Friday, April 22, 2011

A $65 Trillion Question: Why not Free Movement of People?

I have long argued that the free movement of people would constitute a powerful means of enhancing economic growth while empowering people. In American Corporate Governance and Globalization I argued: "The one free market ideal that seems not to be on the agenda of globalization is quite telling: there is little provision for the free movement of people. The free movement of people would allow migration to wherever wages would be the highest, in accordance with free market precepts. Economists conclude that barriers to the free movement of people are costing the world economy 70 percent of world GDP in forgone output." My conclusion in 2007 was that our flawed system of corporate governance permits CEOs to harvest large compensation payments from short term profits; therefore CEOs only seek a globalization that is powerfully rigged towards cheap labor by stranding labor in low cost locales.

Recently, Harvard economist Lant Pritchett published the most compelling economic argument I have seen in favor of free movement of people in The Cliff at the Border, a chapter in the Growth Commission's newest volume Equity and Growth in A Globalizing World. Prichett states: "In contrast to these modest gains from further liberalization of goods or capital markets, estimates of the gains from the fanciful counterfactual of a complete liberalization of labor mobility are that the world GDP would roughly double. At current levels of GDP, this implies gains of $65 trillion." He further notes that:
"The point is that, at the margin, the gains to poor people from relaxing the existing barriers to labor mobility are enormous relative to everything else on the development table."

The WTO exists to breakdown trade barriers, such as restrictions on labor mobility. Moreover, the current round of trade talks--the Doha Round--specifically focuses upon development. The WTO should place the $65 trillion labor mobility question at the top of the agenda. Its importance dwarfs all other issues that have stalled the trade talks.

Further, the labor mobility issue dovetails with the $100 trillion currency reserve issue. The rapid development of the least economically powerful nations would assuage the baseless fear that many workers in developed countries have regarding more expansive immigration--that they will face declining wages and fewer job opportunities (economists show the opposite is true: immigration actually raises native wages overall and increases worker specialization and productivity). First, rapid development would expand demand for all goods produced throughout the world economy. Second, rapid development would diminish the incentives for labor to exit undeveloped nations.

Thus, if the WTO wishes to pursue development it should pursue labor liberalization and currency reserve reform. The economic case is simply overwhelming that a sturdier globalization requires a legal construction that addresses currency reserves and labor mobility.

Perhaps even more importantly, however, are the political implications of such reforms. Free movement of people would mean that nation states would need to compete for the best and brightest human resources. Laborers would seek out locations where their productivity and quality of life would be maximized. As Joseph Stiglitz recognizes, if nations had to compete for talented people then "Governments would compete in providing economic security, low taxes on ordinary wage earners, good education, and a clean environment—things workers care about."

Free movement of people is both an economic as well as political game-changer.


  1. So why does the citizenry get it so wrong? The arizona anti-immigration law, the rhetoric in congress? All seem determined to restrict the flow of labor rather than to maximize it . . .

  2. Great post. It seems to reinforce the unfortunate truth that perception is reality. It doesn't matter whether or not increased mobility hurts native workers or not, it only matters that those native workers think they will be harmed. Its natural for those "on top of the hill" to want to guard their position. The key seems to be increasing awareness about the positives that would accompany increased mobility.

  3. Very interesting post. I agree with most of what you have said and would like to draw attention to a few of the things in this post.

    First, the conclusion that expansive immigration actually raises native employee wages as well as boosts productivity and specialization. This is a point I have not heard before and upon looking at the studies this author cites to, I am rather interested in seeing or learning more about this line of empirical study. Outside of my personal interest, it is a conclusion that a majority of the World (specially the United States) would be reluctant to follow. This seems apparent from our nation’s immigration policy, accompanied with the general perception that foreigners take hard-working Americans jobs. Even though a majority of the labor force that has this natural bias against it takes positions that many Americans do not wish to do, it nonetheless exists and so long as it does, complete immigration liberalization will never happen.

    As to a second point you mention in your article, that if a system of open markets and borders were to come about that “[l]aborers would seek out locations where their productivity and quality of life would be maximized,” this makes one large presumption. That being, that there is ease of access and movement between these markets. Once again, this is another presumption many economists make, but there is a large difference from moving between states, in the U.S., compared to crossing national or continental boundaries, just by the pure volume of mileage. For example, if Tech Worker makes $40,000 per year in Country A and could get paid $50,000 per year in Country B, but it cost him more than the that difference to move to that country, set up his home, and make contacts, is that a choice he will make? At this point he is engaging in his own cost benefit analysis that may not put his talents to the most efficient end.

    This article is one that I agree with at the end of the day. But, the WTO and other IGO’s are simply not willing to actually follow through with what needs done. I would like to say this piece opened my eyes a bit.

    Jacob S.
    Bus Org.

  4. Very interesting and insightful post. I would love to see these ideas in action and the effect on GDP.

    Perhaps I need to read the book, but I am interested to learn more about how the WTO pursues agendas and what effect that would have on countries like the U.S. My biggest concern in seeing the implementation of this idea is the ability and willingness of different sovereigns to open up their borders.

  5. This is a very intriguing theory that makes me curious about the underlying numbers. Without having read the entire study regarding the overall wage increase, for example, the abstract raises a few questions.

    To begin, the focus of the paper is primarily the 90s and early 2000s, during which there was a progression from a minor recession following the boom of the 80s into a stable period of economic growth. How would these numbers be affected if we were to look at a period where the economy was declining? Can the study even be considered circular, as it chooses a period of high immigration, when it is likely that an overall increase in the economy would draw in more immigrants during the period as they have an incentive to relocate? Also, what role does the glut of workers play when the economic downturn begins? While this could be altered by free mobility as the jobs disappear, it then becomes a question of how unemployed workers can generate the necessary funds to relocate.
    I also would be interested to see in what ways the wages change. The abstract of the paper concedes that the wages for american born workers without a high school degree declined during the same period, but this was overbalanced by a rise in the wages of other workers. This calls into question the distribution of any gain in GDP or wages. If the overall wages are increasing during high periods of immigration, is that because native executives gain substantially from a greater supply of workers allowing them to decrease wages or tangential benefits?
    Ultimately, the greatest question may be not legal barriers to worker movement, but the financial ones as Jacob brings up. The rich will not want to leave the land of good jobs, and the poor may not be able to buy their way out of the land of poor jobs. If the movement cannot be realized, neither can the benefits. If the WTO has limited political sway over its constituent companies, it may jsut be that this is better spent in procuring a unified front of basic environmental protections and workers rights that would descrease the damage from corporations penchant for shopping their jobs around for the lowest bidder.

  6. This is a very interesting article on a very controversial topic. I think that with all controversial topics, people should make an effort to understand and appreciate them, rather than dismiss them right of the bat. For example, it is a presumption that all laborers would have the financial/familial/cultural capabilities to pursue the opportunities resulting from complete liberalization of borders, but open borders would still result in more jobs and an increased worldwide GDP. This is inevitable. Many would be able to take advantage of these opportunities immediately, and many would plan and save so that they could pursue a better quality of life down the road. When it comes to the quality of life of one's family, people are capable of extraordinary things.

    When it comes to an idea thats leads to change, the argument that the majority disagrees with it is meaningless. Progressivism is not accepting what the current majority believes, nor is it accepting the way things are. Being progressive is recognizing problems or injustices in the world, and taking steps to correct them. There are clearly problems with complete liberalization of borders. The comfortable way of life that many Americans enjoy may be jeopardized. However, the main reason that the majority would oppose free movement of people is because those with power want to protect their wealth. Openly considering the free movement of people is considering whether we should agree with the priorities of the rich and powerful. Maybe we should and maybe we shouldn't. One thing is clear, however. Millions of hardworking, proactive people do not have the opportunity to prosper. This is a problem worth considering.

    Michael Cardi