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HUMAN CAPITAL AND MIGRATION COSTS FOR ROMANIAN ECONOMIC DEVELOPMENT Laura Diaconu, Faculty of Economics and Business Administration, “Alexandru Ioan Cuza” University of Iaşi, 22 Carol I Avenue, 700505 Iaşi, Romania, tel.: +40.723.30.27.28, email: [email protected] Andrei Maxim, Faculty of Economics and Business Administration, “Alexandru Ioan Cuza” University of Iaşi, 22 Carol I Avenue, 700505 Iaşi, Romania, tel.:+40.722.89.75..82, email: [email protected] Cristian C. Popescu, Faculty of Economics and Business Administration, “Alexandru Ioan Cuza” University of Iaşi, 22 Carol I Avenue, 700505 Iaşi, Romania, tel.: +40.232.20.13.99, email: [email protected] JEL CLASSIFICATION: O15 Key words: migration, public costs, economic growth, human capital accumulation 1. Introduction Human capital is one of the most important factors of production, deeply influencing the productivity of all the others. Despite this, the economic research has hardly included it into its analysis, initially considering only the labor force, although some features related to the human abilities and their influence on the productivity were highlighted from the very beginning of the economic literature (19, 1984, p. 274-355). Later, in the second half of the XXth century, when the new growth theories emerged, the importance of the human capital was reconsidered so that, nowadays, it is estimated to be the only factor that can induce continuously growing returns. The ‘90s brought a more detailed approach of the human capital stock and of its impact on the economic growth (1, 1996, p. 1-43; 2, 1993, p. 363-394; 9, 1999, p. 83-116; 10, 1995, p. 65-93; etc). Private and public efforts related to education or to healthcare directly influence the economic growth rates and therefore, the “drain” of human capital through emigration involves high costs that reduce the productive capacity of the home country. The migration of labor force is one of the most important vectors of the globalization process. This phenomenon is deeply analyzed in the economic theory, usually being debated form different points of view. As main directions, there are, on one hand, the classical studies that reveal the advantages of the receiving countries and the disadvantages of the home countries, and on the other hand, some recent studies that note the benefic effects for all those involved into the process of free movement of labor force. A common aspect for the two tendencies is given by the idea that the regions which generate the greatest number of emigrants are the less and medium developed ones, generally with young population that has slight opportunities in its own economy. Indeed, it is obvious that the migration mainly takes place between the developing countries and the developed ones, but also among or within the developing states, from rural to urban areas. The literature mentions three main causes for migration: the aging of rich countries’ population, the developing technologies that require a larger number of high-skilled persons and the increasing focus of immigration policies of industrialized countries on “quality of human capital”. It is foreseen that in the next years, the migration flows will increase due to the growing competition and to the fact that the governments will be forced to reduce some of the restrictions regarding the immigrants so that the national firms get the competitive advantage of the cheap and easy access to different kinds of abilities and knowledge. This will probably impact the poor and the developing countries that will mainly be affected from the institutional point of view: “the potential constructors – workers or managers – are much more tempted to leave when the institutional system gets worse” (15, 2005, p. 1-8). Despite all the short term difficulties generated by the emigrants to their origin countries, on long term they may contribute to the growth of the national welfare, investing at home the money earned outside and acting as international entrepreneurs or even creating links between national and international social networks. Beine, Docquier and Rapoport (3, 2001, p. 275-289), analyzing the relationship between human capital and economic growth in developing countries, consider that the “drain effect” of the human capital may be positive only if these states, promoting an open economy, will sufficiently increase the investments in education – “brain effect”. Consequently, it can be noted that the winners of this process will not be only the emigrants and the host country, but also the home state if the emigrants return. In Romania, the beginnings of the migration process were marked by the abandonment of the strict emigration control from the communist period, moment when the country became a very complex “migration field” (11, 2002). There are multiple factors that foster emigration but the most important one is the welfare gap – an economic growth gap of 10% causes an emigration rate of 0,05% of population (5, 2005, p. 133). As a result, the EU member states feared that after the accession of Romania to the European Union, their markets will be invaded by Romanian labor force. If we analyze the situation of emigration from previous years, we may conclude that this fear is justified: despite the fact that in previous years there were severe barriers for the emigrants to the European Union, due to the compulsoriness of visas and working passes, Romania and Poland were the only Eastern and Central European countries that have had a positive flow of emigration to the EU (16, 2000, p. 5-12). Moreover, it is foreseen that in the future, the emigration process will probably increase, because apart from those that are not satisfied with their salary, a large number of persons that do not have a job or work in the underground economy will emigrate. Taking into consideration the negative growth rate of the population, various analysts argue that if the migration trend remains unchanged, in less than 40 years the total Romanian population will decrease with 6 millions (20, 2000, p. 2334). 2. Migration Trends in Romania In Romania, after 1989, the migration trends have had some particular features, influenced not only by the national economic and social climate, but also by the characteristics of the international context. Therefore, we note the fact that, especially between 1990 and 1995, the migration configuration has changed: if at the beginning of the analyzed period the migration was dominated by the ethnic component, the circulatory oscillating migration gradually appeared, especially from the rural areas and often characterized by a strong informal component. From the point of view of the socio-economic characteristics of the Romanian people that emigrated between 1995 and 2005, the literature argues that the young persons were more tempted to migrate. Actually, the emigration included persons from a particular age category: between adolescence and the beginning of the professional career. So, more than a third of the Romanian emigrants were under 25 years old. If we add those between 25 and 29, we obtain more than half of the total permanent emigrants of Romania1. One of the most important features of the potential emigrants is their educational level: while the percentage of the high-school and university graduates usually surpassed the national average, the Romanian permanent emigrants who had graduated the economic secondary and tertiary education were almost half of the total number of emigrants. Compared to these, the emigrants with professional education were less than 10% of the total number of emigrants, in the analyzed period. We argue that the Romanian emigration has to be analyzed especially considering the departure period: temporary or forever. In the case of the definitive emigration, the trend is continually descendent (13, 2007), mainly as a result of the equalization of incomes of those with university and post-university studies that were tempted to emigrate and those from abroad with similar studies. Consequently, if in 1998 Romania was on the top of the list of Central and Eastern European countries regarding the permanent emigration, nowadays, most of the Romanian people want to emigrate only on a medium term. From the point of view of the emigrants’ profile, grouped by gender, we notice that during the last years, the most representative category is given by the young men, aged between 18 and 35 years old, with a medium education, especially coming from big cities, including Bucharest (see Table no 1). Table no 1. The number of Romanian emigrants, grouped by gender and regions, between 2004 and 2005 Region North-East 2004 2005 South-East 2004 2005 South 2004 2005 South-West 2004 2005 West 2004 2005 North-West 2004 2005 Centre Total Men Women 1853 1852 767 734 1086 1118 1039 1160 401 477 638 683 578 453 206 168 372 285 589 488 251 182 338 306 1738 1418 596 479 1142 939 2270 1595 927 611 1343 984 IER, Pais Nr.1: Libera circulaţie a persoanelor şi serviciilor, 2005, site: http://www.ier.ro/PAIS/PAIS1/RO/Studiul1B.pdf 1 2004 2005 Bucharest 2004 2005 2958 2164 1033 749 1925 1415 2057 1808 753 710 1304 1098 Source: INS, International migration, according to gender, 2007, site: http://www.insse.ro/cms/files/statistici/Statistici_teritoriale2007/rom/9.htm According to the destinations preferred by the Romanian emigrants, it was noted that there are many factors that influence the territorial distribution of migration. Consequently, the differences in the income levels and in the economic opportunities, the ethnic factors, the regional characteristics, the political regulations, the geographical location and the distance to the potential destinations are considered to be aspects that have fostered or discouraged the migration. The Table n o 2 shows the favorite destinations of the Romanian emigrants, according to the region where they come from. Table no 2. The percentage of the Romanian emigrants, by countries, according to regions, in 2001 Moldavia Muntenia Dobrogea Oltenia Crisana Transilvania Banat Bucharest Italy 36 10 23 19 12 4 Spain 2 12 4 2 5 6 France 0 2 1 1 11 1 Germany 5 9 2 13 25 34 Austria 0 0 1 1 3 1 Israel 8 11 10 5 1 1 Greece 5 4 7 9 1 1 Turkey 8 14 23 2 0 0 Yugoslavia 3 3 2 17 0 0 Hungary 4 1 0 1 10 37 Others 28 35 27 29 31 16 6 8 6 6 4 6 48 20 4 0 0 3 1 2 0 7 1 0 1 1 29 48 Source: Diminescu, D. (ed.), Visibles mais peu nombreux... Les circulations migratoires roumaines apres 1989, forthcomming Editions de la Maison de Sciences de l’Homme, Paris, 2002 It is obvious that the Romanian emigrants are mostly attracted by Italy and Germany, followed by Spain, Turkey, Israel and Greece. Indeed, one of the most detailed reports about the East-West migration flows, drawn up for the European Commission in 2000 by Boeri and Brucker (4, 2000, p. 122), demonstrates the fact that the Eastern and Central European states that mostly contributed to the annual growth of the number of residents in Germany, until 2000, are Romania and Poland. Despite this, the data shows that the number of the Romanians is decreasing, the rate of their reduction being faster and faster (see Table no 3). Table no 3. The annual growth of the number of residents from the ECE in Germany (in numbers) Bulgaria Czech Rep. Estonia Hungary Leetonia Lithuania Poland Romania Slovakia Slovenia TOTAL 2002 22812 11024 3991 16129 8309 12210 66301 66516 9825 1313 218430 2003 20592 9990 3614 14520 7511 11084 60146 60226 8932 1186 197801 2004 18564 9044 3270 13051 6782 10055 54521 54477 8116 1069 178949 2005 16711 8180 2955 11709 6115 9113 49381 49223 7370 963 161720 2010 9606 4860 1746 6573 3556 5490 29693 29035 4493 556 95560 2015 5128 2755 981 3348 1940 3189 17149 16255 2676 300 53721 2020 2337 1434 500 1349 929 1738 9319 8238 1526 140 27510 2025 626 614 202 134 306 833 4479 3275 808 43 11320 2030 -396 116 22 -581 -70 277 1553 265 368 -15 1539 Source: Boeri, T., Brucker, H., The Impact of Eastern Enlargement on Employment and Labour Markets, European Integration Consortium, Report on behalf of the Employment and Social Affaires Directorate General of the European Commission, Berlin & Milan, 2000 3. The Public Costs of the Romanian Labor Force Emigration In a world of perfect competition, with free mobility of labor force, we can talk about equilibrium: those who emigrate will receive higher incomes, natives in the receiving countries can share the immigration surplus and the remaining residents in the sending countries can benefit from the rise in the land/labor and capital/labor ratios. In the Romanian reality, this does not happen because the highly-skilled emigrants generate a number of externalities. First of all, they are net contributors to the government budget and therefore their departure increases the fiscal burden on those left behind. If we consider that only in 2004 the official number of those who emigrated from Romania was about 13.100 persons – while the real number is almost five times bigger - we can partly justify the doubling of the direct and indirect taxes between 2000-2004 (if in 2000 the direct taxes were 31.472 billions ROL, and the indirect ones 96.131 billions ROL, in 2004 their levels were about 75.854 billions ROL and 226.673 billions ROL, respectively). Secondly, skilled and unskilled labor force complement one another in the production process; in a context of scarcity of skilled labor and abundant unskilled labor – as it may happen if many of the high skilled Romanian people emigrate – skilled labor migration may have a substantial negative impact on the productivity and wages of low skilled workers, increasing in this way the domestic inequality. Thirdly, human capital depletion through emigration seems to have a negative influence on a country’s growth perspectives because human capital accumulation is considered to be a central engine of economic development. From this point of view, there will be losses not only in the productivity level and, implicitly, in the GDP, but also in the possibility of innovation and accommodation to the new technologies. It is estimated that starting with 1989, Romania has lost between 2 and 2,5 millions of the active labor force, meaning almost 10% of the total population. The emigration consequences on the innovation process are very important if we consider the fact that 58% of those who emigrated were high-school and post-high-school graduates. The data provided by the Romania’s Statistical Yearbook underline the same idea: the number of the Romanian researchers is continuously decreasing. If in 1989 there were more than 150.000 researchers in Romania, in 2002 the official statistics were mentioning only 38.443 employees in the research field2. The reduction of the number of researchers is mainly explained by the fact that many of the researchers or of the young people that want to follow a scientific career choose to emigrate. It is surprisingly that 64% of the total number of the Romanian researchers with relevant results at international level works in a foreign country, most of them in the USA (29%), France (7%), Canada, Germany and United Kingdom (5%). Apart from the negative influence on innovation and economic progress, the emigration of the high skilled workers generates material losses such as public costs with the education and training of human capital. In Romania, in the last years, there was an ascending trend of the public spending with education: if in 2002 these were 12.633 billions ROL, in 2004 their value was about 19.358 billions ROL3 (almost 3% of GDP). Researches about the Romanian education system underline the fact that in most of the Moldavia region and in the South of the country, where the economic development is lower, the average spending per student is lower. So, districts like Botoşani, Galaţi, Vaslui, Giurgiu, Călăraşi or Ialomiţa are characterized by lower costs per student, compared to Bucharest and to the districts from the Central and Western part of the country (Cluj, Timiş, Bihor). If we consider that the total number of emigrants from the developed areas is higher then the number of those from the rest of the regions – in 2005, for example, in Bucharest, next to the Centre, North-West and West part of the country, there were 6.985 official emigrants (13, 2007), 2 3 Anuarul Statistic al României, 2003, http://www.insse.ro/anuar_2003/asr2003.htm INS, Cap. 21: Finante, 2005, http://www.insse.ro/cms/files/pdf/ro/cap21.pdf compared to only 3.953 official emigrants from the North-East, South-East, SouthWest and South – we may say that the losses with education are considerable for the Romanian state. As demonstrated in various new geography frameworks, skilled labor force is essential in attracting foreign direct investments and fostering research and development expenditures (8, 1999, p. 14-21). In the case of Romania, the foreign direct investments represented an engine of the economic growth. Between 2001 and 2006, in Romania almost 26 billion dollars entered as foreign direct investments, the business men being attracted by the low cost of high skilled labor force. But, the labor force crisis, from various fields, which occurred mainly after the Romanian adhesion to the European Union, may affect the foreign investors because the migration raises the income pressure. Consequently, Romania will become less attractive for these investors, fact that may generate a slowness of the economic growth.4 4. Case Study –The Impact of Migration on a Romanian Knitting Factory Marcroman SNK is a knitting factory from Iasi, Romania, established in 1999. Today, it has only 50 employees and its lohn production is mainly directed to the export. The clients are generally from France, Spain, Germany or United Kingdom. A small part of the production is sold in a private store, under a private label. When this factory entered the market, the Romanian textile industry was in a boom period. This development was mainly due to the cheap labor force that influenced the external demand for production in lohn system. In 2004, 73,4% from the Romanian textile industry production was exported. Yet, after 2005, the textile industry experienced a descending trend, which is likely to be maintained over the next few years. The main factors that induce this change are the national currency appreciation related to Euro (with almost 18% between 2004 and 2007), the cancellation of the quantitative restrictions imposed to China and the growth of the production costs. There has been a continuous raise in the prices of utilities and incomes of the workers. Therefore, due to the fact that the Romanian textile industry looses its main strong point – cheap and abundant labor Rusu, T., Exodul forţei de muncă încetineşte creşterea economică, Săptămâna Financiară, An III, Nr. 130, oct. 2007, p. 48, 52 4 force – the Western European companies have already started to relocate their production to the former Soviet states or to China. In the case of Macroman SNK, the salaries are the main component of the production cost. The permanent increase in the level of the minimum legal income and in the employees’ new demands regarding the remuneration and other benefits strongly influenced the costs. Gradually, the firm could not respond to the demands of those clients that wanted very low prices for the delivered products. Another phenomenon that has lately amplified, especially after the Romania’s adhesion to the European Union, is the migration of the labor force. If in 2006 the firm had 70 employees, nowadays it has only 50 and it is impossible to hire new persons. In 2007, in the region of Iasi there are 4 other knitting manufacturers, compared to 7 in 2006. Some of the firms did not succeed in adapting to the new realities and, consequently, they were forced to stop their activity. The remaining ones hoped for an increase in the available labor force, but, despite the expectations, this increase was only on short term. The situation of Macroman SNK – related to the important decrease of the number of the employees and to the impossibility to attract new ones –, together with the discussions between the managers and those employees that want to leave the firm, reveal the great proportion of the migration trend among the low skilled persons, with low incomes. No matter the age, these employees go to the European states where they may earn considerable higher incomes if they do unqualified work, eventually without having legal forms. Most of them are influenced by relatives or friends that are already working in a foreign country. In the case of highly qualified employees, like engineers, the phenomenon is much more limited. Yet, they prefer going to other regions of the country, where they have chances to earn a higher income, or reorienting to other fields of activity. Under these circumstances, the Macroman SNK strategy is now focused on reducing the produced quantities and on fostering more complex products, with a higher quality, for which it can obtain a better price. The older technologies, used by some competitors from inside or outside the country, make the adaptation of the production structure for a new product be difficult. Such an adaptation is costeffective only in the case of large orders. The investments in modern technologies and its small dimension enable Macroman SNK to meet the demand for small quantities of complex products. Although the production is still focused mainly on the lohn exports, the firm wants to develop new collections, under a private label. This new development strategy involves the implementation of a design department and the adoption of new business processes. But on long term, the firm could have high profits if it no longer depends on the lohn system and if it starts selling its own products on the European Union market. 5. The Effects of Migration on the Macro-Stability In free economies, the demand meets the offer on the market. The same thing happens on the labor market: its self-adjustment mechanism involves a certain rate of employment and a certain equilibrium income. When the offer of labor force reduces, and the level of demand is stable, the labor price rises. If this offer is not correlated to an increase of the productivity, the negative effects will influence the economic performance indicators and the macro-stability. The rise of incomes, without simultaneous improvements in productivity, generates, first of all, an increase in the unitary costs and consequently, a high pressure on the final price of the product. First signs of inflation are correlated to a surplus of money, caused by an increase in the level of income. The two vectors together determine an inflationist trend, which is very dangerous for economy because it may foster the so-called inflationist spiral5 that is difficult to eliminate even on long term. The fast Romanian emigration process of the post-communist period, correlated to a negative birth rate, determined a continuous diminishing of the labor force offer. This involved, through the mechanism explained above, an important growth in the labor cost. The growth coefficient of net average earnings per economy between January 1990 and June 2007, was 3465, 45 (13, 2007). However, due to the strong devaluation of the national currency, the numbers are not very relevant; consequently, we demonstrate the facts with the help of shorter term evolutions. Considering the year 2000 as a bench-mark, the costs with labor force have increased by 414,556 up to the end of the second semester of 2007 (in industry, constructions and services). We have to mention that this was the most dynamic period from the 5 Friedman, M, The Role of Monetary Policy: Presidential Address to AEA, AER, 1968 migration point of view. This fast growth considerably reduced the competitive advantages of Romania. The negative results came soon after. The most significant ones can be noticed in the foreign direct investments flow, which is expected to diminish more than 30% in 2007 compared to 2006. One of the strongest trumps of Romania, in the global relocation process of the industries, was the low price of labor force and the relative abundant and high skilled labor market. The real growth rate of the incomes, which resulted from the nominal increase and from the national currency appreciation, was about 30% between June 2006 and June 2007, while the growth of the productivity was much slower – under 10%. Table no 4. The nominal income growth between 1991 and 2006 (ROL) Year Amount in December 1991 14771 1993 131742 1995 374183 1997 1265671 1999 2559796 2001 5299736 2003 8068932 2005 11210000 2006 14810000 Source: INS, Population income, expenditure and consumption, 2007, site: http://www.insse.ro/cms/rw/pages/index.ro.do Unfortunately, these characteristics of the internal market started to disappear under the pressure of the income growth and of the diminishing number of workers, which were tempted to go to the developed countries, in order to find a better paid job. At the same time, the growth of the incomes induced a high pressure on the inflation rate, changing the foresights for 2007. If the foreseen rate was under 4%, we might expect that it rises at the end of the year. If the income pressure continues, without an improvement in the labor productivity, the Romanian economy risks entering into an inflationist spiral, similar to that of the ‘90s. Nowadays, according to Eurostat, Romania is situated at the end of the list of the European countries – at last but one place, concerning the labor productivity. At the end of 2005, the labor productivity per worker was 39,5% of the average of EU 25; at the same time, in Luxembourg this percentage was about 160,8%, in Belgium 128,1% and in Ireland 126,77%. A factor that negatively influences the slow evolution of the productivity is the low competition of the labor market. The reasons are correlated not only to the economic activity intensification, as a consequence of a favorable international conjuncture and of an attractive internal environment, but also to the diminishing of the number of workers with more than 10% in less than 10 years, due to the reduction of the active population. This phenomenon was favorably influenced mainly by the gradual free movement of persons, especially in the European Union, and by the increased demand of labor force in the developed countries, such as Italy, France, Spain and United Kingdom. There are economic branches like constructions where the demand for skilled workers is considerably higher than the offer. The unemployment rate was 3,8% in July 2007, very closed to the natural rate of unemployment. Under these circumstances, we might expect, for the next period, that the incomes will continue to rise, due to the lack of labor force, and that the pressure on the growth of productivity will be feebler and feebler. Figure no 1: The foreseen evolution of the total population and of the occupied population until 2014 Conclusions As noted in the graphic made by the Economic Forecast Institute (figure n o 1), it is estimated that until 2014, the Romanian population will raise up to 21,1 millions inhabitants, which means that it will be 1 million less than nowadays. This forecast considers not only the negative birth rate but also the emigration process. We might expect that, on age categories, the most significant reduction is that of the young population which is more tempted to emigrate. This aspect may negatively influence the economic growth rate. There are also chances that this situation improves if the per hour income, which was only 2 euro in July 2007, will rise enough to be attractive for the immigrants from countries such as Republic of Moldavia, China or Middle East. This equilibrium is possible to be achieved only for the low and medium skilled workers because the developed countries compete for attracting the high skilled workers. Consequently, we fear that, in the future, Romania might be forced to direct the productive structure to low and medium technological branches, which do not bring real competitive advantages on the international markets. The public policies may have an important role in stopping this impressive emigration process. Creating facilities for the educated young persons, offering subventions to firms that hire and maintain, for a certain period of time, the university graduates, paying higher attention to young families, etc, are just a few methods that might determine young, high skilled persons to remain in the country. Of course, this involves some high present costs. But we have to analyze them in terms of opportunity cost: what we loose now compared to what we gain in future. Placing Romania in the context of the European and global economy depends on the human capital stock that the country will succeed to create and maintain. The great mobility of the people makes a country’s human capital stock volatile, correlated to the economic stability and to the welfare state. Yet, the volatility still rests lower than in the case of the financial capital. This is why we may assume that investing in human capital is more stable and has a higher return than attracting foreign capitals. The human capital is a huge magnet for the foreign firms which decide to relocate their production according to the abundance of the high skilled labor force from a certain region. Consequently, it is not necessary to look for the foreign financial capital in order to bring it inside the economy because it will come by itself when there are favorable conditions for high profit. 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