Returning for another round (first round: the illiberal global labor market) of Breaking the Gridlock, Lant Pritchett attacks international organizations’ assumption that economic development should focus on the nation-state, rather than the national, as the primary unit of interest. This nation-centric perspective pervades most international institutions and frustrates support of labor mobility. If you didn’t know any better, you might believe that the primary objective is to increase the productive capacity of low-yield geographic areas rather than the economic well-being of the inhabitants. Still the perception of economic development as a national phenomena would be of little concern if it wasn’t often at odds with the interests of the nationals themselves. For example, the de facto measure of development progress, GDP, presents the migration of a productive national to another country for a better paying job as a loss. The real benefits of labor mobility are only apparent when development is centered on people, not arbitrary lines.
To begin with a truism, the capacity of a region to support a population changes over time. For example, Ireland’s potato famine precipitated a mass exodus. However, because of the corresponding reduction in labor supply, “real wages in Ireland relative to the United Kingdom never fell and gross domestic product (GDP) per capita never fell.” Similarly, the collapse of industry towns in US met with a decline in population that also mitigated wage losses. When the optimal level of population decreases, a commensurate migration is best for all involved.
In contrast, Bolivia had a clear negative shock as well, but one that occurred in a period in which there was little or no international labor mobility. So, rather than the shock being accommodated by changes in population while real wages of Bolivians remained constant (both in Bolivia and elsewhere), real wages in Bolivia fell spectacularly.
There was no brain drain in Bolivia, but it didn’t help matters. Trapped labor simply drove down the wages of all the unfortunate souls stuck within the Bolivian borders.
Pritchett then looks to Zambia, where the population has grown from 3.5 million at its GDP-per-capita peak in 1964 to 10 million today, with a GDP per capita that measures 59 percent of the 1964 mark: “to raise output per person just to its previous peak, the populations would have to fall to 36 percent of their current levels.” Like Bolivia, wages have fallen as a bloated Zambian population is forced to make due within its borders.
The economics are simple:
If labor demand falls in a region and labor is trapped in that region, by national boundaries for instance, the labor supply is inelastic and all the accommodation has to come out of falling wages. A region that cannot become a ghost (losing population) becomes a zombie economy—the economy might be dead, but people are forced to live there.
The American (and Irish) experience portends that ghost towns are preferable to zombie economies, yet:
There are 10 million people in the Sahelian country of Niger; if there were globally free labor mobility and only 1 million lived in Niger now, how many people would move there? Though some people might say that this creates a case for more aid or freer trade, it is hard to believe that if people moved out of Kansas because farming was no longer an attractive opportunity, then the best that can be done for the people of Niger or Chad is that they get slightly more assistance and slightly better prices for the items they grow.
To be blunt, there is a significant possibility that millions, perhaps hundreds of millions, of people are living in nation-states that because of geographic and technological “shocks” to their economies have little or no possibility of sustaining their current populations (much less their projected future populations) with anything like decent standards of living.
While blunt, Pritchett’s words are also profound. Still, many will read to this point and still be concerned with brain drain — the loss of the best and brightest. For those folks, Pritchett explores a parallel argument for restricting capital flow to protect national development: “capital is good for development, therefore movements of capital out of poorer countries are bad for development, and therefore banks in rich countries should refuse to take deposits or investments from citizens of poor countries.” Such a position has virtually no credence in serious debate, yet, once again, the labor equivalent of the free trade/capital status quo fails to translate peaceably.
Next up, arguments against labor mobility based on industrial country self-interest.