9 Human capital and labor mobility 0

9. Human capital and labor mobility 0

Two huge issues Labor mobility and the gains from globalization Internal migration International migration Promoting the growth of human capital Why are these “huge” for development? 1

Why does labor move? 2

Poverty impact of growth depends on labor mobility Why does labor migrate? What happens in each economy when it moves between them? Gains/losses in GDP and GNI Wages in each economy Labor mobility need not be between national economies China’s experience of internal migration restrictions Hukou acts like a tax on rural labor 3

Migration and wages: standard model w 1 VMPL 1 a 0 w* VMPL 2 d b e c 01 LA L* w 2 w* w 2 0 02 • VMPL = marginal product of labor (demand), with K fixed in each sector • Outmig. area reads from right, L importer from left • Migration = flow equal to qty LAL* equalizes w. Notice w 1 must fall to achieve this-- unless VMPL 2 rises for some reason 4

Labor effects of FDI with segmentation w 1 VMPL 2 VMPL 1 w 2 a w 1 0 c 01 LF w 2 0 02 • No migration – labor fixed at LF, wages do not equalize • FDI raises L demand in sector 1, what happens to wages in 1? To wages in 2? To poverty, assuming that’s in sector 2? 5

Labor effects of FDI with integration w 1 1 VMPL 2 VMPL 1 a w 1 0 w 1 w 2 2 2 c 01 w 2 LF w 2 0 L* 02 • No migration – labor fixed at LF, wages do not equalize • FDI raises L demand in sector 1, what happens to wages in 1? To wages in 2? To poverty, assuming that’s in sector 2? 6

Globalization produces unbalanced growth • Pursuit of comparative advantage implies uneven distribution of industry gains and losses • Most industries are clustered by location • Adjustment to globally-linked economy requires factor mobility, especially for labor Logic of industry locations (mines, ports, etc…) Limits on factor mobility constrain capacity to gain from globalization “If globalization is the engine of growth, labor immobility throws sand in its gears” 7

Vietnam: spatial concentration of activity 8

Inter-provincial migration, by region 9

What would poverty changes have been without migration? Poverty 1993 Poverty 1998 Change (%) Red River Delta 62. 7 29. 3 -53 North East 86. 1 62 -28 North West 81 73. 4 -9 N. Central Coast 74. 5 48. 1 -35 S. Central Coast 47. 2 34. 5 -27 Central Highlands 70 52. 4 -25 South East & HCMC 37 12. 2 -67 Mekong Delta 47. 1 36. 9 -22 VIETNAM 58. 1 37. 4 -36 Region 10

Poverty impact of FDI depends on labor mobility Analysis: (i) effects of FDI on labor demand; (ii) response of the labor market (e. g. rural-urban migration) Poverty is most widespread in rural areas Labor market may be “segmented” How will gains of FDI-led growth be distributed? 11

Labor exports and cross-border migration Since 1970 s: big extra-regional flows: SE Asian workers in resource-extracting economies of Middle East Filipinos in high-income industrialized economies (US, EU, HK, Australia, etc) SE Asian workers in high-income industrializing East Asia (Korea, Taiwan, Japan) = “South-North” migration Post-Plaza: ASEAN income divergence, big intra-regional flows: Indonesia to Malaysia and Singapore Burma, Laos and Cambodia to Thailand Vietnam to Malaysia. Thailand Philippines to Hong Kong, Singapore and everywhere = “South-South” migration 12

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Manning & Bhatnagar. Numbers are in thousands. Thai figures are grossly underestimat 14

Case studies South-North: Filipino emigration and labor export 9 -11 m Filipino workers abroad (~10% population; nearly 20% of potential labor force) South-South: Burmese labor export to Thailand 1. 5 – 2 m Burmese workers in Thailand (~12% labor force? ) ~ 6 -7% of Thai labor force; maybe 20% or more of unskilled workers

Filipino workers are their country’s main export Source: UST Social Research Centre 16

Who leaves the Philippines? Everybody Source: UST Social Research Centre 17

South-North migrants do the best Source: UST Social Research Centre 18

Burma-Thai divergence: rough comparisons Indicator Burma Thailand T/B Ratio Source Per cap. inc. 1956 (Rs, COL adj) 300 400 1. 33 Myrdal 1967 Per cap. inc 1978 ($, OER) 150 490 3. 27 World Dev. Rep. 1980 19

Why do Burmese move to Thailand? economic motives incomes and opportunities unemployment and forced labor inflation, shortages, rationing political motives Risk of persecution, human rights abuses, political and ethnic repression Internal violence and armed conflict There are estimated to be as many internally displaced people within Burma as there are exiles and outmigrants

How many Burmese workers? Numbers About 600, 000 registered Burmese “temporary migrant workers” workers in Thailand (2006) Perhaps 1. 5 m more unregistered workers Trends Numbers of Burmese workers in Thailand have increased steadily, with a small decline only after 1997 (Asian crisis) Comparisons Burmese labor force estimated to be 27 m workers Burmese in Thailand are 80 -90% of Burmese workers abroad Burmese account for 80 -90% of foreign workers in Thailand Comparable to % undocumented workers in the EU, US

What do migrants experience in Thailand? Occupations Dirty, difficult (degrading) and dangerous. Fisheries, farming, construction, personal services; factory work Among registered workers: 24% in fisheries; 18% in farming; 14% in domestic services; others in mfg, mining, quarrying, construction Unregistered workers in these occptns and also market/trade; hotels, restaurants, prostitution Wages and conditions; job security Wages frequently reported as ~/23 - 3/4 Thai equivalents In real terms, monthly wages constant (~$60 in 2003 prices) since 1980 s No measurable wage premium for registered workers Few rights; none for unregistered workers (but in Burma, rights violations for all are the norm, not the exception) Regulatory and legal environment Thailand introduced permit system 1996 Registration and legal status (Registration costs equiv to 2 mo. income) Labor rights; human rights; access to social services 22

Impact of migrants on Thai prodn and trade Sector-specificity of occupations taken by most migrants Jobs in fisheries, agriculture, construction and personal services sectors cannot be outsourced Trade benefits Ag & fisheries contribute 18% of Thai exports by value Movement of Thai garment producers to the western provinces: migrant workers delay the ‘sunset’ for these labor-intensive industries (13% of exports) Fewer migrants --> lower prodn in these sectors Anecdotal evidence: 1999 deportation of 30, 000 B. workers in Tak province --> closure of 30 garment and canning factories, unharvested vegetable, flower and other hort. crops Less than 6, 000 Thai workers sought to fill vacated jobs Factor market complementarities: Migrants promote foreign direct investment inflows In longer term, may raise returns to skilled labor (and thus to educational investments) How? ? ? 23

Impact of migrants on the Burmese economy Wages and conditions in Thailand are vastly superior to equivalent occupations in Burma Agriculture (>>50% Burmese labor force) has been subject to price controls and mandatory sales to the state; reducing returns on land labor Forced labor in infrastructure projects (est. 3% GDP) Instability and destruction through internal warfare Average income less than $1/day Child labor rate estimated at 24% ==> Remittances (if any) from overseas workers should be highly influential to households that can receive and use them If Mexico-US migration is a guide, benefits are concentrated along the border and dissipate with distance 24

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Human capital and education Adding human capital (H) into Solow: Y = Aƒ(K, H, L) Increases in stock of human capital are like augmentation of total labor force More H raises the marginal productivity of K, L Putting it all together: Y = Aƒ(K, H, L)*N where K = Kdom + KFDI Openness and human capital accumulation are usually complementary 26

Past education investment in SE Asia NE Asia: famous for education “ahead of demand” What about SE Asia? (Booth 2003) 27

Past and projected years of schooling 28

Education and labor productivity Labor productivity is raised by increases in capital stock… …and by improvements in labor quality (education, etc…) Returns to education are higher in economies that innovate and move up product ladder Therefore, in more open economies – other things equal What about countervailing forces? Is there a downside to globalization? Could more openness actually reduce L productivity? Incentives for education? 29

Labor productivity growth in East Asia 12000 Labor productivity ($USD/worker) 10000 8000 1960 s 6000 1970 s 1980 s 4000 1990 s 2000 -08 2000 , C hi na re ap o H on g Ko ng ng a, re Ko Si Re p . ia ys al a M la nd Th ai a in Ch es ia do n In Vi et n am 0 Source: Computed from data in WDI Online 30

L. prod’y growth – a closer look 3000 Labor productivity ($USD/worker) 2500 2000 1960 s 1970 s 1500 1980 s 1990 s 1000 2000 -08 500 0 Vietnam Indonesia China Thailand Source: Computed from data in WDI Online Malaysia 31

Labor productivity growth 600. 0 Real labor productivity growth, 1984=100 500. 0 400. 0 China Indonesia 300. 0 Malaysia Singapore 200. 0 Thailand Vietnam 100. 0 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 0. 0 Source: Computed from WDI Online 32

Homework questions…. (1) What do you think are the main determinants or constraints to increased H supply? (2) What do you think are the main drivers of increased H demand? Remember that as with all production factors, demand for H is “derived” (not direct). It is determined by demand for the product in which the factors are used (just as the demand for agricultural land is “derived” from agricultural product markets and food prices). (3) Think about a country that is moving up the product ladder – to exports dominated by fragmented component production for the China assembly industry. What do you expect to happen to returns to H as it moves up the ladder? Will they increase, decline, or not sure? (4) Now think about a country that has a mix of industry and natural resource wealth. What do you think could happen to returns to H as it experiences a boom in natural resource exports? Will they increase, decline, or not sure? (5) If you were to offer any policy advice to the resource-rich country, what would it be? In your answer, be brief and be as specific as you can. 33

Educational investments and returns E Asian Miracle: primary education investments yield highest % contribution to GDP growth Consistent with global data on returns to education What causes educational attainments to rise or fall? Where is most public education investment concentrated? How are the gains from educational investments distributed? Khoman (2005): Thailand case 34

Educational expenditure and distribution – evidence from Thailand’s education rates were low before the boom, and didn’t rise much with it Opportunity cost of schooling: farm/factory earnings Taking account of quality and cost of education In 2001, 75% of rural Thai workers still have primary education or less (Khoman: 258). Quality of educational experience regarded as low Structural reasons (educational policies/infrastructure) Most able teachers leave for private sector (opportunity cost) 35

Access to education in Thailand In rural areas, majority of children don’t stay in school beyond 12 -14 years old (majority of urban do) Financial costs exclude the most low income groups Rural job qualifications do not demand much education Only formal sector jobs (public service, large companies) require ed. beyond primary If prob. of formal sector job is low, why stay at school? School quality & quantity is far lower in rural areas Public kindergartens are all urban, so is ½ municipal school enrolment and ½ private high schools Low education low incomes inter-generational perpetuation of low access 36

Access & distribution of public expenditures Most public education is heavily subsidized Fees charged: Secondary: 2 -22% of costs Vocational: 4 -37% of costs Universities: 7 -14% What do low fees do to structure of demand? Who benefits from this? Most demand for higher education (and even secondary) comes from more wealthy households… 37

Distribution of benefits from pub exp on ed Hhold group Benefits (Baht m) Distribution (%) Poorest 10% 8. 913 7. 6 2 nd 10% 9, 210 7. 9 3 rd 10% 9, 346 8. 0 4 th 10% 8, 938 7. 7 5 th 10% 8, 925 7. 7 6 th 10% 9, 567 8. 2 7 th 10% 10, 223 8. 8 8 th 10% 12, 236 10. 5 9 th 10% 16, 515 14. 2 Richest 10% 22, 838 19. 6 Total 116, 710 100. 0 Differences in opportunity to take advantage of education favor the wealthiest 38

Summary Labor mobility is the key to spread of gains from globalizn National border matter less than before… international “fragmentation” of labor markets Labor movements support changes in comparative advantage, as does FDI Human capital investments – key to sustained growth and productivity improvement Constraints on H supply growth: financial cost, opportunity cost Public policies are less than optimal implications for both growth and equity 39

Tomorrow Can a developing country manage its macroeconomy? The tradeoff between growth and stabilization in Vietnam Quiz #2 Turn in research projects Lunch in Hanoi! 40