Thursday, November 17, 2005

New World Bank report features remittances 

A couple of weeks ago we had a seminar presented by Dilip Ratha, a World Bank economist who you'll see a great deal of over the next few months. Peter Gallagher reviews the new Global Economic Prospects 2006 report from the Bank, which focuses on workers' remittances. Gallagher notes correctly that both developing and industrialized economies have been quick to lower barriers to trade in goods and capital but not for labor. Indeed, USA Today reports this morning that momentum is building for a fence to run the entire length of the US-Mexico border. That ignores the gains that can be made in industrialized countries from having smart, motivated workers join already-skilled labor forces, and the gains to developing countries from wages remitted by workers back to their home countries. Longtime readers of the Scholars will remember I did some work on this in Armenia two summers ago.

Gallagher suggests you buy Western Union stock, because they transfer money. The problem with WU is that they're awfully expensive. If I want to send $50 to my great-uncle in Armenia it will cost me an extra $13 to make the transfer. I can do much better by going into "little Armenia" in the Hollywood/Glendale area and find a window in the back of a store owned by an Armenian. I give him the money, he calls a friend back in Yerevan, and the friend takes money to whomever is to receive it. Rich Armenian parents can support their kids in America this way, for example, by letting the kid pocket the $50 here and handing the $50 over to the relative there; this avoids the banking system entirely. And other banks can do this for less than the WU wire; between Russia and Armenia, the cost was 1%. All of which is to say, don't buy Western Union stock for this reason.

That aside, there's much to learn from this report, particularly for the United States and other countries that attract immigrants:

Destination countries can enjoy significant economic gains from migration. The
increased availability of labor boosts returns to capital and reduces the cost of production. A model-based simulation performed for this study indicates that a rise in migration from developing countries sufficient to raise the labor force of high-income countries by 3 percent could boost incomes of natives in high-income countries by 0.4 percent. In addition, high-income countries may benefit from increased labor-market flexibility, an increased labor force due to lower prices for services such as child care, and perhaps economies of scale and increased diversity.

There are losers to be sure, particularly in the wages of lesser-skilled workers and within that group most particularly among earlier migrants. The net benefits or costs to the countries from whence immigrants originate is much harder to calculate. Sure, they get those large benefits, but they also suffer brain drain. I haven't read all of the report yet, just the intro and first chapter, but between that and talking with Ratha I get the impression he thinks the net might be negative for origin countries, a result that strikes me as surprising. I'll have to ask him about this next time I see him.

Dilip appears in this radio report from MarketPlace.

UPDATE (11/18): And this from the BBC.