September 27, 2015

What Happens When People Migrate?

Image: Mint via AFP


IDFC Institute's Vivek Dehejiawrites in Mint: "A more efficient—and a more just—world would involve breaking down, rather than erecting, barriers to the movement of people".


Excerpts below:


"The recent focus on the refugee crisis in Europe has once again cast the spotlight on the large-scale migration of people... What does economics—and the economics of international trade, in particular—have to say on the subject? In particular, is large-scale labour migration good or bad for global economic welfare?

As a matter of basic economics, the movement of labour across national borders may be understood, analytically, as one example of the movement of factors of production—rather than commodities—which would also include capital and land...

While capital and labour mobility raise distinct analytical questions—since, for instance, people vote and have preferences, while machines don’t, at least not yet—surprisingly much can be gleaned by considering them, in the first instance, generically as factors of production as distinct from those goods and services that are, in turn, produced using the services of factors of production.

While, to the layperson, the movement of people or capital—whether physical capital, in the form of machinery, or financial capital, as in the form of investments—may appear very different from the movement of goods and services, to economists of international trade, they are, in fact, two sides of the same coin.

The workhorse model of international trade theory, known variously as the Heckscher-Ohlin-Samuelson model or “factor proportions model”, posits that the pattern of international trade is principally a function of the relative endowments of factors of production across national borders.

Thus, a capital-abundant economy—one endowed with relatively more capital than labour—will tend to export capital-intensive goods and services—those that require relatively more capital than labour to produce. Likewise, a labour-abundant economy will tend to export labour-intensive goods.

What this implies for the pattern of global trade is that capital-rich economies—mainly advanced Western economies such as the US—will export high-tech manufactured goods and services, while they will import low-tech manufactured goods, agricultural goods and other commodities that are produced by labour-rich economies such as China, India and other developing and emerging economies...

Samuelson demonstrated that in a world of free trade in goods, but no mobility of factors permitted, the equalization of goods prices through trade would necessarily imply that the rewards to factors of production would also become equalized.

The upshot would be that free trade in goods would be sufficient to equalize the returns to capital and labour between advanced and developing economies—no factor movements would be required...

Put another way, if as Samuelson showed trade in goods may substitute for trade in factors, Mundell showed that the reverse is necessarily also true within the identical analytical framework.

However, even if these stringent assumptions are not met, the general presumption remains that trade in goods and trade in factors are substitutes to some extent—even in the absence of full equalization of goods or factor prices. The other crucial presumption that remains intact is that, to the extent that free trade in goods is beneficial for all countries that engage in trade, free trade in factors—both labour and capital—is also likely to be mutually gainful.

The importance of this last idea cannot be overstated. While the real world never matches the perfection of a theoretical model, the basic idea that, other things being equal, letting goods, services, capital—and people—move freely and without hindrance is likely to be good for everyone—sending countries, receiving countries and the migrants themselves—remains a key and robust insight of international trade.

Just as it is gainful for all nations if goods move from where they are more cheaply produced to where they are more costly, equally, it is gainful for all if people move from where wages are low to where they are high—the incentive to earn a higher wage being the key economic driver of labour migration, much as the incentive to earn a higher rate of return is the key economic driver for capital movement..."

Topic : Transitions / In : OP-EDS
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