario foreseeing income convergence within a generation, it looks we’re back at the slow grind towards convergence, driven by incremental progress in geography (infrastructure, see work of Jared Diamond), institutions (see work of Daren Acemoglu) and trade (e.g. regional agreements on trade in services).

The article is rather pessimistic in tone, as it considered the gains in poverty reduction as an exceptional feat not likely to be repeated soon. It raises critical questions for countries like India and Bangladesh which are looking to benefit from their demographic dividend and take over some of China’s low-wage industry.  It also underlines the need for investments in education.

Unfair Trade

FairTradeCoffee“A CUP of “fair-trade” coffee used to make mud taste good, and you could buy it only in churches and charity shops (The Economist).

A recently published 4-year study of The School of Oriental and African Studies (SOAS) in London which uncovered some uncomfortable findings about the fair trade industry in Ethiopia and Uganda, may make Fairtrade coffee even taste less good.  It has raised a flurry of reviews (The Guardian, The Economist).  Some extracts.

From The Guardian

“Our research took four years and involved a great deal of fieldwork in Africa. We carried out detailed surveys, we collected oral histories, we talked to managers of co-operatives, to owners of flower companies, to traders and government officials, to auditors, to very young children working for wages instead of going to school, to people who had done fairly well out of Fairtrade, and to people who appeared not to have benefited.”

“One of our interviewees, James in Uganda, is desperately poor and lives with his elderly father in an inadequate shack very close to a tea factory supported by Fairtrade. Despite the fact that his father was once a worker at the tea factory, James is charged fees at the factory’s Fairtrade health clinic. He cannot afford them and instead has to make his way on one leg to a government clinic more than 5km away to get free treatment.”

Some main findings:

  • Fair Trade agricultural seasonal and casual workers often earned lower incomes than those working for non-FT employers.
  • Social community services intended as a by-product of Fair Trade are often not accessible for FT workers.
  • More concern with the incomes of producers than with wage workers’ earnings.
  • Differences could not be attributed to the fact that Fairtrade cooperatives were based in areas with higher or particular disadvantages.

The study raises some questions about Fairtrade, to say the least.  It may not fit with our view of helping the poor, but workers may be better off working with large producers, offering higher wages, better facilities and more days of work.  Moreover, most of the organisations that are certified tend to come from richer, more diversified developing countries, such as Mexico and South Africa, rather than the poorer ones that are mostly dependent on exporting one crop.  As one of the researchers writes:

” If we are interested in what makes a difference to extremely poor people, it is important to compare areas with Fairtrade organisations not only with other smallholder producing areas, which we did, but also with areas where producers are much larger. If larger farmers can pay better and offer more days of work, this is surely an important thing to understand.”

The findings may have some parallels with wider issues with development:

  • the convenience of small efforts that show solidarity with the poor
  • charging a premium for easing one’s conscience
  • a stereotypical view of ‘the poor’  and what they prefer
  • the attractiveness of simple, straightforward solutions
  • a proliferation of labels and organisations, harnessing this desire ‘to do good’
  • a romanticized ‘small is beautiful’ view on development