Download Globalization and international migration Speech by Mr

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Globalization and international migration
Speech by Mr. Wellink on Friday 12 th of March, at the lunch meeting of the “Rotterdam Japan club”.
Introduction
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Good afternoon ladies and gentlemen. Let me begin by saying that it is a great pleasure to be
here. Speaking before such a reputable international audience, in a city that boasts having the world’s
largest harbor, the subject of my talk today – globalization – may be considered highly appropriate.
Indeed, you are all active witnesses and participants in the process of international economic
integration. Half of the members of the “Japan club” are from a country on the other side of the world.
They have come here to profit from the advantages of international economic specialization. Japanese
companies have seen opportunities to do business in this faraway country. In doing so, they have also
sent employees here to capture a very specialist niche in the Dutch labor market: that of Japanese
speaking managers that can bridge the gap between cutting-edge companies in Japan and their Dutch
subsidiaries. Today I would like to talk about three flows that are important for economic integration.
These are: international flows of capital, international flows of goods and services; and international
flows of labor. Whereas the first two flows are relatively free, the latter is still subject to many
restrictions. On the latter front, I will present some considerations.
Global trade and capital flows are beneficial
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But first, let me say something about global trade and capital flows. Economic theory tells us
that the exchange of capital and goods is beneficial. You may recall the line of reasoning from your
study books. For trade of goods and services, this rests on the theory of comparative advantage. The
theory goes back to the famous early nineteenth century economist David Ricardo. Basically it boils
down to international specialization. If every country produces what it does best and trades what it
produces, we are all better off. For example, neither Japan nor the Netherlands would probably benefit
from producing labor-intensive products such as textiles and shoes. This is because companies in
China or India can do such things relatively better. It is in our interest to focus on more high-tech
products such as developing new medicines or the next generation of DVD-players. And we can trade
the proceeds of our specialization to our mutual benefit. Of course, we should also always stick to
producing cheese and flowers and Japan should never give up making sushi.
3.
Turning to capital, the liberalization of flows increases the opportunities for intertemporal
savings and investment decisions. Surplus aggregate savings can be directed towards the
internationally most profitable investment opportunities. This allows some countries to accumulate
assets for later consumption, while others with large investment needs can import capital. For
example, spendthrift Americans are able to sustain their consumption and investment by borrowing
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from foreigners, while Japan can accumulate savings to take care of its rapidly ageing population. As a
result, the Japanese economy as a whole is accumulating substantial claims on future US production.
Foreign capital can also foster technological spillovers. Many developing nations prof it from foreign
direct investment as they learn international best practices. For example, China’s rapidly expanding
economy has benefited enormously from international expertise by opening the country up to foreign
investment. For developed nations, the efficiency enhancing effect of foreign competition is also
important. An example is the car market, where Japanese companies have boosted production
efficiency in both Europe and the US when they entered these markets.
4.
Over the past decades the world has reaped the benefits I have just mentioned. We have seen a
tremendous increase in global trade flows, at about twice the rate of global production. Furthermore, in
the past decade we have seen an explosion in global FDI and portfolio flows. Strikingly, these have
risen even faster than trade flows. Governments around the world have recognized the potential for
greater welfare and have launched various liberalization initiatives to reap the rewards. Particularly in
the last decade, many of these initiatives have taken form at the regional level. Allow me to highlight
the developments in the three major trading blocs.
Regional examples of increased integration
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A good starting point is the enactment of NAFTA in 1994, which removed many restrictions
on trade and capital flows between the economies of the United States, Canada and Mexico. This
agreement was highly controversial in all three countries. Many feared stiffer competition, increased
unemployment and downward pressure on wages. Agricultural interest groups secured various
exemptions and lengthy tariff phase-out periods. Despite the remaining agricultural restrictions, trade
flows between the three countries almost tripled once NAFTA was signed. Capital flows have also
surged. American companies have invested nearly $250 billion to profit from lower labor costs in
Mexico. This increased integration has generated substantial benefits. This can be illustrated by
pointing to the fact that in Mexico, those regions with the greatest exposure to globalization registered
a higher increase in wages. Moreover, the shift of manufacturing jobs to Mexico did not lead to overall
job losses in the US. In fact, the US unemployment rate dropped substantially in the 1990s. Indeed,
between 1994 and 2000 the US economy created more than 2 million new jobs a year even as
productivity accelerated. Virtually all economists and businessmen now consider NAFTA to be a
success.
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Turning to Europe, we have also seen an intense drive towards economic integration both
within the EU and with countries that will be joining the union in the near future. Since 1993, the
annual export growth of the accession countries towards the EU has averaged close to 15%. In
addition, since 1990 more than $100 billion in FDI flowed eastwards to benefit from cheaper labor and
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specialization. These flows have triggered drastic changes in export and import structures. For the
current EU-members, the accession countries have now developed into the largest export market after
the United States. In May, this economic integration process will culminate in EU-entry for ten
accession countries. I do not doubt that most of you have been taken a close look at these
developments, have felt their economic impact, and are considering the economic opportunities.
Indeed, this may have been the very reason for companies to operate from the Netherlands. Our
economy has traditionally been very open, in contrast to some other European countries, which allows
companies to profit from these developments. Moreover, in the past years we have been one of the
most dynamic economies in Europe. And while we are currently experiencing some economic
difficulties, I do not doubt that our economic future is bright.
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I now turn to the region where perhaps the greatest strides towards economic integration have
been made: in Asia. Japan is lucky to be situated in the most dynamic economic area of the world,
which will turn into a center of global economic activity in the coming decades. Large capital and
trade flows have facilitated this development and will continue to do so in the future. This is triggered
for a large part by the booming Chinese economy. Last year alone, China attracted more than $50
billion in foreign direct investment. Moreover, its blistering pace of growth has been accompanied by
an ongoing integration into the world economy. China is rapidly developing into the hub for intraAsian trade through vertical specialization. Regional semi-products are exported to China, processed,
and re-exported to developed markets. Japan has benefited tremendously from this development. The
improved profitability of its manufacturing companies and its latest economic upturn are firmly
supported by robust exports to China, which increased by almost 40% in 2003. I do not know if there
already exists a Shanghai-Japan club, but I do not doubt there will be one in the future.
International labor migration remains restricted despite benefits
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So far, I have talked about the great progress that has been made in important parts of the
world in liberalizing capital and trade flows. While the policy dynamics driving liberalization have
often been regionally oriented, they have been underpinned by global trade and capital liberalization
efforts through organizations as the WTO and OECD. In contrast, the international flow of labor
remains fairly restricted. This is regretful because international labor migration has substantial benefits
too. According to the economist Dani Rodrik, global welfare can be greatly improved by lifting
immigration restrictions. He argues that this will bring more benefits than further trade or capital
market integration. Greater international labor mobility would allow economies to balance shortages
and surpluses of labor at the aggregate level, and to solve labor mismatches at the micro level. The
economic consequences of global ageing spring to mind as an important example. On a somewhat
smaller scale , the shortage of Japanese speaking managers in the Netherlands I referred to earlier is
another example.
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Despite the obvious benefits, international labor mobility remains restricted. Arguably, labor is
also considerably less mobile than it used to be in the past. This is especially true, if we compare today
with the end of the nineteenth century. At that time, large numbers of Europeans and Asians headed
towards the United States in search of a better future. The world has been witness to the results.
Today, the pressures for international labor migration have risen in line with the greater mobility of
goods, capital and information. They are also spurred on by sustained disparities in the global income
distribution. Nevertheless, in this day and age, countries are reluctant to liberalize migration flows.
This generally stems from concerns related to a country’s social cohesion and, in a more economic
sense, the sustainability of social security systems. This is especially true if immigrants’ skills do not
meet the demands of the labor market, creating the risk of a heavy burden on state benefit schemes. A
flexible economy and labor market can serve to limit these risks. The argument can then be turned on
its head: if integration is successful, immigrants add to the tax base and help sustain social security
systems. Beside the common concerns about welfare programs, another worry among many is that
immigrants cause downward pressure on domestic wages. However, economic studies suggest that this
effect is small at best. Some studies even find positive wage effects. A drawback is that these benefits
were realized mainly by highly-educated workers, which could lead to greater income inequality.
International migration policy
10.
I now turn to reflect on those labor policy initiatives and migration challenges that are
particularly relevant for Europe, Japan and the United States. A good starting point is the reluctance to
open the EU labor market for accession countries. Already some 400 thousand workers from central
Europe work legally within the EU. Estimates from the CPB Netherlands Bureau suggest that over the
longer term almost 2 million immigrants from the accession countries could head to join the nearly
380 million people that currently reside in the EU. This potential migration of a host of Eastern
European workers is seen as a threat, rather than as an opportunity. Many current member states,
including the Netherlands, have therefore decided to maintain restrictions on laborers from accession
countries, even after the formal EU-entry. In Japan, the story is much the same. Historically, it has
always been relatively closed to foreigners. Although it now has one of the fastest ageing populations,
and immigrants could add to the local economic dynamics, Japan continues to restrict its labor market
for foreign workers.
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For a different approach to immigration we can turn to the United States, which has a long
tradition of using permissive immigration policies to stimulate economic growth. But also there, fears
of labor migration are prevalent. Especially when NAFTA was enacted, Mexican immigration was
seen as a direct threat for US jobs. In practice, an estimated 1.3 million Mexicans have actually
migrated to the US since 1994 in search of a better future. And the flexible US labor market has
managed to absorb these newcomers. They are contributing substantively to American production.
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Moreover, the influx of foreign labor has lessened the burden of ageing in the US, which may provide
an important example for Europe and Japan.
Conclusion
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Ladies and gentlemen, let me conclude. International integration through increased trade and
capital flows has progressed rapidly in the last decades. The global economy has profited from this
development. However, policy makers have shied away from liberalizing the international labor
market, especially in Europe and Japan. In the United States, we can see that a sufficiently flexible
economy can profit handsomely from immigration. In Europe, the fear of foreign labor has led to
restrictions on workers from the accession countries, even though this old continents’ population will
age faster in the coming years, causing labor shortages. In Japan, we can already see that there is a
continuing debate on possible innovative migration policies to limit the economic burden of an ageing
population. In Europe, this debate will continue to surface as well. I thank you for your attention.