WTO 22 September 2008

Liberalising Mode 4 trade Liberalising Mode 4 trade what impact on exporting what impact on exporting

countries?countries?

Massimiliano Calì

Overseas Development Institute

2

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%

How large is current mode 4 trade?

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How large is current mode 4 trade?

Number of countries admitting workers under special schemes, circa 2005

Source: Abella (2006)

 High Income

Upper Middle Income

Lower Middle Income

Low Income

Surveyed countries 31 18 26 17

Professionals, scientists, managers, other highly skilled

11 1 2 0

Contract workers 6 2 0 0

Seasonal workers especially for agriculture

6 2 0 0

Trainees 16 0 0 0

Working holiday makers 7 0 0 0

For employment in priority sectors esp. exports and small industries

7 5 6 3

For employment in priority regions

1 1 2 0

4

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

RRegulatory barriers may severely constrain Mode 4 tradeegulatory barriers may severely constrain Mode 4 trade

How restricted is mode 4 trade?

5

H1B Visa into the US

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

CAP # issued

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

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).

But domestic constraints are biting too

7

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

What effects for exporting countries?

8

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

Static effects Dynamic effects

Brain drain - +

Remittances + +/-

Network effects + +

Return + +

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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)

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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

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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’?)

Remittances

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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?

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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)

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Thank you

m.cali@odi.org.uk