Does skilled migrants remit less?

Who remits more: skilled or unskilled migrants? According to a new Asian Development Bank (ADB) working paper, unskilled migrants remit more than skilled migrants. Okay! But what policy conclusion can we derive from this finding? Well, the authors of the paper argue that for a source country, it would be better to focus on policies to promote unskilled labor migration. This finding somehow support the argument that brain drain is bad. But it may not be necessarily so in this globalized world- see this article from The Economist. Also, migration does not always have to be from poor to rich countries; it can happen the other way round or from poor to poor countries.

Skilled migrants tend to have higher incomes and can afford to send more remittances to their families back home. On the other hand, they tend to come from better off families whose demand for remittances is lower relative to poorer ones. Furthermore, skilled migrants are able to bring their families along with them as they tend to enjoy more secure legal status. All of these factors reduce the incentives to send remittances. Thus, the net impact of an increase in migrants’ level of education on remittances is ambiguous a priori. Empirical studies have so far been unable to resolve the debate on this issue. This paper’s main contribution is to show that remittances actually decrease with an increase in migrants’ overall level of education.

They find that remittances decrease for migrants with tertiary education.This is hard to believe given the fact that India, China, and France (three of the top five recipients of remittances in 2007) get a substantial chunk of remittances from skilled workers. Meanwhile, countries like the Philippines, Bangladesh, Mexico, and Nepal receive a major chunk of remittances from unskilled workers. Here is a list of top ten remittance receivers in 2007.

The determinants of remittance are migration levels and rates, migrants’ education level, and source countries’ income, financial sector development, and expected growth rate, among others. I think rate of return of labor and rate of return of education of workers in their home country are two of the main variables of migration function. A World Bank study on remittances and brain drain found that in the case of Mexico, migrants are less uneducated than nonmigrants. Generally, if the rate of return for labor and education is higher in source country, then educated workers opt to stay back. On a policy level, it is not necessary to focus on retaining educated migrants because they make decision based on the rate of return in the domestic market. Meanwhile, it might be fruitful if policies are designed to facilitate migration of unskilled workers to countries where there is high return to labor, provided that the domestic market is either saturated or incapable of absorbing unskilled, unemployed workers.

Doing Business in Nepal

Here (or here) is a Doing Business Report 2009 focused on Nepal.

Check this one out for my earlier blog post, which contains discussion about the ease of doing business in Nepal and South Asia.

Global financial crisis and Sub-Saharan Africa

The IMF has released a report highlighting the effect of the current financial meltdown on the Sub-Saharan Africa region. The regional growth rate is expected to slow down to 6% in 2008 and 2009, down from 6.5% in 2007, because of the impact of rising commodity and fuel prices in oil-importing countries and the worsening impact emanating from financial meltdown in the West. Meanwhile, inflation is expected to shoot to 12% and 10% in 2008 and 2009 respectively (how much has hyperinflation in Zimbabwe skewed this number?). Concerns on remittance and private capital flow to Africa remain high amidst the worsening financial crisis.

…So far, the main effects of the global financial turmoil appear to be indirect, in the form of slower global growth and volatile commodity prices. Recent heightened turbulence raises the risks, including of a decline in resource flows to Africa in the form of private capital, remittances, and even aid.

The challenge for policymakers is to adjust to the food and fuel price shock, preserve economic stability in the face of global financial turbulence, and shield the poor. With food and fuel prices substantially off recent peaks, it should be easier to fully pass through higher prices to the economy to encourage adjustment. With food accounting for a major part of household expenditure, the resulting loss in the purchasing power of the poor is a serious concern. Measures to cushion the impact of higher food and fuel prices on the poor therefore need to be well targeted—and also supported by donors. For oil exporters a particular challenge is to preserve a medium-term perspective; caution use of oil revenue windfalls permits smoothing of fiscal spending in the face of price declines as well.

Here are some important observations about Sub-Saharan African growth:

• Sub-Saharan Africa has enjoyed a remarkable growth takeoff since the mid-1990s.
• Sustained growers in sub-Saharan Africa have gotten the critical basics right and avoided major policy failures.
• Recent African success stories also demonstrate that governments need to play a proactive role but that there is no simple recipe for achieving high growth.
• Higher aid has been part of the story for fast growers that have not benefited from large resource rents, providing room for higher social spending and public investment and promoting or at least being consistent with fast growth.
• High growth cannot be taken for granted.

The IMF, which is more obsessed with the free market ideology than its sister organization, WB, quite surprisingly argues that the government can do a lot to stimulate economic growth. Remember that, unlike in the past the IMF recently supported the $700 rescue package while it opposed a bail out package during the 1997 Asian Financial Crisis (especially in South Korea and Indonesia, which it described as not having as “systemically important” financial institutions as the US has right now!). Here, it also supports country specific growth policies, unlike in the past!

Countries need to choose policies that allow them to benefit from what is happening externally, preserve macroeconomic stability, promote effective public and private investment, and ensure that all share in the benefits of growth, which must include improvements in health, education, and the other areas addressed by the MDGs as well as income. Moving toward growth trajectories that emphasize value added and nontraditional exports—paths that characterize most sustained fast growers in other regions—is not easy, but it can be done.

More on financial crisis and IMF: Can the IMF save the world?

Special section on the financial crisis from the BBC News here.

Aftermath of the financial mess: Redistribution of talent

Esther Duflo feels that the growth of financial sector until now has led to unproductive distribution of intelligence (talent). She argues that with stricter oversight and monitoring of CEO salary and bonus and disappearance of their exorbitant earning may encourage talents to seek job opportunities in other industries, thus leading to a more realistic allocation of talent.

If paying the bankers (a lot) less or taxing them (a lot) would certainly be more desirable from a moral point of view (not to mention considerations of equity), would it be harmful in terms of economic efficiency, as many economists suggest? Is there a risk of discouraging the most talented to work hard and innovate in finance? Probably. But it would almost certainly be a good thing. A study on Harvard graduates showed that those who work in finance earn almost 3 times more than others. The temptation for young talent to work in this sector is enormous – 15% of 1990 Harvard graduates are working in finance, compared with only 5% of the class of 1975. More generally, the massive deregulation of the financial sector, which began in the 1980s, and the opportunity to make extraordinary profits have been accompanied by an increase in the number and qualifications of employees in this sector. Again, according to Philippon and Resheff, one has to go back to 1929 to see such a gap between the average education of an employee in the financial sector and one in the rest of the economy. The complex financial products, but also the evolution of standards in the social sectors over the past 30 years, have made the financial sector particularly attractive to any graduate, intelligent as he or she may be.

What the crisis has made bluntly apparent is that all this intelligence is not employed in a particularly productive way. Admittedly, a financial sector is necessary to act as the intermediary between entrepreneurs and investors. But the sector seems to have taken a quasi-autonomous existence without close connection with the financing requirements of the real economy. Thomas Philippon calculates that the financial sector, which accounts for 8% of GDP in 2006, is probably at least 2% above the size required by this intermediation. Worse, the sub-prime crisis is almost certainly in part linked to the fact the needs of the financial markets (the insatiable demand from banks for the (in)famous “mortgage-backed securities”) led to excessive borrowing and a housing bubble. Watching the events of the last few days unfold does make us one want to send some of the finance CEOs back home. More pragmatically, the disappearance of their exorbitant earnings may encourage younger generations to join other industries, where their creative energies would be socially more useful. The financial crisis could plunge us into a severe and prolonged recession. The only silver lining is that it could cause a more realistic allocation of talents. One must hope that the bail-out packages in Wall Street and in Europe do not convince the best and brightest that the financial sector is still their best option.

The most competitive nations

The World Economic Forum (WEF) has published The Global Competitiveness Report 2008-2009. Click here for highlights of the report. The US, followed by Switzerland, Denmark, Sweden, Singapore, and Finland are the top five competitiveness nations in the world, according to the report. Below are the top ten nations and their comparative movement along the list.

China is in 30th position (up by 4 positions from last year), India is in 50th position (down by 2 positions from last year), and Nepal is in 126th position (down by 12 positions from last year). From the Sub-Saharan Africa, Tunisia is in 36th position (up by 4 positions), South Africa is in 45th position (up by one position), Botswana is in 56th position (up by 20 positions), and Mauritius is in 57th position (up by 3 positions).

Among the 134 countries included in the report, the last ten, except for Nepal and Timor-Leste, are African nations. The bottom ten in the report are: Madagascar, Nepal, Burkina Faso, Uganda, Timor-Leste, Mozambique, Mauritania, Burundi, Zimbabwe, and Chad.

The co-author of the report states that amidst rising food and energy prices, international financial crisis, and slowdown in leading economies, the importance of a competitiveness-supporting economic environment is even higher as this helps to fend off these kinds of shocks in domestic economies.

“Rising food and energy prices, a major international financial crisis and the related slowdown in the world’s leading economies, are confronting policy-makers with new economic management challenges. Today’s volatility underscores the importance of a competitiveness-supporting economic environment that can help national economies to weather these types of shocks in order to ensure solid economic performance going into the future,” said Xavier Sala-i-Martin, Professor of Economics, Columbia University, USA, and co-author of the report.

Well, this needs a little bit of explaining to show how competitiveness-supporting economic environment actually help weather the financial and economic crisis, like the current one, emanating from the developed countries! Are the most competitive nations weathering the impact of the current financial crisis right now? Or, is there evidence that the least competitive nations not being able to weather the impact of the recent financial crisis? Put it another way: Is competitive environment helping weather the impact and risks inflicted by the current financial crisis and rise in commodity and fuel prices? Note that I am not doubting the power of markets!

Meanwhile, the director of WEF’s global competitiveness network said:

…despite the present turmoil the index was still relevant because it measured a wide range of factors important for long-term growth in productivity and living standards…Once the global economy emerges from the current financial crisis, which it will, the countries that do well on our index are those that are best prepared to bounce back and perform well in the longer term

The report looks at twelve “pillars of competitiveness” namely institutions, infrastructure, macroeconomic stability, health and primary education, higher education and training, goods market efficiency, labor market efficiency, financial market sophistication, technological readiness, market size, business sophistication, and innovation.

Finally, this one from the FT:

Like the rival index produced by the Swiss-based IMD business school, the WEF index relies heavily on the views of business executives as well as statistical data, and the rankings depend crucially on the weights given to the various factors.

This helps to explain some oddities in the WEF rankings. For instance, Qatar and Saudi Arabia are ranked above China (30), while now bankrupt Iceland (20) tops rich and solid Luxembourg (25).

Nice sentences

…developing nations will have to stop looking to financial markets and multilateral agencies for the recipes of economic growth. Perhaps most difficult of all, economists will have to learn to be more humble!

- Dani Rodrik, One Economics, Many Recipes, pp242

Links of Interest (10/07/08)

Zoellick argues for Modernizing Multilateralism and Markets and says the G-7 is not working. He calls for a new Steering Group including Brazil, Russia, India, China, Mexico, Saudi Arabia, South Africa, and the current G-7.

Why Nepal has to be at the heart of South Asian climate discussion initiatives: Regional initiatives, global strategies

Paul Collier on cracking down on Africa’s loot-seeking elites

Paul Romer’s take on the financial crisis: Fundamentalists versus Realists

Stiglitz, Hubbard, and Scholes throw The Dismal Questions at Obama and McCain ahead of the presidential debate!

Taking another look at land reform in Nepal

Perry gives the Good News From Africa (about improvement in governance indicators as shown by the Ibrahim Index)

The Ibrahim Index explained

List of formally educated African leaders

Geographic ignorance: ‘Nepal is Tibet’:The saga of gaffes continues

Pachauri on fighting climate change for the sake of the poor