New Economist

How rural villages have gained from China's great migration

Inter-county migration in China - mostly rural migrants moving to urban areas - increased four-fold during the 1990s, from just over 20 million in 1990 to 79 million by 2000. With what effect?

Co-authors Alan de Brauw from the International Food Policy Research Institute and Michigan State University's John Giles examine the impacts this great tide of migration has had on China's rural villages. Their paper, Migrant Labor Markets and the Welfare of Rural Households in the Developing World: Evidence from China (PDF), finds that rural out-migration has boosted per capita consumption and reduced inequality:

We find that increased migration from rural villages leads to signicant increases in consumption per capita, and that this effect is stronger for poorer households within villages. Household income per capita and non-durable consumption per capita both increase with out-migration, and increase more for poorer households.

Villages with the fastest growth in out-migration have seen the largest reductions in village poverty headcount and the strongest growth in average consumption levels. Out-migration has also reduced inequality - "expanded migration is associated with decreasing inequality within villages", as poorer households "supply more labor to productive activities and experience more rapid income growth".

There are mixed effects on rural investment - new earnings from urban jobs have largely been spent on better homes and durable goods:

A second important finding relates to the impact of migration on investment in rural areas. Increases in migration from rural China are associated with increased accumulation of housing wealth and consumer durables, but we do not find evidence of a significant relationship between migration and investment in productive assets.

While none of these findings are particularly unexepected, they help unpack China's economic story. And they show that it is not just international migration that brings benefits.

Why people emigrate

Semi-regular blogging service resumes this week with a few posts on migration - still a very topical issue on both sides of the Atlantic.

The first paper I'd like to highlight is by the University of Chicago's Jeffrey Grogger, and UCSD's Gordon H. Hanson. Their recent NBER Working Paper No. 13821, Income Maximization and the Selection and Sorting of International Migrants, seeks to explain to what extent selection and sorting account for international migration flows using data on emigrant stocks by schooling level and source country in OECD destinations. As the authors conclude, a simple model can explain a lot:

Two dominant features of international labor movements are positive selection of individuals into migration and positive sorting of migrants across destinations. We show that a simple model of income maximization can account for both phenomena.

The more educated are more likely to emigrate; and more-educated migrants are more likely to settle in destination countries with higher rewards to skill. As the authors explain:

In our selection regression, we find that migrants for a source-destination pair are more educated relative to non-migrants, the larger is the skill-related difference in earnings between the destination country and the source. That is, positive selectivity is stronger where the reward to skill in the destination is relatively large. This result obtains for wage differences expressed in levels, but not in logs.

...Positive sorting is a general prediction of income maximization. In our sorting regression, the relative stock of more-educated migrants in a destination is increasing in the level earnings difference between high and low-skilled workers. This correlation is stronger when wage differences are adjusted for taxes, implying that migrants weigh post-tax earnings when choosing a destination. The U.S. and Canada enjoy relatively large post-tax skill-related wage differences, which largely account for their ability to attract more educated migrants relative to other OECD countries.

Other factors are also at work:

Our analysis also shows that language, history, and policy affect migration. English-speaking destinations draw higher-skilled immigrants than other destinations, whereas former colonial powers draw lower-skilled immigrants from their former colonies than from other source countries. Destinations with liberal refugee and asylum policies draw relatively low-skilled immigrants, all else equal.

An ungated version of the paper is available here or here.

The trouble with Joe

Ever been to a concert or play where the rest of the audience were in raptures, but you weren't? That's been my experience every time I've gone to hear Joseph Stiglitz speak on globalisation in London. Each time I've come away wondering how such a first rate economist can offer up such populist tropes, sloppy reasoning and pessimistic interpretation of the facts.

So why do his speeches (and books) make me so queasy? It's not that I disagree with most of his policy prescriptions. Like Stiglitz, I was shocked by the incompetence with which the IMF dealt with the Asian currency crisis a decade ago. And like Stiglitz, I would like to see western governments pay greater attention to those among their constituents who most stand to lose from globalisation.

Robert Skidelsky's review of Stiglitz' latest book, Making Globalization Work, makes the case more eloquently than I ever could. Writing in the New York Review of Books, he concludes:

My final criticism is that Stiglitz's book is carelessly written. Stiglitz was—and perhaps still is—an outstanding economic theorist. But he has been producing big, loosely argued books. The laudable aim behind them is to inform a broader audience about economic policies that could make the world a better place, certainly with better lives for the poor, and such advocacy has its place in moving people to action. But he lacks the eloquence, urgency, and passion of the preacher, while he has too often abandoned the rigor of the scientist. In my view, he has not yet found a style suitable to the popular exposition of his economic ideas.

Based on my readings, that's a fair cop. More rigour please Joe.

Rethinking free trade?

Is support for free trade losing ground amongst economists? Business Week Washington bureau chief Jane Sasseen writes of an apparent shift in mood: Economists Rethink Free Trade:

..something momentous is happening inside the church of free trade: Doubts are creeping in. We're not talking wholesale, dramatic repudiation of the theory. Economists are, however, noting that their ideas can't explain the disturbing stagnation in income that much of the middle class is experiencing. They also fear a protectionist backlash unless more is done to help those who are losing out. "Previously, you just had extremists making extravagant claims against trade," says Gary C. Hufbauer, a senior fellow at the Peterson Institute for International Economics. "Now there are broader questions being raised that would not have been asked 10 or 15 years ago.

So the next President may be consulting on trade with experts who feel a lot less confident of the old certainties than they did just a few years ago. From Alan S. Blinder, a former vice-chairman of the Federal Reserve and member of the Council of Economic Advisers in the Clinton Administration, to Dartmouth's Matthew J. Slaughter, an international economist who served on President George W. Bush's CEA, many in the profession are reevaluating the impact of globalization. They have studied the growth of low-wage work abroad and seen how high-speed telecommunications make it possible to handle more jobs offshore. Now they fear these factors are more menacing than they first thought.

No one is suggesting that trade is bad for the U.S. overall. According to estimates by the Peterson Institute and others, trade and investment liberalization over the past decades have added $500 billion to $1 trillion to annual income in the U.S.

Yet concern is rising that the gains from free trade may increasingly be going to a small group at the top. For the vast majority of Americans, Dartmouth's Slaughter points out, income growth has all but disappeared in recent years. And it's not just the low-skilled who are getting slammed. Inflation-adjusted earnings have fallen in every educational category other than the 4% who hold doctorates or professional degrees. Such numbers, Slaughter argues, suggest the share of Americans who aren't included in the gains from trade may be very big. "[That's] a very important change from earlier generations, and it should give pause to people who say they know what's going on," he says.

The mixed benefits of remittances

Recent years have seen international agencies like the World Bank and IMF extol the econmic benefits of remittances. Sending money to the folks back home boosts the incomes of developing countries and helps to offset losses fom the 'brain drain'. What's not to like?

Well, we wouldn't be economists if we weren't looking for unintended consequences. And sure enough, David Grigorian and Tigran Melkonyan have found some. Their recent IMF working paper Microeconomic Implications of Remittances in an Overlapping Generations Model with Altruism and Self-Interest studies the impact of remittances on Armenian households:

We demonstrate that when the migrant and the relative(s) cooperate to maximize the joint utility of the household, this leads to higher level of remittances as well as investment and hours worked by the relative(s). We use data from Armenia to test our predictions regarding implications of remittances flows on behavior of receiving households.

Consistent with our predictions, remittance-receiving households work fewer hours and spend less on the education of their children. While saving more, these households are not leveraging their savings to borrow from the banking system to expand their business activities. This evidence suggests that the benefits of remittances might be overstated and emphasizes the importance of measuring their impact in a general- rather than a partial-equilibrium context.

So remittances lead to households working fewer hours: "The coefficient is negative and significant and its magnitude is rather large." More surprising is the apparent negative effect on education. The authors conjecture:

The impact of remittances on education spending (column 3, Table 3) is perhaps the most controversial of our findings. The negative (and significant) coefficient here could be indicative of two things. First, it is possible that members of remittance-receiving households are likely to later migrate themselves and, therefore, not value the local education as much. Second, because their consumption patterns might be under scrutiny by the remitter, the receiving households may adjust their consumption pattern to look more conservative and be
centered around necessities (such as food and public services/utilities, and presumably not education and other types of spending that could be considered unnecessary from theremitter’s point of view). To the extent that remittances represent a large share of the receiving family’s income, for the same level of disposable income, this tendency to “simplify” the spending pattern could in fact lead to lower spending on education (in nominal terms) out of total income.

Families with remittances do accumulate more savings. While the costs of migration on households have a negative effect, it is "not large enough ..to offset the accumulation of savings due to remittances."

I would be interested to see if similar remittance effects are to found in other countries with high levels of emigration.

Vietnam: the world's next factory?

Bloomberg's Andy Mukherjee has been to Ho Chi Minh City - and he likes what he sees: After China, Vietnam Will Be World's Factory

After China, Vietnam is emerging as the world's next factory of choice for labor-intensive goods.

One can see that in the changing composition of the country's exports. Rice and coffee -- two of Vietnam's biggest agricultural exports -- are now becoming less significant to the $61 billion economy than textiles. Footwear shipments are gaining prominence over seafood.

The other fast-growing export industry is furniture. Exports of wood-based products have grown 24 percent from last year to more than $2 billion.

James Koh, a Singapore businessman, makes dining tables and chairs in Vietnam for customers around the world, including Williams-Sonoma Inc.'s Pottery Barn stores in the U.S. Koda Ltd., of which Koh is the managing director, also has factories in Malaysia and China. Yet, it's Vietnam's lower costs that are prompting the company to expand capacity here by 25 percent. "The labor cost in Vietnam is half that of China, while worker productivity is about the same,'' says Koh.

Starting next year, the government will increase the mandated minimum wage for foreign-funded companies in Ho Chi Minh City and Hanoi, the national capital, by 13 percent to 1 million Vietnamese dong ($62), a level that is still affordable, Koh says.

Chinese-made goods have become increasingly expensive in the U.S. for the past six months. That gives Vietnamese manufacturers an opportunity to win a bigger share in their largest export market.

Vietnam's accession to the World Trade Organization in January has provided its textile industry with quota-free access to the U.S. Joining the WTO regime has also caused a 37 percent surge this year in overseas investment commitments to $13 billion.

The biggest draw of the country is clearly its labor. The median age in Vietnam is 25 years. The workforce isn't just young, but also literate and healthy: The proportion of people who are undernourished has been cut in half over the past three decades.

But there are also challenges ahead:

Why Is Elvis on Burkina Faso postage stamps?

The University of Michigan's Joel Slemrod has a fascinating new paper examining how many small states commercialise their state sovereignty. This can ioccur in a variety of ways, from stamps to tax havens. His paper, Why Is Elvis on Burkina Faso Postage Stamps? Cross-National Evidence on the Commercialization of State Sovereignty (PDF), looks at four forms of commercialisation and the relationship between them. He concludes that countries that are poorer and smaller are, ceteris paribus, more likely to commercialise state sovereignty:

Commercialization is more attractive to poorer countries in three out of four cases, and in two cases to more agricultural countries at a given level of per capita income. This provides some support to the notion that when revenue is difficult to raise in other ways commercialization becomes more attractive. In three of four cases these activities are more attractive to small countries, a finding that is consistent with the Slemrod and Wilson (2007) hypothesis about tax havens that the benefits are unrelated to size but the costs are.

But there are downsides too, ranging from "costs related to integrity" to sanctions "for less benign activities".

Has world poverty really fallen?

The short answer is: maybe, maybe not. Here's a slightly longer answer:

We evaluate the claim that world consumption poverty has fallen since 1990 in light of alternative assumptions about the extent of initial poverty and the rate of subsequent poverty reduction in China, India, and the rest of the developing world. We use two poverty indicators: the aggregate headcount and the headcount ratio, and consider two widely-used international poverty lines ($1/day and $2/day).

We conclude that, because of uncertainties in relation to the extent and trend of poverty in China, India, and the rest of the developing world, global poverty may or may not have increased. The extent of the estimated increase or decrease in world poverty is critically dependent on the assumptions made. Our conclusions highlight the importance of improving the quality of global poverty statistics.

That comes from an article of the same title by Barnard College's Sanjay Reddy and Columbia University's Camelia Miniou in the latest issue of the Review of Income and Wealth (Vol. 53, No. 3). For now at least, it is available to download free.

Why should men care about women's rights?

UCLA's Matthias Doepkey and Stanford's Michèle Tertilt ask a good question about women's rights and development: Women’s Liberation: What Was in It for Men? (PDF). Here is their answer:

Women’s rights are closely related to economic development. This is true both across countries, where women have most rights in the richest countries, and in time series data: women have slowly improved their legal position in parallel with fast improvements in the standard of living. In most cases, the initial extension of rights to women amounted to a voluntary renouncement of power by men.

In this paper, we investigate the economic incentives for men to share power with women. We show that men may want to voluntarily relinquish some of their power once technological change increases the importance of human capital. The reason is that men face a tradeoff between how they would ideally like to treat their own wives and how they want other women to be treated. While men might want little rights for their own wives, they may prefer their daughters to have a better bargaining position with future husbands. In addition, a wife’s education matters for producing high-quality children. A husband prefers his children to find high-quality mates, and therefore stands to gain from increasing the power of his children’s mothers-in-law.

Men have wives - but they also have daughters. Indeed, seeing the world through a daughters' eyes can make even the most macho or chauvinistic man reconsider their attitudes on gender equality.

For those near Yale, Michèle Tertilt is presenting the paper there on Monday 15 October to their Development Workshop

Does another China trade row loom?

First we had bra wars. Then shoe wars. Is yet another China-Europe trade row brewing? The Economist certainly thinks so. The China trade syndrome explains why Europe's next big globalisation row will be over trade with China. It gives this analysis of the reasons:

Three linked China problems are now causing big ructions.

The first is one of sheer scale. Low-key policies that seemed adequate a couple of years ago have struggled to keep pace with the explosive growth of trade. Two-way trade between the EU and China expanded by over 20% last year to a total value of €254 billion ($319 billion), and the trade balance has swung sharply in China's favour. Compared with America, the EU has shunned confrontation, preferring dialogue with China over such concerns as the deficit or intellectual property. But this calm approach may be a harder sell when the bilateral trade deficit with China is running at an average of €15m an hour.

The second problem is that China ignores gentle hints to stick to commitments it made when it joined the World Trade Organisation. The charges are numerous: there are perennial (and hard to prove) accusations about state subsidies and a failure to guard against the theft of intellectual property. A bleak report by the EU Chamber of Commerce in China notes a fresh threat: the unequal treatment of foreign companies by newly muscular Chinese regulators. Chinese officials are even accused of diverting EU energies into “process”—endless argument over when and with whom meetings will take place. It does not help that many commissioners fall for this nonsense, tripping over each other in their eagerness to visit China and meet the right officials. The 27 member countries are worse, eagerly undermining agreed positions in a quest for national advantage.

The third problem is China's currency, the yuan, which has lost about 40% of its value against the euro since 2000, making Chinese exports ever cheaper. President Nicolas Sarkozy of France loudly argues that euro-area governments should join forces with the European Central Bank (ECB) and back American demands for the Chinese to let their currency appreciate (it is still loosely pegged to the dollar). But the sad reality is that any finger-wagging by the Europeans might serve only to expose their impotence. Noting the euro's steady rise against the yuan, several American analysts conclude that the Chinese have taken a deliberate decision to allow Europe to foot the bill for any small concessions they may offer to America on the yuan.