58963 POVERTY THE WORLD BANK REDUCTION AND ECONOMIC MANAGEMENT NETWORK (PREM) Economic Premise JANUARY 2011 · Number 45 JUNE 2010 · Number 18 Trade and the for the Poor: Is Really Labor MobilityCompetitivenessitAgenda Possible? José Guilherme Reis and Thomas Farole Manjula Luthria The global economic crisis has forced a major rethinking of the respective roles of governments and markets in the processes of trade and growth. Indeed, industrial benefits of migration, it in not been easy to least, doors into devel- Despite mounting evidence that supports the pro-poorpolicy seems to be backhas fashion--or, at unlocktalking about it is. But a renewed "activism" by government in the trade and sending and receiving countries are return to old-style oped country labor markets. This is largely because both labor growth agenda need not mean a unsure that such pro- grams can be designed or executed in "picking winners." Instead, it may mean a often competing) interests. This note by policies of import substitution and a manner that considers their respective (and stronger focus on competitiveness offers unlocking the constraints to private sector­led growth. This note win-win the renewed role of government guidance on how to design and implement a migration scheme that isdiscussesfor both host and source countries. in trade and growth policy from the competitiveness angle, and it suggests some priorities for the new competitiveness agenda. In the past, migration policy was found exclusively in the do- In fact, there is strong evidence now showing that labor mar- mestic immigration policy of developed countries, but it has ket restrictions are imposing a much greater burden on the Export-Led Growth, the Crisis, and the End now become central to the debate on international develop- global economy than the remaining trade restrictions. trade pacts of the crisis on the policy environment regarding It has of an Era ment and poverty alleviation. Indeed, some have argued that been estimated becoming more apparent. developed addi- and growth werethat a 3 percent increase in theIndeed, in coun- nothing quite separates an individual from the benefits of de- try workforce due to over the could deliver benefits trade tion to raising concerns migrationglobal commitment toin the The dramatic expansion in global trade over recent decades velopment as much as a work visa (Clemens, Montenegro and range of $305 billion a has also led to some serious rethink- liberalization, the crisis year to the current citizens of poor coun- has contributed significantly to diversification, growth, and Pritchett 2008). Yet, economic theory predicts that, under cer- tries--almost twice conventional wisdom regarding the ing of some of thethe combined annual benefits of full trade poverty reduction in many developing countries. This for tain conditions, the free movement of goods is a substituteperiod liberalization ($86 most foreign aid ($70 of which is the growth agenda--thebillion),important resultbillion), and debt of rapid export growth has been enabled by two critical the free movement of the factors embodied in the production likelihood that governments will play a much more activist relief ($3 billion in annual debt service savings) combined structural changes in trade trade: (1) the vertical and in- of those goods. Hence, globalin goods that are highly laborspatial role in the coming years. There are three principal reasons (Pritchett 2006).1 fragmentation the same for wages as into highly integrated tensive should do of manufacturing the physical movement Despite the caveats associated more actively involved in why governments are likely to bewith general equilibrium es- "global production networks," and (2) the rise of services of people, accomplishing a result close to factor price equaliza- timates, the trade policy in the coming years. industrial andmessage that differences in productivity and wag- tion inand end. growth theory has not been borne these, reali- trade the the But this of "offshoring." Both of out in in turn, es across the world are so large that moving workers across First, the crisis has undone faith in markets and discred- ty, in part because theby major technological revolutions; and were made possible conditions listed in textbooks--such as boundaries offers huge rewards is simply on trade policy ited laissez-faire approaches that rely widespread. And that they were supported by multilateral trade policy reforms perfect competition, identical production technology, constant skilled and mobile workers are able to reap these rewards with liberalization. Instead, governments and local markets have returns to scale, and perfectin domestic factors and investment and broad liberalizations mobility of trade within coun- increasing ease is also no secret. Migration programs activist been "rediscovered." In this sense, the demand for in most tries--are not present in the real world. However, productivity- environments worldwide. developed countries are well skewed toward the skilled and government is likely to gohighlybeyond financial markets and adjustedglobal economic crisis came crashing into the middle The wages do seem to be converging and evidence shows are becoming even more so as policy environment in inten- regulation, and it will affect thethe hunt for global talentwhich that these differences in productivity are highly location spe- of this long-running export-led growth party during 2008 sifies everywhere.2 strategies are designed. trade and industrial On the other hand, the unskilled tend not cific 2009. Between the last quarter of 2007 and the second and (Pritchett 2006). This means that a ready stock of mi- to have any ready points of entry into labor-scarce economies, Second, the crisis has highlighted the critical importance grants would be able to raise their incomes by moving to, or even though labor shortages exist across the board in many de- quarter of 2009, global trade contracted by 36 percent. But of diversification (of sectors, products, and trading partners) working in, high-paying locations. veloped countries. Increasing the access to international labor as the recovery started to strengthen in 2010 (at least until in reducing the risks of growth volatility. The recent era of the clouds began to form over Europe), the longer-term im- globalization contributed to substantial specialization of 1 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise 1 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise markets for the poor then has very strong poverty reduction New Zealand Department of Labour (2010) recently conclud- outcomes and is therefore becoming an important focus of ed that "Overall, the RSE policy has achieved what it set out to development policy. do." The policy provides employers in the horticulture and viti- Because the poor lack the financial resources or social net- culture industries with access to a reliable and stable workforce, works to migrate, programs that explicitly target people with with productivity gains starting to emerge as workers return for low income would yield the greatest benefits. However, desti- another season. The main concerns raised about temporary la- nation countries remain reluctant to open their labor markets bor programs have been mitigated: the evaluation finds little to the poor from developing countries because of the perceived, displacement of New Zealand workers; almost all workers re- and real, fiscal and/or sociopolitical costs. Therefore, it is virtu- turned, with overstay rates of about 1 percent in the first season ally impossible to contemplate any realistic permanent migra- and less than 1 percent in the second; and concerns about work- tion options for the poor, but the prospect of a temporary er exploitation have arisen in only a couple of isolated cases. A movement of persons (TMP), where the poor have limited and World Bank evaluation (McKenzie and Gibson 2010) also re- circumscribed access to developed world labor markets, is be- vealed that the RSE has also lived up to the policy goal of im- coming more appealing. It has appeal on both sides--receiving proving development in the Pacific Islands. countries are able to have services performed in sectors where it Based on this positive record, this note provides general les- is becoming increasingly difficult to attract native workers and sons for policy makers who wish to institute similar TMP pro- sending countries are able to use the safety valve of overseas em- grams for the poor. These lessons could have wide portability ployment for workers for whom their own domestic environ- due to the fact that the Pacific­New Zealand program is size- ments are unable to provide enough economic opportunities-- able by international standards--already reaching one-third the resulting in greater socioeconomic stability, remittances, and size of Canada's Seasonal Agricultural Worker Program, which even skill enhancements. is in its 44th year of operation and considered global best prac- While almost all Organisation for Economic Co-operation tice thus far. Three broad areas emerge as a priority for policy and Development (OECD) countries have temporary worker and operational focus: design, management, and capacity migration programs--with seasonal workers as the largest single building. category, totaling 576,000 workers in 2006 (OECD 2008)-- these programs remain controversial. This is particularly true Design of programs geared to low-skilled migrants, such as seasonal mi- Solid design is critical for the scheme to operate successfully. gration programs, as witnessed by the policy debate in the Unit- Not all TMPs are the same, and, in fact, design has quite a lot to ed States over a new guest worker program and continued de- do with the different observed outcomes. The key is to ensure bate in Western Europe about the role of seasonal workers. that the scheme is designed in an incentive compatible manner: Some critics of such programs raise concerns that workers will that is, incentives (or disincentives) are compatible with the overstay and/or compete down the wages of native poorer work- outcomes desired. The four aspects of basic design--the four ers (Borjas 2007), while others raise concerns about the possi- Cs--are important. ble exploitation of workers and whether workers can earn Cost: The high fixed cost of movement for the poor usually enough to make it worthwhile if the duration of work is short. tends to be a factor in how long migrants need to stay overseas To be sure, there have been problems with previous temporary to recover their substantial investments. The higher the cost schemes. As attractive and mutually beneficial as such a TMP borne by the migrant, the longer they will need to stay abroad, sounds in theory, in practice, the adage, "There is nothing more and the longer they stay abroad, the less likely they are to re- permanent than a temporary worker," seems to personify the turn. Cost-sharing with employers works to alleviate this bur- general suspicion with which TMP is viewed. den and enables migrants to quickly accumulate savings that If any progress is going to be made on expanding labor mar- they can consume at home. Imposing some cost on employers ket access for the poor, then this popular perception will need in developed countries also solves the problem of foreign work- to be better understood and hopefully reversed. To this end, ers being used (or being perceived to be used) to undercut local this note offers some thoughts on how TMP can be made to wages, which makes such schemes domestically difficult in de- work internationally. These thoughts are based on a careful veloped countries. The duration of the access to the labor mar- study of some past (German-Turkish), existing (UK-EU, Carib- ket also has implications for cost recovery and needs to be fine- bean-Canada), and a more recently instituted program between tuned carefully. Too long a duration increases the probability of the Pacific Islands and New Zealand.3 temporary migrants settling in (as seen in the German-Turkish The Pacific Islands and New Zealand program, known as the scheme); too short a duration may imply low participation in Recognised Seasonal Employer (RSE) scheme has been de- the scheme altogether (as seen in the Australian-Pacific scheme) scribed by the International Labour Organization's good prac- or a higher propensity to overstay beyond the duration of the tices database as a model for other destination countries. The employment contract. 2 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise Choice of workers: The qualifications of workers matter The single biggest reason for needing active management of greatly. If overqualified workers are selected to do unskilled all stakeholders is the time inconsistency problem, where mi- jobs, the tendency of such workers is to use the TMP program grants enter the host country in the first stage and host country as a stepping stone into the developed market rather than the firms can choose to train these immigrants (Amin and Mattoo restricted employment opportunity that it is meant to be. It is 2005). The cost of identifying/recruiting/training is mostly in- not uncommon at all in sending countries to see interest from curred in this first stage and is hence treated as a sunk cost with educated and skilled workers in applying for semi- or unskilled the benefit accruing in the next stage. However, while firms work abroad. This could undermine the scheme, and to pre- may initially participate in such programs, accepting the tem- vent this, greater attention needs to be paid to the recruitment porary nature of the arrangements in time period t + 1, such an practices in sending countries. arrangement is not in their interest in time period t + 2. This Circularity: Access to an international labor market needs to results in too much permanent migration and too little tempo- be repeated rather than treated as a one-time event (that is, rary migration--as has happened with numerous TMP pro- workers should be able to go again year after year). Often, well- grams. Particularly for unskilled workers, the social costs are intentioned developed country policy makers try to limit the generally perceived to be greater than the private training costs number of times a single worker can have access to overseas em- incurred by firms, so the wedge between private and socially ployment with equity considerations in mind (that is, to spread desirable policy can be sizeable--which explains the current im- the economic benefits to a wider population in the sending passe on TMP, because some destination countries sometimes country). This again tends to undermine the scheme and re- prefer a "no-migration" scenario altogether. sults in overstaying. In game theory terms, making it a repeated Table 1 is an attempt to map out the possible scenarios that sum game rather than a one-shot game changes behavior and emerge with varying levels of private fixed costs and social costs. aligns it as the intended consequences improve. When the fixed costs of selecting, recruiting, transporting, and Commercial viability: Destination countries can be reluctant training workers is high, employers in the host country will lean to enter into arrangements with developing countries to im- toward trying to keep these workers permanently. Conversely, port unskilled labor, even in times of labor shortages, because if these costs are low, employers will have a higher tolerance for of the fear that when labor market conditions change for the using them for a finite period and letting them go at the end of worse and local unemployment rises, they would continue to one season or cycle in the expectation of incurring some of be bound to a specific intake of foreign workers. This is consid- these (small) costs in the next cycle again. Different migrants ered too politically risky in times of downturns and makes des- are also associated with different real or perceived social costs to tination governments wary of supporting private sector's de- host countries. Governments are sensitive to this cost and mands for foreign labor. On the flip side, sending countries when this cost is seen to be high (usually for unskilled), host don't help this cause when they try to insist on quotas being governments are keen to ensure temporariness, whereas if the written into bilateral agreements or memoranda of under- cost is seen to be low (skilled), they may have a higher tolerance standing with a view to providing certainty of access. Instead, for temporary entry points to turn into permanent pathways. the emphasis needs to be on maintaining the commercial via- The least problematic is the case when the fixed and social bility of TMP schemes by putting the private sector's needs costs are low, where a spectrum of outcomes is tolerable to all front and center and allowing the scheme to adjust to domestic three parties: source governments, host governments, and to labor market conditions. host country firms (cell D below). In the second scenario, where fixed costs are low but social costs are high (cell B), host Management governments definitely want temporariness, whereas the After designing the TMP in an incentive-compatible manner, source governments may adopt a casual attitude that fosters a equal if not more attention should be paid to implementation. permanent outflow. This creates a conflict of interest between It is too often the case that good design is not followed by ac- the two governments; however, because fixed costs are low, tive management of the risks that are inherent to the system. firms in the host country can be co-opted by their governments This in turn causes the scheme to be either suboptimal in de- to keep the workers only temporarily. livering development outcomes, or worse, results in the ero- The situation gets increasingly complex in the latter two sion of the goodwill and political capital that are necessary to scenarios. When social costs are low, the host government may get a TMP to work. This issue leads to a discussion of funda- be willing to accept permanence, while the source govern- mental reasons for focusing on the incentives of various stake- ments might still perceive home country benefits in having holders and pinpointing the scenarios under which a systemic these workers return and therefore favor temporariness. In a breakdown of the TMP scheme is most likely, which both high fixed-cost and low social-cost scenario (cell C), firms also highlight the need for sound planning and sufficient resourc- lean toward permanence, and tacit collusion between host ing from the beginning. governments and employers may go counter to the source 3 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise Table 1. Migration Scenarios firms that enter into the program, and on how penal- Policy emphasis ties are determined and enforced. required to make Fixed cost is high Fixed cost is low a TMP work Capacity Building Social cost is [A] [B] Burden is on SG The preceding discussion on the areas critical to en- high Firmsa want P. Firms can do T. to actively screen, sure a successful TMP program highlights the ineffec- SG probably wants P. SG probably wants P. regulate, and HG wants T. HG wants T. repatriate. tiveness of hands-off approaches in migration manage- Problem area-- Problem area, but Need mechanisms ment. Both receiving and sending countries have been domestically and domestic to ensure SG guilty of adopting hands-off approaches on the as- internationally-- cooperation possible cooperation. sumption that "stroke-of-the-pen" reform will auto- firms and HG want because firms and matically lead to institutional reforms that support different outcomes. HG interests are aligned. TMP schemes. Unfortunately, this assumption is usu- ally incorrect on account of the widespread market Social cost is low [C] [D] Burden on HG. failures that exist in labor markets, particularly in in- Firms want P. Either outcome Need mechanisms SG wants T. probably acceptable. to ensure HG ternational labor markets. Information market fail- HG wants P. commitment and ures (about the existence or quality of labor supply or If HG and F collude, cooperation. employment opportunities) and coordination market commitment failures (between hiring contractors, government problem. agencies, private employers, unions, and nongovern- Policy emphasis Burden on mental organizations [NGOs], domestically as well as required to make firms--robust across borders) can bring even a well-designed system TMP work eligibility criteria for to a halt. This is why market access granted by stroke- employers needed, with credible of-the-pen reform does not easily translate into the enforcement and ex benefits envisaged during reform planning. post penalties. Exacerbating these market failures is the reality of international labor markets: the capacity endowments Source: Compiled by author. Note: Fixed cost = selection, recruitment, training, and travel; SG = source country government; HG = of receiving and sending countries are very dissimilar. host country government; P = permanent migration; T = temporary migration. a. Firms denote employers in the host country. Therefore, while labor-sending countries must invest in alleviating information and coordination asymme- tries, receiving countries are usually better positioned country's desires. The most difficult scenario perhaps is one to play a stronger role, especially if the success of the scheme is where the fixed and social costs are high (imagine poor work- perceived to have some additional noneconomic advantage. ers from distant lands with high travel and training costs), im- Addressing such capacity constraints between sending and re- plying that employers will not want to incur high fixed costs ceiving countries--some separately and some jointly--is a major again and again and lean toward keeping workers permanent- step in building trust in the mechanisms that shape the TMP. ly, the source country may also be quite willing to let these Development institutions can play a role here. Just as it is workers leave permanently, but the host government strongly common place now for advocacy for freer trade to be accompa- favors temporariness (cell A). In this situation, not only are nied by aid for trade and "behind-the-border" interventions, host and source government intentions misaligned, but also such as technical assistance and funding assistance, to ensure the intentions of host governments and their own employers that the benefits of freer trade are more widespread, it is now are at odds. time to do the same for labor movements. Filling knowledge Overall, in high fixed-cost scenarios, the implementation gaps on costs and benefits is a necessary first step and will natu- focus should be on scrutinizing employers' behavior and ac- rally have to continue for some time, but, in addition, a concert- tions during implementation. In scenarios with high social ed effort must be made to put in place capacity-building mea- costs, the focus needs to be on getting source governments to sures for source country governments to prepare, manage, and perform certain due diligence functions properly--and hope- coordinate across a variety of domestic and international actors fully offering capacity-building assistance (discussed next). (box 1). Without such advice and support, source countries are When the social cost is low, the host country governments need likely to find themselves ill-equipped to address the numerous to show commitment to returning workers if the source coun- and various types of market failures in international labor mar- try desires their return. This has implications that are not yet kets. This would mean international mobility for the poor fully understood on recruitment management practices (pub- would remain too low and an important opportunity for pov- lic versus private), the management of the vetting process for erty reduction would be missed. 4 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise A second role for development institutions is the proper Box1. Capacity-Building Measures for Labor Export Countries mainstreaming of monitoring and evaluation (M&E) of the de- Most sending countries require advice and funding to establish velopment impact of such labor movements. Credible informa- a sound framework of policies and practices to facilitate the export of labor. To be effective, this assistance should begin tion on the development impact could reduce the cynicism with a thorough assessment of the goals, capacities, and that prevails among stakeholders and help broker dialogue be- governing responsibilities of the relevant public or private tween sending and receiving countries. However, the RSE actors in the source country, whose active participation is scheme remains the only TMP program that has conducted necessary for a successful program. A sample of activities that often need support are: baseline surveys of participants, tracked workers year after year, and has provided credible counterfactuals of what would have Some tangibles--the must haves happened to households in the absence of migration. Such evi- Legal framework: Review of existing employment acts to dence has played an important role in maintaining widespread ensure they include provisions for hiring under a TMP program is a necessary first step. The depth of the review depends on domestic and international support for the program and also how the hiring is expected to be performed: directly by foreign helped get a similar scheme off the ground in neighboring Aus- employers, their agents based locally, or through existing tralia. Given the large public good provided by M&E, and its government programs. high cost, development institutions may wish to support such Costs: Some countries have found the need to set up revolving efforts more widely. funds to provide workers with financial support to cover the upfront costs of participating in a TMP program, and In conclusion, it is indeed possible to design TMP schemes governments need advice on how best to operate these funds. that are win-win for sending and receiving countries. The key is Assistance with reforming the remittance infrastructure is also to begin by designing an incentive-compatible program that often warranted so that workers can send money home without avoids previous mistakes. When followed by a hands-on imple- paying unduly high fees and gain access to financial services. mentation approach, along with capacity-building and moni- Some intangibles that have been indispensable toring assistance, a well-designed scheme can offer a real chance Education and training: Structuring and delivering TMP for the poor to participate in the benefits of greater globaliza- program participation information in requires multistage tion of international labor markets. training programs--pre-application, postselection, and predeparture. The content of each stage of training varies and About the Author needs to be customized to suit the receiving country as well as the source country. A domestic awareness campaign is often Manjula Luthria is Senior Economist in the Poverty Reduction and a good idea to manage expectations and prevent abuse by Economic Management Unit in the East Asia and Pacific Region. illegitimate actors (for example, black market traffickers). This note draws on her experience with migration programs in Organizational structure: Various government departments and ministries may have to work together to facilitate a TMP the Pacific while based in the field office in Sydney, Australia. program. Clarity on the processes of coordination and oversight Endnotes at each stage is critical to avoid bureaucratic delays. Some trial and error is inevitable, but external help can catalyze the 1. Calculated at 2001 prices. streamlining of the various private and public roles. Identifying 2. There is very little that can or should be done to curb this. the staffing and training needs of each department to fulfill its mandate is often overlooked and ends up compromising Indeed, some experiences show that the motivation to migrate the credibility of the program. It is also helpful to have good increases the incentive to invest in skills, and, to the extent that databases that contain detailed information on the workers only a subset will eventually be able to migrate, it can lead to an leaving, ranging from basic demographic data to detailed increase in the stock of skills at home. contractual information regarding the overseas employment. 3. The author has had first-hand experience with this program, Some minimum data and reporting standards have emerged and source countries may require assistance in instituting from inception to implementation to monitoring. systems to reach these standards. These systems also generally need to be coordinated and integrated across various References government agencies. Borjas, George. 2007. "A Lemon in the Senate." National Review (online). http:// Marketing tools: Source countries often benefit from a www.nationalreview.com/articles/220991/lemon-senate/george-j-borjas. "branding" strategy to help enter new markets or new sectors. Clemens, Michael, Claudio Montenegro, and Lant Pritchett. 2008. "The Place Assistance in devising a realistic strategy for labor export and Premium: Wage Differences for Identical Workers across the U.S. Border." following it up with good communication and dissemination Center for Global Development Working Paper No. 148. tools such as Web sites, advertising, and focused marketing Amin, Mohammad, and Aaditya Mattoo. 2005. "Does Temporary Migration missions can deliver results if well targeted and designed. Have to Be Permanent?" Policy Research Working Paper Series No. 3582, Importantly, such branding is most effective if it also signals World Bank, Washington, DC. the presence of quality-enhancing measures in the source New Zealand Department of Labour. 2010. Final Evaluation Report of the country, such as comprehensive predeparture training. Recognised Seasonal Employer Policy (2007­2009). Wellington: Evalue Re- Source: Compiled by author. search and New Zealand Department of Labour. http://dol.govt.nz/publi- cations/research/rse-evaluation-final-report/rse-final-evaluation.pdf. 5 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise Luthria, Manjula, Richard Brown, Ron Duncan, Peter Mares, Nic McLellan, et Pritchett, Lant. 2006. Let Their People Come: Breaking the Gridlock on Global al. 2006. "At Home and Away--Enhancing Employment Opportunities Labor Mobility. Washington, DC: Center for Global Development. for Pacific Islanders." World Bank, Washington, DC. OECD (Organisation for Economic Co-operation and Development. 2008. In- McKenzie, David, and John Gibson. 2010. "The Development Impact of a Best ternational Migration Outlook 2008. OECD, Paris. http://www.oecd.org/ Practice Seasonal Worker Policy." Impact Evaluation Series No. 48. World document/3/0,3343,en_2649_33931_41241219_1_1_1_1,00.html. Bank, Washington, DC. The Economic Premise note series is intended to summarize good practices and key policy findings on topics related to economic policy. They are produced by the Poverty Reduc- tion and Economic Management (PREM) Network Vice-Presidency of the World Bank. The views expressed here are those of the authors and do not necessarily reflect those of the World Bank. The notes are available at: www.worldbank.org/economicpremise. 6 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise