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.
I’m half-sauced now, I leave it to Menzie’s better judgement whether this gets past the filter. I think this guest post is cool because I found new blog because of this post I’ll be checking into and posting semi-blathers on. Always looking for new blogs (I assume this guy has an “RSS” feed). You know what this post weirdly reminds me of?? I know it’s mainly talking about immigrants between nations sending money back to their parents or whatever. But migrant can even “sort of” be inside a country (between provinces). And I remember alot of my Chinese students, who many of whom had lost all motivation long before entering my class, and just thinking some of them (even as I was teaching them) would end up as this kind of life “migrant worker”, maybe be demeaned on some video on a Chinese TV show. OH, “the migrant workers”. Just like a 1/2 step above Uighers in Chinese culture parlance. “Oh the shame”. What else were they gonna do??— even if they had learned English well?? The extremely motivated ones, of which I had some attending my class, maybe could make a go of it–but even 98% of those were going nowhere without guanxi. And even the city permit to work or whatever it was called. Where high-ability rural Chinese students looking for good city employment were F’ed because they didn’t have the permit to work in the city, so it went to some lazy A__ rich parents city kid. Maybe one of Menzie’s Chinese propaganda visitors like “The Rage” or our Air Force boy can fill me in the Chinese name, I’m sure I was told 50+ times and forgot now. Children (and their future son-in-law’s income) as health insurance policy for their parents.
Nauseating. All of it is extremely nauseating
I would not have guessed that China was a recipient of remittances. It makes sense, though. That’s another layer in the trade balance and strange relationship between the US and China that I had not considered before.
I’m half-sauced now…
[ Sadly happening to notice this comment, I would say “completely prejudiced now” would be the proper description. Proper and frightening. Counseling could help. ]
@ “ltr”
You have a right to your opinion. However, I would think that someone who sees racism in their Cheerios, cottage cheese, in their own navel, and as a message from the Sun god probably needs more than professional help. I suggest a lobotomy. Or better yet, spend just under 7 years in a country culturally the polar opposite to your own, on your own, and navigating pretty well, then I’ll give a flying -F*ck WHAT you “think”.
I usually leave little gnats like you alone on this blog, because crossing antlers with morons doesn’t do anything to sharpen my mind, but I may just put you right under BRJ as my personal “project” now.
Posted this over at AB: Thanks for the excellent article Joseph.
JJ- “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.”
IZ- Question: Is there a way to understand how vital those forms of income declines are to the current accounts and how vital the current accounts are to the countries’ economies? I would imagine, there would be vast differences due to the upcoming changes in policy and it is much easier for capital from advanced economies to move and much more difficult for the movement of labor/migrants because of COVID restrictions.
I also like the reframing posed by the OECD-library in The Future of Global Value Chains: “Business as Usual” or a New Normal, because it dovetails with PGL’s discussions on closing tax loopholes:
“But since wages and productivity often diverge – among others because of frictions in the labour market, an alternative modelling approach has been used to directly impute an increase in production costs (mimicked by increasing production taxes).”
JJ- “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.”
IZ- So, how would this affect our policy decisions; I initially like the potential for this to be used with Brad Setser’s idea of connecting a country’s labor/haven status and our taxes connected the GVCs. “Countries witnessing an increase in their production costs will become less attractive in GVCs for the sourcing of intermediates. The increases in production costs result in global trade to fall both in absolute terms and in percentage of GDP in 2030. Higher prices as a result of rising wage costs discourage demand on domestic and international markets.”
This would be seem to necessitate a broader tax base for the future expenditures that will be needed. What is troubling is anticipating effects of a prolonged downturn for emerging economies with GVC’s seemingly puttered out from 2011 until 2030. But, “The fact that some emerging economies become more expensive makes offshoring from developed economies a less attractive option; instead domestic sourcing of intermediates increase relatively more in developed economies.”
JJ- “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.”
IZ- So these are some really important limits, what do you feel are the most important priorities and objectives for crafting policy with these limits in mind?