Today we are fortunate to have as a guest contributor Joseph Joyce, Professor of Economics and M. Margaret Ball Professor of International Relations at Wellesley College.
Trade in goods and services constitutes the most visible component of globalization. But there are also markets for labor and capital, the factors of production, as workers and firms seek profitable opportunities in foreign markets. Their activities yield income in the form of wages, which can be sent to the home countries of the workers as remittances, and profits, which can be repatriated or reinvested. Both forms of income have diminished considerably this year and may take a very long time to recover—if they ever do.
Remittances have become a major source of foreign exchange for the home countries of migrant workers. Among the largest recipients in absolute terms are Mexico, China and India. When scaled by GDP, remittances are particularly important for smaller economies such as Haiti, Nepal and El Salvador. The payments often provide a counter-cyclical offset to domestic downturns or disasters such as hurricanes. They appear as credits in the current accounts of the recipient countries, and as debits in the countries where the payments originate, such as the U.S. and Saudi Arabia.
But during a global economic decline all workers suffer losses in income. The World Bank has projected that remittances will fall by about 20% to $445 billion in 2020, the sharpest decline in recent history. The decline reflects the contraction of employment opportunities available to the migrants, as well as a fall in wages of these workers, who often not eligible for transfer payments in the host countries. The drops in remittances are projected by the World Bank to be particularly severe in Europe and Central Asia, as well as sub-Saharan Africa and South Asia.
In oil-exporting countries, the impact of the pandemic is compounded by declines in oil prices. Those countries in the Middle East that are not energy producers supply workers to their neighbors and benefit from the money they send home. Almost 3% of the Egyptian population work in Arab countries, as does 5% of the populations of Lebanon and Jordan and 9% from the Palestinian territories. Moreover, if foreign job opportunities dwindle, governments can not use them as a relief valve for those workers who do not find jobs domestically, which could result in domestic unrest.
The decline in international labor income has been accompanied by a fall in income generated by foreign direct investment (FDI). FDI income paid by multinational affiliates located in member countries of the Organization for Economic Cooperation and Development (OECD) to their foreign parents fell by 5% in 2019 after rising steadily since 2013. The income earned by parent units in the OECD countries declined by 1%. FDI income will continue to fall this year, and the United Nations Conference on Trade and Development (UNCTAD) reports that the profits of multinational companies have been revised downward for 2020 by 40% on average.
Many developing economies register outflows of this type of income, as they are hosts to multinationals (see here). The major recipients include the U.S., France, Japan and Germany, the home countries of these firms. A decline in outflows of FDI income lowers the current account deficits of the emerging markets, while reducing credit items in the advanced economies’ current accounts. There are also substantial FDI capital flows amongst the advanced economies that also generate income.
International labor and capital income, therefore, flow in different directions. The wages that are remitted to the home countries of the migrant laborers move from advanced economies to developing economies. The flows of investment income follow the opposite path, from developing nations to the advanced economies. The declines in both forms of payments will generate adjustments in the current account, with the net effect for a particular country depending on the relative sizes of the declines in both forms of income.
However, the capital account is also affected by FDI income. This income can be repatriated by its multinational parent or reinvested in the host country. Reinvested earnings are an important source of FDI inflows, accounting for up to 50% of such expenditures. These earnings will drop as a consequence of lower profits, but also because FDI flows are expected to fall.
Global labor and capital income will not soon revert to their former levels. Beyond the impact of the pandemic are U.S.-China tensions which will reduce the scope of investment no matter who wins the next Presidential election. In the long-term, advances in information technology will reduce the incentive to locate production where there is cheap labor (see here). In addition, some migrant laborers may find their old positions eliminated. The falls in the flows of labor and FDI income are further demonstrations of the new limits on globalization.
This post written by Joseph Joyce.