Labour Migration between the Developing and the Developed

Labour Migration between the Developing and the
Developed

Law and Globalization - Interdisciplinary Seminar
28.07.2006

Laura E Catton

Abstract:
This paper is focused on the driving and limiting factors of the movement of workers
from labour rich developing countries to developed countries facing limited labour
supply, and the possible solutions countries should adopt to foster more liberalized and
valuable labour migration.

The first section this paper concentrates on the social and economical benefits of
labour migration including the positive effect of remittances to developing countries,
the possibility of real wage increases within the developing country’s economy, and
the ability for developed countries to meet their labour shortage demands.

The problems associated with labour migration, including the brain drain, xenophobia,
discrimination and cultural barriers, the intrusion on domestic labour, and the
possibility of economic inefficiencies and lack of innovation, are discussed in second
section of this paper.

Solutions both developing and developed countries can adopt to help solve these
problems are raised and discussed in third section of the paper.

Finally, a concise introduction into GATS Mode 4 - the movement of natural persons - is
presented. The final section of the paper raises the question of the usefulness of Mode
4 as it currently stands today and criticizes the vague yet restrictive nature of the
text.

The rise of globalization has put increasing prominence on the liberalization of
services, including the liberalization of the movement of labour. It is evident that
economics drives labour migration; wage differentials and labour surpluses are the
most common reasons for the movement of labour abroad. These driving factors,
coupled with the increasing ease of relocation with lower transportation costs, have
caused an increase in labour migration over the past couple decades. According to the
World Bank (2004), “globalization is driving the movement of people across borders…
falling costs of transportation and communication have reduced the distance between
peoples, and the drive for better lives has motivated workers to move to areas where
jobs are more plentiful and pay is better”.

I. Driving forces of Migration of Labour:
There is a strong push from developing countries to further liberalize the labour
market for many beneficial economics reasons. Firstly, developing countries gain from
higher wages abroad, which, in returns, results in the influx of money into the
country’s economy from foreign workers’ remittances. The World Bank (2004)
estimates that in 2001, “workers remittances alone provided some $70 billion to
developing countries, nearly 40 percent more than all development assistance and
significantly more than net debt flows to developing countries” and “(these)
remittances represent a large proportion of the GDP and constitute a major
contribution to the stability of foreign exchange”1.

Secondly, workers within developing countries also benefit from the migration of local
workers as (1) the outflow of labour causes the supply of labour to decrease which, in
turn, (2) causes an increase in real wages (figure 1). The labour supply decreases from
the original supply (S1) to a lower supply (S2) as workers seek employment abroad.
This decrease in labour supply, denoted as ∆SL, results in an increase in real wages
within the country by ∆RW.

1
Labour Migration. Workshop for Policy Makers: 86th Session, 18 Nov. 2003, International Organization for
Migration. <http://www.iom.int/DOCUMENTS/GOVERNING/EN/LabourWorkshops_Report.pdf>.

Figure 1

Real S2
Wages
DL
S1

RW2
∆RW
RW1

Supply of
Labour
(Quantity)
SL2 SL1

∆SL

Assuming those in developing countries are rational actors, neoclassical economics
tells us that workers from developing countries will seek employment abroad when
their benefits of doing so outweigh their costs. Corresponding with the
aforementioned, workers from developing countries will seek employment abroad
when the benefit of the gain from the large wage differential and increased living
standard outweighs the monetary and social costs of relocation. It is therefore evident
that the decrease in the costs of migration will result in an increase in migration rates
as one’s cost-benefit offers a higher positive net return from migration.

Furthermore, developed countries also benefit from migration of labour. Developed
countries are currently faced with aging demographics and are experiencing shortages
of young workers to fill these vacancies. The United Nations reports that in 10 years
from now developed nations will be faced with only 87 young entrants into to the
labour force for every 100 retirees while developing countries emit, “342 new labour
market entrants for every 100 first world retirees”2. It is believed that, “affluent
countries must import vast numbers of immigrants to maintain the age ratio between
tax-paying workers and retirees to prevent the collapse of social security systems”3
(although this notion is later challenged). It is evident, however, that developed
countries must embrace labour migration from developing countries to overcome their
labour shortcomings.

Moreover, through hiring foreign workers, the developed countries have the reverse
effect on their real wage rates as found in developing countries. With the influx
foreign workers, there is a shift of the supply from S2 to S1 (change of ∆SL) causing a
market reaction of decreased real wages of ∆RW from RW2 to RW1 (Figure 1). This
decrease in real wages allows companies in developed countries to achieve positive

2
Lund, Michael. "A Labour Shortage Can Be a Blessing." Financial Times 8 June 2006. <www.ft.com>.
3

economies of scale; companies within the developed countries markets are able to
produce more units of goods and services for lower input costs (lower labour costs).
Later in the paper, however, I will challenge and refute the notion that the decreases
in real wages are positive to the developed country’s economy by asserting that
decreasing real wages will result in inefficient economies.

II. Driving Forces against Labour Migration:
Labour migration is not a clear cut answer, however, for solving labour shortage in
developed countries and labour surplus in developing countries as labour migration
comes with its own set of economical and societal consequences and costs.

The Brain Drain
For the migration of skilled labour, the most prominent concern of the exporting
country is the likelihood of a ‘brain drain’ occurring. The coined term ‘brain drain
migration’ became popularized in the 1960’s when developing countries lost
considerable invested resources by means of losing skilled labour to developed or more
appealing countries4. The receiving country reaps the economic benefits of these
skilled workers while the sending country “loses productive capacity due to the
absence of higher skilled workers and students”5. In the case of developing countries,
the emigration of skilled labour can impede the countries’ ability to industrialize.

Xenophobia, Discrimination, and other Cultural barriers
Social factors that hinder the migration of labour include family separation,
xenophobia, discrimination and cultural/language barriers. With the movement of
labour to countries which don’t allow for family reunification, the sending country is
faced with the social costs of disunited families. Likewise, foreign workers are faced
with instances of xenophobia - the contemptuousness of natives towards foreigners.

This contempt in conjunction with language and cultural barriers encumber workers to
seek employment abroad and can result in prejudicial hiring of non-immigrants or poor
treatment of migrant workers. In a study titled ‘Combating Discrimination against
(Im)migrant and Ethnic Minority Workers in the World of Work’ launched in 1991 by the
ILO, results showed that in countries such as Belgium, German, the Netherlands, and
Spain one in three job applications put forth by a minority of foreign origins was
rejected on the basis of racial prejudices. Outside of the work environment, foreigners
are faced with further segregation and xenophobia:
…systemic discrimination may be manifested by differential access to
housing --such as relegating minorities to ghettos, or distant suburbs; by
provision of inferior education through under-funding and understaffing
schools in minority neighborhoods, areas or regions; provision of inferior
health facilities; by lack of public transportation between
minority/target group living areas and places of available employment;
and so on.6
4
Cohin, Robin. Brain Drain Migration. University of Warwick. Official South African Commission on
International Migration, 1997.
5
International Mobility of the Highly Skilled. Organization of Economic Co-operation and Development.
Paris: OECD Publications, 2001. 1-336. <http://www1.oecd.org/publications/e-book/9202011E.PDF>.
6
Taran, Patrick, and Eduardo Geronimi. Protection is Paramount. Conferencia HemisféRica Sobre
MigracióN Internacional: Derechos Humanos Y Trata De Personas En Las AméRicas, 20 Nov. 2002,

Amongst local employees in jobs that can be easily filled by migrant workers (most
commonly labour intensive occupations), there is the fear that importation of labour
will undermine local job security and, hence, leads to contempt towards foreign
workers. This contempt can also been seen by those in careers not easily overtaken by
foreigners such as doctors and lawyers who require quite often country specific
training and qualification. The contempt from these workers rises from the fear that
foreigners are a drain on the nation’s social services; for the receiving country,
language and cultural differences also pose high social and economic costs. A study
within Switzerland found that these diversities,
…manifest themselves in high social and economic costs of integrating a
foreign population with diverse cultural backgrounds and languages. The
costs of integration are particularly large in the case of less-skilled foreign
workers from less-developed countries, who not only put a strain on the
Swiss educational system but also instill a feeling of alienation among
some Swiss.7
Xenophobia towards foreigners is also on the rise from the increasing portrayal of
foreigners in terrorist attacks. This xenophobia coupled with government fears of
allowing the movement of possibly dangerous individuals into one’s country has lead to
an increased tightening of labour migration policies in developed countries. According
to Rubén Silié, however, this is unjustifiable:
To want to justify the campaign against immigration as a resource in the
fight against terrorism makes absolutely no sense whatsoever, since the
onset of terrorism is not the product of migration. Terrorism is a state of
war whose motivations differ entirely from those of the workers who
leave their countries in search of better opportunities for life and
employment. If some causality could be established between terrorism
and migration, we would find more terrorists among the Hispanic
community than in the Muslim community, whose numbers are far lower
than the former.
In this light the ‘fight on terrorism’ can be seen as a poor excuse for hindering the
ability for migrant workers to find work in developed countries. Countries must adopt
background checks similar to those being performed for permanent migrants to ensure
that those coming for non-beneficial reasons are rejected.

To sum up, for migrant workers factors of xenophobia from natives might hinder their
decision to take advantageous work offers abroad while the increased social service
costs along with pressures from national trade unions coupled with negative public
opinion associated with the influx of foreign workers makes democratically elected
governments hesitant to liberalize their borders to labour migration.

Intrusion on Domestic Labour
The decrease of labour costs caused by the increase of labour supply in developed
countries can furthermore also be associated with negative economic outcomes.
According to the International Organization of Migration, “protection of the domestic
labour force is one of the principle challenges of the receiving countries and is among

International Labor Office (Geneva).
<http://www.cepal.org/celade/noticias/paginas/2/11302/PTaran.pdf.>.
7
Cattacin, Sandro, ed. Debate: Immigration Policy. Swiss Political Science Review 7. 2001. 95-118.
<www.sscnet.ucla.edu/soc/faculty/wimmer/Konturen.pdf>.

the main reasons for restrictive immigration policies”. Unemployment or decreased
real wages of native workers can be a causal effect of over importation of labour.
Simple Keynesian macroeconomics tells us that consumption depends on income.
When incomes decrease, consumption will decrease. As consumption decreases,
demand for consumer goods decreases. When demand for consumer goods decreases,
the need for labour likewise decreases causing real wages to further plummet.
Ultimately, if this process continues, a recession is born out of the multiplier effect
(Figure 2).
Figure 2

Decrease in real Decrease in
wages and/or consumption of
unemployment of consumer products
native workers

Decrease in
Decrease in
demand for
demand for labour
consumer products

Wages, which were previously being re-invested into the economy, are being
eradicated out of the economy by means of remittance. Further intolerance for
foreigners could also arise within the nation as fears rise that foreigners will replace
native workers in the labour force.

This need for the protection of domestic labour can be exclusive, however, to
particular types of labour migration. Conventionally, North – North migration is more
commonly accepted by those in developed nations. Firstly, “In North-North migration,
the sending country or region is relatively developed so the question of the migration
being detrimental to the sending region tends not to arise”8 while those involved in
North-North migration are seen have similar lifestyles and religious backgrounds which
makes them easier to integrate into receiving countries’ culture. In South-South
migration, referring to the flow of migrant workers between or within relatively
underdeveloped regions or countries, even if the migration occurs in the geographical
north, is usually associated with the movement of low or unskilled skilled workers out
of inhabitable lands or the movement of workers from the rural to urban regions. In
some cases the influx of migrant workers from one developing country to another
leads to the strain on the receiving country’s already limited resources. This, amongst
other factors, leads to the reluctance for developing countries to allow for migration
of foreign low-skilled workers, who bare no applicable skills for the development of
the receiving country, into their nation. This fear of workers being a drain on a
country’s resources likewise arises from South-North migration which refers to the flow
of migrant workers from developing to developed nations (this also includes the
8
Ellerman, David. "Policy Research on Migration and Development." World Bank Policy Research Working
Paper 3117 (2003).

movement of workers from developing Eastern Europe to developed Western Europe).
South-North migration also sees prominent xenophobia as those from developed
nations feel as if those from developing nations won’t be able to integrate into their
society easily causing a drain on social services. It can be seen that xenophobia
towards foreign workers is based on one’s opinion of whether they feel the foreign
workers are able to easily adapt to the receiving country’s culture and society.
Similarly, the degree of xenophobia is proportional to the sense of whether the foreign
workers are beneficial or a drain on the receiving country’s economy. Unfortunately,
this xenophobia stems off stereotypes which makes citizens feel as if North-North
migration is always good while South-North migration is always bad (which can be
easily refuted).

The mercantilist ideology of ‘zero-sum’9, correspondingly, is often adopted by those
against the migration of foreigner workers; those who follow this ideology believe that
the gain by the foreign workers results in a loss by national workers.

The Development of Inefficient Economies
The development of inefficient economies is an additional economic concern as the
availability of cheap labour from foreign markets can have a detrimental effect on the
innovative nature of domestic companies. When faced with labour shortages,
“businesses have an incentive to invest in labour-saving technology, which boosts
productivity growth by enabling fewer workers to produce more.”10 When countries can
just import more low-priced labour there is little vigour for companies to invest into
innovative technologies. Furthermore, according to Michael Lund of the Financial
Times, the perception that it is necessary to import labour to maintain a ratio
between tax-payers and retirees in order to sustain the social security is false. Lund
believes that, “productivity growth can solve much or all of the pension funding
problem”. To support this, the United States labour pool went from eighteen workers
per one retiree in the 1950s to three workers per retiree in 2006 without
complications. The US avoided a failure in the social security system by increasing its
productivity per worker by means of technological advancements. The importation of
low-cost labour can be seen as the ‘quick-fix’ but not the ultimate solution to sustain
innovative economic growth.

III. Solutions to Driving Factors against Labour Migration:
Although there are some compelling arguments challenging the migration of labour, it
is impossible to deny that labour migration is vital to both stakeholders - the
developing and the developed nations. The question is not whether labour migration
should be endorsed but rather how labour migration should be endorsed.

Mitigating the Brain Drain
Firstly, the sending country of labour must be able to combat the problem of the
‘brain drain’ in order to sustain its own national economic growth. The brain drain is
seen as a significant misuse of a country’s resources. In many Latin American nations,
for example, enrolment for medical school is significantly high, but the nation faces a

9
Zero-sum describes a situation in which a participant's gain or loss is exactly balanced by the losses or
gains of the other participant(s). (Wikipedia.org)
10

shortage of doctors11. Jagdish Bhagwati, a professor in Law and Economics at Columbia
University, New York, proposed an initiative to develop a brain drain tax making it
mandatory for skilled workers who emigrate from developing nations to developed
nations to “share a part of their brain-drain gains with their country-men and -woman
who have not been able to improve their economic fortunes by emigration”12.

Although good in theory, Bhaqwait’s proposal lacks real credence in the real world.
There are many complexities that coincide with Bhagwati’s proposal: most arising in
the logistics of implementation. Since developing countries would be levying this tax
from its emigrated workers while abroad, the sending country would require the
support of the host country to help enforce the payment. In countries, such as the
United States of America, assistance with enforcement would almost certainly be
denied as the tax would been seen as unconstitutional for it discriminates against
aliens. According to Bhagwati, a multilateral lateral agreement would need to be
developed among nations to impose such a tax although no such initiative has been
raised at world forums because the tax brings rise to conflicting interests. Developing
countries could, however, try to impose such a ‘brain-drain tax’ on the world forum by
claiming the tax is a ‘support payment’ for remaining family members much like a
parent must pay child-support payments for their children. The dilemma arises
however in conflicting interests between developing and developed countries as
money would be extradited from the developed country’s economy which, in turn,
would have a negative impact on their economy. For this reason, the developing
countries would have extremely tough resistance to the agreement of a ‘brain-drain
tax’ from developed countries.

Developing nations should conversely concentrate their focus on developing incentives
to retain and return highly skilled workers back into their economy. The International
Labour Office in Geneva developed a rubric of the 6 R’s developing countries should
adopt to mitigate the effects of the brain drain:

1. Return of migrants to their source country
2. Restriction of international mobility to own nationals and foreign workers
3. Recruitment of international migrants
4. Reparation for loss of human capital (compensation)
5. Resourcing expatriates (Diaspora options)
6. Retention: through educational sector policies and through economic development
Source: Wickramasekara, International Labour Office

Focusing on the ILO’s solutions of return and retention, sending countries must first
analyze the reasons their workers decided to acquire employment abroad and then
rectify these problems. As seen previously, the two most prominent reasons for the
migration of labour is better work and pay opportunities abroad. These variables,
however, are quite difficult for developing countries to influence. Likewise, the
alternative solution of straight out banning migration to counter the brain problem
goes against Human Rights conventions. Developing nations must instead encourage
11
"Labour Migration." Wikipedia.Org. <www.wikipedia.org>.
12
Bhagwati Jagdish, Ed. (1976). The Brain Drain and Taxation - Theory and Empirical Analysis.
Amsterdam, North-Holland Publishing Company.

the retention of current skilled workers through generating ‘rapid economic growth’
within their own nation - although this is easier said than done according to Devan and
Tewari: “… the hard reality is that few emerging markets have any hope, in the
foreseeable future, of creating the type and volume of economic opportunities needed
to reverse or even substantially slow the brain drain.”

This raises one of the foremost problems associated with the brain drain: the
multiplier effect it causes. As workers leave the country the economy suffers resulting
in more workers seeking employment abroad. Developing nations need desperately to
break this negative cycle in order to have any hopes to reclaim a growing economy.
Hope seems to exists, however. As per the International Labour Office’s Philippines
Study, new communications technology such as the internet might be the key to break
the cycle and keep laborers in the country:
The pervasive use of the internet as real time communications media
has effectively closed the gap between users and suppliers of high skill
work without actual physical dislocation. In particular, programming and
software services are being transacted through the internet without the
necessity of worker migration.13

Beyond promoting the use of emergent technologies that allow laborers to provided
services abroad without the necessary movement abroad, developing countries should
also focus on shifting their educational resources from higher education to primary
education to increase the average productivity of the non-skilled to low-skilled
workers who are left to support the economy.

Combating Xenophobia and Other Cultural Barriers
The practice of exclusion and ‘racialization’ can hinder a foreigner’s ability to
integrate into the receiving country’s social sphere and further promotes alienation
and xenophobia. Likewise, limiting the ability for foreign workers to reunite with their
family can further feelings of alienation amongst foreign workers.

To combat this racial intolerance, receiving countries should educate natives about the
importance and necessity for foreign workers to sustain a growing economy and
separate the image of the ‘media’s foreigner’ (as media normally dwells on the
negative subject matters relating to foreigners such as illegal immigration, terrorism,
etc.) and the larger majority of migrant workers who are beneficial to the country.

Furthermore, the adoption of national laws that protect non-nations, the promotion of
diversity and multiculturalism, and the promotion of business to implement non-
discriminatory hiring policies can help divert the xenophobia associated with foreign
labourers and further promote the integration of migrant labour into society. Canada,
a country that highly relies on the influx of foreign workers for seasonal temporary
work, requires both the employer and migrant worker to sign an agreement which “…
specifies the employer’s responsibility to cover the worker’s return travel costs, to
provide accommodation at no extra charge, and to pay workers the highest applicable
minimum wage”14 with sanctions for employers who knowingly breech the terms. The
entry of foreign labour for seasonal employment helps Canada foster higher
13
Alburo, F. and D. Abella (2002). Skiller Labour Migration from Developing Countries: Study on the
Philippines, International Migration Papers No. 51, International Labour Office, Geneva
14
Background Paper. Trade and Migration Seminar, 4 Oct. 2004, IOM / World Bank / WTO. <www.wto.org>.

productivity gains than would be impossible with the otherwise limited native
population while the agreement ensures that migrant workers receive full national
treatment and protection with respect to working conditions and wages.

Allowing for family unification, although requiring strict definitions on what
constitutes ‘family-member’ to avoid the over emigration of non-workers (that are
costly to the host country), will help with integration of migrant workers into their
new surroundings. According to the International Organization for Migration, “social
integration of migrants and their families is essential for increasing social cohesion and
combating xenophobia in host countries.”15

Protecting the Domestic Labourer
The policies and practices of countries concerning the admittance of foreign workers
via visa, quotas, and/or work permits have not been subjective to international or
multilateral regulation as “the ability to determine which non-nationals enter its
territory and under what conditions are considered one of the fundamental attributes
of state sovereignty”16. There are currently many methods imposed by countries to
ensure the protection of domestic employment: “To protect domestic labour, receiving
countries conduct labour market assessments/tests, establish yearly quotas or number
of admissions of temporary cards, determine the length of stay and conditions of stay,
including family reunion and permit renewal, specify the terms of occupational
mobility, and monitor migrant workers’ obligations to their employers.”17 Countries
such as Germany, Switzerland, South Africa, the United States of America, and Canada
(among others) have established such quotas based on market forecasts entitling a
finite number of foreign workers per sector to be allowed to seek employment within
the country in order to preserve a balance between native and foreign workers.

Likewise, ‘economic needs tests’ have also been used to determine whether the needs
of certain employees can be fulfilled by a native worker within the country. Employers
in countries that implemented the economic needs tests must prove that they cannot
find a skilled native labourer to fill the position before looking to import foreign
labourers. Sixty-seven of the one hundred and thirty-four WTO members have used
economic needs test to regulate the flow of services including labour migration18
(labour migration being defined under MODE 4 of GATS). Although these measures
promote the protectionism of native labourers they are also criticized for enabling
market inefficiencies. Quota systems, which are generally regulated by governments,
are criticized for being too static for the dynamics of markets as: “… governments do
not react quickly enough to labour market changes”19. To resolve this predicament, an
alternative is to have governments construct a framework to allow companies to
determine the number of foreign workers required within their industry.

15
Labour Migration. Workshop for Policy Makers: 86th Session, 18 Nov. 2003, International Organization for
Migration. <http://www.iom.int/DOCUMENTS/GOVERNING/EN/LabourWorkshops_Report.pdf>.
16
17
18
LISTS OF ECONOMIC NEEDS TESTS IN THE GATS SCHEDULES OF SPECIFIC COMMITMENTS. UNITED NATIONS
CONFERENCE ON TRADE AND DEVELOPMENT, 17 Aug. 1999, TRADE AND DEVELOPMENT BOARD.
<www.unctad.org/en/docs/poitcdtsbd8.pdf>.
19

Restrictive quota systems, on the other hand, are criticized for the promotion of
illegal migration; in the recent decade as legal immigration has been restricted the
European Union has seen illegal migration soar to half a million people annually while
the United States has approximately 300 000 workers enter illegally each year20. With
the influx of illegal workers due to the decrease of legal labour migration, countries
are ultimately worse off than liberalizing their immigration policies as “…(illegal)
immigration will lower the wage more if immigrants are prepared to work for less than
natives, as seen plausible in the case of illegal immigrants, for example. An influx of
such immigration not only shifts labour supply, but makes it more elastic”21.

Illegal labour migration not only contributes to the increase in wage differentials in
the receiving country but also strains social institutions such as schools, hospitals, and
law enforcement and removes the term “temporary” out of “temporary labour” as the
government is unable to track when these workers have stayed beyond their allotted
time since they have no legal record of the citizens.

Governments must be willing to increase expenditures into enforcement and create
tougher sanctions on employers hiring illegal workers in order to combat the problem
of illegal labour migration. Nevertheless, some countries, such as the USA, are
economically dependent on illegal workers to meet labour needs. Between the 1996
through 2000, the US economy generated the need for 14.3 million new jobs while the
US population increased by only 12.3 million people, including legal migrant workers22.
As an American journalist cleverly put it, “if we manage to expel all the illegal
immigrants from south of the border, who's going to build the fence to keep them
out?”23 Turning a blind eye to illegal migration is often easier for publicly elected
governments than going against public wishes and providing provisions for further
liberalized national borders to migrant workers. Such conflicts of interest further
undermine the success of labour migration liberalization.

Through liberalizing strictly certain service sectors, conversely, the concept of
liberalizing the movement of natural persons could be more seen as more appealing to
developed nations as they would be able to protect particular sectors of their
domestic labour force while allowing the influx of foreign labourers into sectors such
as IT and health care which are in large demand for labourers. Yet the inhibiting of
certain labour migration raises the following problems mentioned above: the
inefficiency of dictating constraints instead of letting the market determine its own
equilibrium and the possibility of increasing illegal migration through restricting legal
migration.

20
Labor Mobility and the WTO. World Bank, 2004. Liberalizing Temporary Movement.
<http://siteresources.worldbank.org/INTRGEP2004/Resources/chapter4.pdf>.
21
The Impact of Immigrants on Host Country Wages, Employment and Growth
Rachel M. Friedberg; Jennifer Hunt The Journal of Economic Perspectives, Vol. 9, No. 2. (Spring, 1995),
pp. 23-44. <http://links.jstor.org/sici?sici=08953309%28199521%299%3A2%3C23%3ATIOIOH%3E2.0.CO%3B2-
S>
22
Gans, Judith. (Illegal) Immigration: Global and National Context and Prospects for Reform. University of
Arizona.
<http://udallcenter.arizona.edu/programs/immigration/publications/illegal_immigration_overview.pdf.>
23
Thomasson, Dan K. "Our Unhealthy Dependence on Illegal Workers." Scripps Howard News Service 28
May 2006.

Keeping Efficiency in the Economy
As discussed earlier, the opportunity of low-priced labour can influence companies to
utilize labour intensive methods of production instead of investing into innovative
production methods. As renowned economist Henry George explains:
… truth is, that a low rate of wages does not mean a low cost of
production, but the reverse. The universal and obvious truth is, that the
country where wages are highest can produce with the greatest economy,
because workmen have there the most intelligence, the most spirit and
the most ability; because invention and discovery are there most quickly
made and most readily utilized. The great inventions and discoveries
which so enormously increase the power of human labor to produce
wealth have all been made in countries where wages are comparatively
high. 24
A Prisoner’s dilemma arises however as,
…an individual producer gains an advantage when he can force down the
wages of his employees below the ordinary level, or can import laborers
who will work for him for less, and that he may by this means be enabled
to undersell his competitors, while the employer who continues to pay
higher wages than other employers about him will, before long, be driven
out of business.
As table 1 illustrates, there is a first-mover advantage if either company takes
advantage of low wages as it might be able to undercut its competitor. If both
companies (assuming this trend is followed on a national level) choose to do so, the
economy becomes over reliant on inexpensive labour and little incentives arise from
companies to invest in more efficient methods of production. If both companies retain
their normal wages, conversely, the companies will search for labour cost-cutting
measures through innovative technologies.

Table 1
Company B exploits Company B retains
lower wages normal wages
Company A exploits Economy reliant on Company A can temporarily
lower wages inefficient labour intensive undercut Company B with
production methods lower production costs
Company A retains Company B can temporarily Economy remains innovative
normal wages undercut Company A with and invests in efficient
lower production costs productive methods

Since the economy is argued to be better off when both companies choose to retain
normal wages, how can governments influence both companies to choose this
equilibrium result? One method adopted by almost all developed countries is minimum
wage requirements - a price floor is set to which employers cannot legally offer wages
below. Such practice persuades companies to invest into labour-saving technologies
when cost-benefit analysis deems that the initial costs are surpassed by the future
24
George, Henry. Protection or Free Trade: an Examination of the Tariff Question, with Especial Regard to
the Interests of Labor. New York: Doubleday, Page & Co, 1905.

savings in labour costs.

Wage minimums, however, also criticized for creating a prisoners dilemma amongst
other nations as nations who employ lower wage minimums, or no wage minimum
wages at all, are able to produce for less ultimately undercutting competing nations.
The Heckscher-Ohlin model, however, states that the liberalization of trade does not
create an unfair advantage over those employing low-waged employees. The
Heckscher-Ohlin model concludes that nations with low-wages produce goods requiring
labour intensive production methods while capital intensive nations, facing high wage
prices, produce goods requiring high capital inputs for production and,
correspondingly, the two nations trade the two goods amongst each other. The
Heckscher-Ohlin model, however, is based on the assumption that capital and labour
are not interchangeable between nations. What happens when labour becomes
interchangeable? When a positive cost-benefit position arises from migration,
neoclassical economics theory concludes that workers will see it initially advantageous
to go to countries with higher set wages (capital intensive nations) resulting in what is
commonly referred to as ‘social dumping’. Much like the fear of product ‘dumping’
with the liberalization of trade between nations, the fear of the dumping of people is
associated with the liberalization of labour migration. Social dumping, however, is only
seen as a short term problem with the liberalization of temporary labour migration as
the movement of workers to developed/higher-wage nations will result in the increase
of wages in the sending country as labour supply decreases while the migrant workers
will be faced with either decreased wages or unemployment in the receiving country
as labour supply increases. Overtime it would be expected that real wage
differentials, keeping in mind that one wage might be monetarily the same but hold
significantly less buying power in the country of residence, would be eliminated as
wages get equalized with the free movement of labour. The market will dictate a
labour supply and demand equilibrium which ultimately eliminates wage differentials.

To further prevent the American economy from becoming inefficient by the over
relying on labour intensive production methods, United State’s Government published
a report, ‘Expanding Economic Opportunities’, in May 2006 stressing the importance of
insuring the USA’s economy focused on continuing its labour productivity growth. The
White House proposed four basic sources of labour productivity - growth-capital
investment, technological innovation, education and training, and enhancing basic
efficiency25. The US government aims to increase national capital investment by
decreasing taxes levied on the investment’s returns. Likewise, technological
innovation is encourage vis-à-vis the American Competitiveness Initiative (ACI) “which
makes Research and Experimentation (R&E) tax credit permanent, increasing Federal
research and development spending, and increased funding for math and science
education”26. By providing better access to quality education and by influencing
monetary policy the US government hopes to achieve the last two factors they deem
important to increase labour productivity growth within the nation - education and
basic efficiency. Measures such as these can be adopted by countries to mitigate the
probability of inefficient economies emerging as a result of the influx of low-cost
labour.
25
United States of America. Office of Management and Budget. EXPANDING ECONOMIC OPPORTUNITY.
<http://www.whitehouse.gov/omb/budget/fy2007/opportunity.html>.
26
United States of America. Office of Management and Budget. EXPANDING ECONOMIC OPPORTUNITY.
<http://www.whitehouse.gov/omb/budget/fy2007/opportunity.html>.

IV. Introduction to GATS Mode 4:
The service sector is the fastest growing part of the global economy and it is
estimated that the service sector accounts for 60% of global output, 30% of
employment and nearly 20% of global trade27. This considerable growth caught the
attention of policymakers and the General Agreement on Trades in Services (GATS) was
negotiated under the World Trade Organization in the Uruguay Rounds and was
implemented in January 1995. The GATS ultimate goal, according to its preamble is to:
"…(develop) a multilateral framework of principles and rules for trade in
services with a view to the expansion of such trade under conditions of
transparency and progressive liberalization, and as a means of promoting
the economic growth of all trading partners and the development of
developing countries."

The GATS agreement breaks services into four modes (figure 3):

Figure 3

The movement of natural persons (individuals travelling from their home country to
supply services in another country) is classified under Mode 4 of the GATS agreement.
Annex 3 of the GATS on the Movement of Natural Persons, however, states that the
agreement does not apply to “measures affecting natural persons seeking access to
the employment market" nor does it apply "to measures regarding citizenship,
residence or employment on a permanent basis". The Annex also clarifies that
regardless of their obligations under the agreement, members may regulate the entry
of natural persons and their temporary stay in their territory28. This exclusion allows
countries to enforce visa requirements and labour quotas to ensure the protection of
their domestic labour. Although the definition on what is defined as a natural person is
not limited to any particular skill level, in practice it has been limited to high skilled
workers. The relationship to the services provided by the natural person, on the other
hand, is clearly defined. Mode 4 only applies to a natural person who is either self-
employed/independent service supplier, an employee of a foreign company who has
sent the worker to fulfill a contract for the host country, an employee of a foreign
company who has established its business within the host country (intra-corporate
transferee), or a business visitor. Not clearly explained, conversely, is the definition,
27
GATS Mode 4: How Trade in Services Can Help Developing Countries. Development Research Centre on
Migration, Globalisation & Poverty. 2004. 1-4.
<http://www.migrationdrc.org/publications/briefing_papers/BP4.pdf>.
28
United Nations, Department Of Economic An. BACKGROUND NOTE ON GATS MODE 4 AND ITS
INFORMATION NEEDS. Meeting of the Technical Subgroup on Movement of Natural Persons – Mode 4, 31
Jan. 2005, World Trade Organization and OECD.
<http://unstats.un.org/unsd/tradeserv/TSGdocuments/tsg0502-8.pdf>.

or rather the lack of definition, for the term ‘temporary’. The only clarification of the
length of stay a natural person can remain is the exclusion of the migrant worker to
claim permanent migration via residence, citizenship, or employment on a permanent
basis (see Table 2 for summary of GATS 4).

Table 2 Summary of GATS mode 4 coverage:
Included Excluded Borderline
Duration of stay Temporary Permanent Temporary is
presence migration (GATS undefined
does not apply to
measures affecting
residence,
citizenship or
employment on a
permanent basis)

Purpose of Stay Presence of natural Persons seeking to Scope of certain
persons for the access the sectors, e.g.
supply of employment “services
commercial market. Natural incidental to
services persons working in agriculture,
non-service sectors hunting and
- e.g., agriculture, forestry” (e.g.
manufacturing agricultural
Services supplied workers or
under suppliers of fruit-
governmental picking services?)
authority etc. Lack of
certainty over
precisely what
would fall under
the carve out for
“services in the
exercise of
governmental
authority” (e.g.
education or health
services)

Skill Level All skill-levels
included

Categories of Business visitors Employees of all
Natural Persons Contractual service domestic
suppliers (self companies -locally
employed or as owned -
employee of a established in the
foreign service host country
supplier) Intra-
corporate
transferees
(foreign employees
of foreign
companies
established in the
host country)

Source: United Nations, Department of Economics and Social Affairs

V. Does MODE 4 of GATS really Liberalize Migration of Labour?
One criticism of GATS is it over emphasises migration of only highly skilled workers.
Since the comparative advantage of developing countries lies in the supply of low to
middle skilled service workers, the developing countries are ultimately marginalized in
trade negotiations. The World Bank estimates that developing countries stand to gain 6
trillion dollars between 2005 and 2015 from liberalization of trade in services yet are
ultimately suppressed by the restrictive nature of Mode 4. Further research by
economist Alan Winters suggests that the global economy can benefit from gains over
$300 billion per year when the migration of labour is further liberalized allowing for
easier labour mobility29.

Yet mode 4 “… is by far the smallest mode of service delivery in terms of both trade
flows and the volume of scheduled concessions recorded under the GATS” and only
accounts for “less than 1.5 percent of total trade in services”30. With such large
economic gains forecasted by further labour migration liberalization, why has Mode 4
not foster greater free trade of labour services amongst nations?

One theory is that people fear the unknown. The inclusion of Mode 4 is often criticized
for it vague nature; as the Organization for Economic Corporation and Development
recently reported, “If the economic impact of Mode 4 is difficult to assess, it is
essentially because the definition of this mode, and the instruments used to measure
it, are very imprecise”. Initial fears of the problems associated with the labour
migration resurface with talk of liberalizing it on a multilateral level. Qualms of the
brain drain, xenophobia and other cultural costs, protectionism of domestic labour,
and economic inefficiencies are reborn with talks of Mode 4.

VI. Mode 4 - Part of the Problem or Part of the Solution?
29
Winters, Alan L. et al. "Negotiating the Liberalisation of the Temporary Movement of Natural Persons."
Discussion Papers in Economics. (2002) No. 87. Brighton: University of Sussex.
30

Mode 4 could be the solution to these doubts and fears of labour migration
liberalization. Enforcing strictly temporary movement of labour would return skilled
workers to developing countries with new beneficial skills acquired from their work
abroad countering the fear of the brain drain. It must be noted, however, that Mode 4
is not an effective measure to mitigate the brain drain problem if applied solely on a
country by country basis; workers could simply move from one country to another as
their temporary migration visas expire. This, in turn, keeps the skilled labour from
returning to their home country. It is for this reason that the topic of labour migration
must be imposed on the world forum; agreements on topics such as the maximum
amount of time for foreigner workers can be employed abroad should be reached
amongst all participating nations of Mode 4.

Furthermore, Winters affirms that, “Host countries fear cultural and integration
problems because the unskilled are less likely to adapt to Western culture; they fear
drains on the public purse; the jobs that unskilled immigrants take do not command
immediate respect and appear to be at the expense of the employment of local
unskilled workers”. Nonetheless, temporary labour movement poses little cultural or
integration costs as the workers are not needed to be integrated into society as their
stay is temporary. Furthermore, regulations regarding the use of social services by
migrant workers or the requirement that hiring firms pay a ‘foreigner-tax’ per foreign
worker employed would further alleviate the reservations of foreigners being costly to
incoming countries social service systems. The fear that foreign workers could impede
on domestic labour is still a viable threat with the introduction of further
liberalization of Mode 4. The economic gains coupled with the growing labour
shortages, however, are said to counteract this threat:
… in general, there is little evidence that native workers are harmed by
immigration. On the contrary there is considerable support for the view
that migration creates new business and jobs and fills labour market
gaps. Migrants have little impact on native wages or employment,
because their work is concentrated in areas and sectors where there are
unfilled vacancies.31
To combat the fear of inefficient markets from the over-reliance on labour intensive
production methods, nations should adopt domestic policy and taxes incentives to
promote further investment by companies into more efficient production capital as
seen in the ‘Expanding Economic Opportunities’ report published by US Government.

Fears of the inclusiveness yet non-transparent nature of GATS Mode 4 has countries
turning more frequently to bilateral agreements for the temporary movement of
labour for purposes such as seasonal work, cross-border workers, contract workers,
etc. In 2004 there were over 176 bilateral agreements for temporary labour migration
in OECD countries.32 For the receiving country bilateral agreements create cross-
border labour markets, offset, labour shortages, promote cultural/political ties and
exchanges and encourage co-operation in managing migration. For the sending
country, on the other hand, bilateral agreements help ensure the protection of
labours’ rights, employ surplus labour, and enhance welfare of the country through

31
32
Lemaitre, George. Bilateral Labour Mobility Agreements. Managing the Movement of People: What Can
Be Learned for Mode 4 of the GATS, 4 Oct. 2004, OECD.

remittances33. Bilateral agreements are far easier for developed countries to manage
as a systematic process ensues to fill seasonal/temporary labour shortages the longer
the relationship endures. With the increasing number of labour shortages, however, “in
some specific sectors and occupations, some countries have developed multilateral
recruitment schemes that target a large group of sending countries”34 while “the
similarities in labour demand across receiving countries, as well as the emerging
competition for labour from sending countries, may support a multilateral approach,
or at least co-ordinate policies among receiving countries”.

Although bi-lateral agreements are a temporary fix, it is evident that a multilateral
agreement is needed. The question arises is whether the current GATS Mode 4 is the
response to this need? At the present time Mode 4 is not part of the solution. Its
ambiguous and limiting nature makes it only relevant to the big players, the developed
countries trading labourers amongst themselves, and ignores those who really need it -
the developing countries.

How can GATS Mode 4 be part of the solution? Alan Winters et al. suggest that the
following actions should be immediately discussed and implemented under GATS Mode
4:

· negotiating new sub-contracting schemes to include the movement of lower-skilled
service providers under Mode 4,
· separating temporary movements of people from permanent ones, and, once national
security clearance has been achieved, granting multi-entry GATS visas to temporary
workers to provide their services,
· uniform definitions and coverage of service personnel categories and expanding the
coverage to include middle and lower skilled workers and professionals,
· accelerating the mutual recognition of qualifications,
· codifying of economic needs, and
· separating out social security contributions into short-run (work-related accident and
health) and long-term (pension) social protection.

In the long run, Mode 4 should focus on further liberalizing temporary migration by:
· confirming that the GATS does cover domestically employed-service providers and
liberalising these schemes as well,
· setting up auctions for any remaining numerical quotas,
· abolishing economic needs tests, and
· addressing the wage-parity issue in a way that recognises the comparative
advantage of developing countries.35

Yet, as it stands today, GATS MODE 4 is not part of the solution; can we therefore
assume Mode 4 is part of the problem? Such a blithe agreement could be seen as
merely spot holder, diverting attention away from developing a pertinent agreement
that liberalizes between the developing and the developed.

33
Lemaitre, George. Bilateral Labour Mobility Agreements. Managing the Movement of People: What Can
Be Learned for Mode 4 of the GATS, 4 Oct. 2004, OECD.
34
Garson, Jean-Pierre. BILATERAL AGREEMENTS AND OTHER FORMS OF LABOUR RECRUITMENT: SOME
LESSONS FROM OECD COUNTRIES’ EXPERIENCES. Workshop on International Migration and Labour Market in
Asia, 17 Feb. 2006, OECD.
35

Luckily, this has not been the case. Since the introduction of the GATS Mode 4, six
nations (three developed nations including the US, the EU, Canada, and three
developing including India, Columbia, and Pakistan) have submitted proposals to the
WTO for negotiating changes to Mode 4. Amongst the requests of India include the
request for a broader designation of natural person to include low-middle level
workers:
(India’s request includes the) further expansion in the scope of categories
to include middle and lower level of professionals into the existing
coverage of ‘other persons’ and ‘specialists’. This clearly addresses the
concern of many developing countries. They feel that their comparative
advantage lies, not in highly skilled professionals, but in middle and
lower level professionals.36
Expanding the classification of the type of labourer covered by Mode 4 in conjunction
with pronouncing that GATS Mode 4 also includes domestically employed-service
providers, a natural persons from Member A (the sending territory) employed by a
service firm of Member B (the receiving territory), developing countries will be able to
seek greater liberalization of their service workers abroad through Mode 4.

Developed countries have also showed interest in furthering the substance of Mode 4.
Canada suggest in their filing that trade policy, immigration and labour market
officials should discuss collectively the issues involved to open transparency into the
matter. Likewise, as their supply of labour continues to decrease, developing countries
are realizing that they must seek further liberalization of labour migration to sustain
their labour demands.

The following changes, along with the suggestions made by Alan Winters et al., to
Mode 4 could make it a more influential and operational text instead of the trivial
document it is today. Continued pressures, however, by developing countries to
include further liberalization within Mode 4 have caused a stalemate between
developed and developing countries on Mode 4 reform. With little in the way of
changes of Mode 4, however, countries are continuing to rely on bilateral agreements
to liberalize the movement of non-professional workers. The further continuation of
reliance on bilateral agreements could, however, ultimately undermine Mode 4’s
importance.

Whether GATS Mode 4 will ever be liberalized is uncertain and left open to speculation
- whether GATS Mode 4 should be liberalized is obvious as greater liberalization under
Mode 4 is in the interest of both developing and developed countries when executed
correctly.

36

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