Impact of Liberalizing Mode 4 Trade on Exporting Countries

1. Liberalising Mode 4 trade what impact on exporting countries? Massimiliano Calì Overseas Development Institute WTO 22 September 2008

2. How large is current mode 4 trade? • Size of trade is disputed due to lack of proper data • Immigrant remittances: $167 billion in 2005 (World Bank) - larger than Mode 4 as they include also permanent migrants • Compensation of foreign employees: $72 billion in 2005 (IMF BoP). • Mode 4 trade has almost doubled between 2000 and 2005 with the ratio to Mode 1 and 2 increasing from 7.6% to 9.2%

3. How large is current mode 4 trade? Number of countries admitting workers under special schemes, circa 2005 Source: Abella (2006)

4. How restricted is mode 4 trade? • Stringent immigration rules esp. for unskilled labour: • quantitative restrictions (65,000 H1B Visa) • economic needs test • wage parity requirement • Discriminatory treatment of foreign providers • Recognition of qualification • De facto barriers Regulatory barriers may severely constrain Mode 4 trade

5. H1B Visa into the US Source: Department of Homeland Security, National Foundation for American policy, American Council on International Personnel The current H1B visa cap is exhausted many months in advance

6. But domestic constraints are biting too • Very poor countries are less involved in mode 4 trade: • no LDCs among the largest 15 ‘exporters’ of doctors to the UK in 2004; one (Sudan) in the first 30, but 8 out of the first 15 are developing countries; • one (Zambia) out of the first 15 foreign countries for new nurses registered in the UK is an LDC, while 12 out of 15 are developing countries. • Domestic supply capacity constraints rather than regulatory barriers are the biting ones (similar argument to aid for trade in goods).

7. What effects for exporting countries? • Temp. migration responds to widening demographic and economic differentials between countries: higher differences imply higher potential gains • Mode 4 trade may help developing countries exploit comp. advantage in semi-skilled and unskilled labour, so liberalisation of visas quotas such as H2B may be esp. beneficial • Some developing countries’ “revealed comparative advantage” is in high skilled services sectors, such as engineering, accounting, nursing, software development and data processing (IOM, 2005) • Hard to estimate effects in the absence of liberalisation policies and good data – Walmsey and Winters estimate large worldwide benefits from small liberalisation, but this is larger than Mode 4

8. Mode 4 & exporting countries: possible effects of a complex relation

9. Mode 4 and the “brain drain” The direct effect of Mode 4 exports is to reduce the available supply of labour in the sending country, in particular of skilled labour: • 31.4% of African residents in OECD were tertiary educated in 2000 (23 % in 1990) • small countries are most affected by high tertiary migration rates (41% of tertiary educated stock in the Caribbean) • Some skilled groups particularly affected - 28% of total physicians from SSA work abroad (75% in Mozambique)

10. What would happen to domestic skills without temporary migration? Mode 4 exports may stimulate human capital formation • Micro evidence shows that university graduates would drop by 40% in Cape Verde without migration (Batista et al, 2007) • Macro evidence suggests optimal migration rate of 20-30% to maximise human capital stock (Beine et al., 2007) This is true even for health professionals’ exports: • 10% increase in migrants’ stock is associated with 1.5% increase in physicians’ stock per capita in SSA (our calculations) • growth of nurses’production in Indian states that are active in migration

11. Remittances US$167 billion in 2005 + large remittances via informal channels (due to high transaction cost) Micro-effects (poverty reduction, insurance, factor accumulation) Macro-effects (investment vs. consumption; multiplier effects; ‘Dutch Disease’?)

12. Other channels • Network effects • + 10% in Mode 4 movements into the US raises US imports from source country by 1.7% (Jansen & Piermartini, 2004) – higher than permanent migration effects • + 10% in migrants’ stock increases US FDI in the country of origin by 5% (Javorcik et al, 2006) (also vice-versa?) • Trade effects are larger for developing than for developed countries (White, 2007) • Return migration • Enhanced skills and access to capital • But how appropriate are the skills? How productively are they employed?

13. Implications for policies • Restricting Mode 4 is undesirable for exporting countries: • prevents possible positive effects of mode 4 exports • raises ‘brain waste’ reducing benefits for exporting countries • strong case to liberalise Mode 4 in unskilled services • Designing temporary migration schemes to minimise turnover costs • Facilitating expansion of skills’ base (export strategy?) • Payments by ‘receiving’ countries for ‘perverse’ subsidy? • Strengthening oversight capacity during expansion • Maximising the inflow and the efficiency of remittances • reducing costs • special financial products for remittances (e.g. ForEx bond)

14. Thank you m.cali@odi.org.uk