One way out of global inequality

What are inequalities around the world associated with? Some typical answers include: gender and race discrimination, education or family background. However, Branko Milanovic's study of global inequality shows that over 2/3 is actually explained by country of origin. Differences in the qualities (read GDP per capita levels) of countries are so massive that they translate to big differences in opportunities for individuals. This citizenship premium is what leads to thousands of people every year to spend all their savings, risk their lives and venture across oceans with the slim hope of reaching a better place. (The recent case of almost one thousand migrants dead crossing the Mediterranean with illegal traffickers is a clear example)

Up until the First World War traveling between countries was simpler, without the formalities of passports or strict border controls. Open borders was the norm. The terrible period until the Second World War led to stricter controls for all flows between countries, including investment and trade as well as people. Nevertheless, after 1945 the world has managed to recover some freedom in the flow of the first two, but free migration of individuals has not been recovered. This was argued by Lant Pritchett at the recent Harvard IDC conference to have lead to massive gaps in the wages of observably equivalent (e.g. same nationality, age, sex, education) labor around the world. Branko Milanovic's research could be read as people born in "bad" countries are not able to access proper education so they are doomed to low income, no matter where they live. However, Lant argues this is not true as differences in productivities (even for low skill workers) between countries are big enough to compensate for that education. Together with Micheal Clemens and Claudio Montenegro, they were able to compare the wages of people with same characteristics in their country of origin and the US (say Peruvian-born, Peruvian-educated 35 year old with nine years of schooling living in Peru versus living in the US).  

Table 1: Wages of observably equivalent workers at country of origin and US. 

Table 1 shows that the apparently same workers make in average five times as much in the US as in his home country, which amounts to over 15 thousand dollars a year (even after adjusting for price differences). A well trained economist would argue that selection could be a problem: the individuals that decide to migrate could have more ambition or drive, making them more productive even if they had stayed at home. This could bias the results upward, but the authors suggest that controlling for that would amount to (at most) dividing those results by a factor of 1.4. Even taking selection into account, letting a person move from his home country to the US would amount to an increase of around four times in his income. 

These results are impressive. In order to get a sense of their magnitude it is useful to compare them with other suggested measures to reduce poverty in developing countries. How long would a person have to work in the US in order to equal the benefits from a lifetime of other programs or interventions? Table 2 shows that a Bangladeshi would need less than  a month in the US to be able to make as much extra money as if she gained the net present value of a lifetime of access to micro-credits (one of the supposedly most successful interventions available, pioneered by Nobel Peace Prize winner Muhmmad Yunus). Similarly, an Indonesian worker would have to work half a year in the US to equal a lifetime of gains from the anti-sweatshop movement. 

Table 2: Gains from international movement of workers relative to other policies applied at home country.

Nowadays we focus on the recent "globalization" trend of opening trade and investment opportunities across the world. However, comparing with the world we had before 1914 we clearly live in a world of "nationalization", where flows of individuals across borders are prevented by coercion. Changes at the margin of labor mobility seem capable of leading to impressive results in reducing global poverty and inequality. The question that remains open is whether major changes in labor mobility would lead to similar results: It could be the case that allowing for just one extra migrant leads to impressive results because there are 10 employers looking for workers, but open borders could lead to thousands of migrants which could outnumber the positions required by those employers. But the magnitude of the benefits highlighted in Pritchett's work seems to suggest that, at least for the migrants, the benefits may be massive anyways. 

What about the workers from the recipient countries? That's an open question, but there is no clear evidence (from academic research) that they would be damaged. Maybe a possibility would be to start by allowing migrants for positions not desired by Americans (e.g. elderly or child care) or imposing an extra immigrant-labor-tax for the first years in the US that could be used to compensate national workers. This would introduce needed workers or tax revenue benefits for the recipient countries on top of allowing people from poor countries to improve their lives and avoid the many deaths due to illegal trafficking of migrants.

Based on Lant Pritchetts presentation at Harvard IDC and his paper with Micheal Clemens and Claudio Montenegro.