Alleviating Global Poverty through Labor Mobility

Lant Pritchett starts off boldly: "I am going to start with a simple but striking claim, defend that claim, and then circle back to the broader questions the title raises. My simple claim is that as any citizen of the West contemplates the question “What could we do to alleviate global poverty?” the right answer is: “The least you can do is better than the best you can do.”

Alleviating Global Poverty: Labor Mobility, Direct Assistance, and Economic Growth

Turns out giving cash is not that economical.

Abstract

Decades of programmatic experimentation by development NGOs combined with the latest empirical techniques for estimating program impact have shown that a well-designed, well- implemented, multi-faceted intervention can in fact have an apparently sustained impact on the incomes of the poor (Banerjee et al 2015). The magnitude of the income gains of the “best you can do” via direct interventions to raise the income of the poor in situ is about 40 times smaller than the income gain from allowing people from those same poor countries to work in a high productivity country like the USA. Simply allowing more labor mobility holds vastly more promise for reducing poverty than anything else on the development agenda. That said, the magnitude of the gains from large growth accelerations (and losses from large decelerations) are also many-fold larger than the potential gains from directed individual interventions and the poverty reduction gains from large, extended periods of rapid growth are larger than from targeted interventions and also hold promise (and have delivered) for reducing global poverty.

Compare that to the EU's position on migration:

Angela Merkel in Nigeria: Migration in focus at end of Africa trip

"The leaders of Europe and Africa's largest economies have met for talks in Abuja. Promoting economic measures to stem migration has been a priority during the German chancellor's trip to western African countries."

That was a face-saving trip for her. The EU's measures do not sound wise and make little sense economically.

"So think of two ways to help the global poor. One is for rich people (in a global sense) to give a dollar and get roughly a dollar’s worth of benefits for the poor. The other people is for rich people to allow people who would like to work at the prevailing wage of their country to do so and not deploy active coercion to prevent this—which reflects the person’s contribution to product and hence is (or can be made to be) zero net cost to the host country. Of course, a dollar for a poor person could produce vastly more human well-being than had the richer person spent the money as the marginal utility was much, much higher for the poor person, but this redistribution effect is the same for both options. This means, at least in current conditions, the least you can do—just increasing the freedom of people who want to work and people who want those people to work to carry out that mutually beneficially transaction across national borders—is better than the best you can do of trying to directly help people in poverty but without allowing them to move to opportunity."

Here is what drives people and how they gained.

"Empirically, their own initiative is how most people report escaping poverty. As part of a massive exercise of participatory assessment of how people’s well being had changed over a 10 year period we held village meetings in 14 countries and three states of India (Narayan, Pritchett, Kapor 2009). In a ranking exercise people ranked the level of living of households today and their level 10 years ago. This identified almost 4000 people who, by their village neighbor’s assessments, had moved out of poverty. We then interviewed them and asked them what they thought the primary reason for their move out of poverty was. This is of course subject to all the subjectivity biases about how people narrate the story of their lives but 87.7 percent of them reported their own initiative (60.1 percent an initiative outside of agriculture, 17.4 percent in agriculture, 4.7 percent accumulation of assets, and 5.5 percent hard work). Only .3 percent (12 people of 3,991) who moved out of poverty named NGO assistance as the cause."

Conclusion

A large part of the explanation of differences in labor productivity across countries is differences in “A”—total factor productivity. Transmitting A from country to country has proven difficult. This implies that labor with the exact same intrinsic productivity will have much higher productivity (and hence justify a higher wage) in a high A than in a low A country. But, by and large, rich countries have passed extraordinarily strict regulations on the movement of unskilled labor. A relaxation of these restrictions could produce the largest single gains in global poverty of any available policy, program or project action. And since these gains to movers are (mostly) due to higher A which (at the margin) is a “public good” (it is non-rival and non-excludable) in the host country these gains are essentially free to the host country (or could be free to the host country under some technical design conditions).

One thought for addressing the injustice of condition of birth based discrimination that keeps people in low productivity places is to imagine that rich country citizens will carry out philanthropic activities that raise the incomes of the global poor in situ. But the fact they are in low productivity places means it will be costly to raise their income in those places. Extrapolating from the fact that a “best in class” anti-poverty program produced, on average across 5 countries, $344 in annual gains in income for the poor with $4,545 in costs, to produce the annual gains of allowing a low skill worker to work in the USA of $17,115 would require an investment of $226,000 per person—versus producing those same gains essentially for free by relaxing barriers to mobility. The “best you can do” in situ is much less effective than the “least you can do” of letting people work and get paid a wage that reflects the value of their work.

That said, sustained rapid economic growth in developing countries—that is sustained by improvements in A—can also produce cumulatively enormous gains. And avoiding growth collapses/stagnation can prevent enormous losses. So, even though traditional measures of the country to country transfers of resources via “foreign aid” do not, in and of themselves, appear to be responsible for producing most of the observed differences in economic growth, investments that could bring that about more sustained growth (both more sustained accelerations and fewer sharp and extended decelerations) could also have astronomical returns. And, to be clear, no reason why more labor mobility and sustained economic growth cannot go hand in hand in improving well-being.

Wise thoughts, however, implemented in Germany it would make the AfD the strongest political party in a very short time.