When you look at figures regarding international migration, the movement of people from developing to developed countries is most talked about and is the most common of the four types. Figures issued by the McKinsey Global Institute estimate that 120m people have made this move – see graphic below:
The second largest move is from developing to developing countries with just under 80m. This flow has been a popular option as people leave a poor country for a somewhat less poor country in search of higher wages. For instance the World bank estimated that 1.5m migrants from Bukino Faso live in the Ivory Coast which is proportionately larger than Indians in the UK, Turks in Germany and Mexicans in the US. The Ivory Coast is a poor country but not as poor as Burkina Faso and with wages double what they are in Burkina Faso migration is an attractive proposition. The World Bank estimates that $343m in remittances flowed from Ivory Coast to Burkina Faso in 2015 and accounts for 87% of all remittances.
Another example of movement from a developing to developing country is India and Bangladesh with an estimate of 20m Bangladeshis living in India. The World Bank estimates that more money is remitted to Bangladesh from India than from any other country – $4.5bn in 2015.
Why is developing to developing becoming more prominent?
- Neighbouring countries tend to share currencies meaning money can be moved more easily in ways that officials do not notice.
- Poorer people cannot afford travel to the West or the Gulf
- The poorer people are the shorter the distance they can travel so neighboring countries might be attractive
- Neighboring countries often share a language
- Tribes often span borders of developing countries
- In developed countries most jobs require legal documentation and authorisation. In the developing world informal work is seen as the norm.
- More less-skilled work is available in developing countries.
- The West does not have enough jobs for those from developing countries – African, Asian countries may offer more opportunity.
Sources: McKinsey Global Institute, The Economist.
Commodities have been the engine of growth for many sub-Saharan countries. Oil rich nations such as Nigeria, South Africa and Angola have accounted for over 50% of the region’s GDP whilst other resource-intensive countries such as Zambia, Ghana and Tanzania to a lesser extent.
I have mentioned the ‘resource curse’ in many postings since starting this blog. It affects economies like in sub-Sahara Africa which have a lot of natural resources – energy and minerals. The curse comes in two forms:
- With high revenues from the sale of a resource, governments try and seek to control the assets and use the money to maintain a political monopoly.
- This is where you find that from the sale of your important natural resource there is greater demand for your currency which in turn pushes up its value. This makes other exports less competitive so that when the natural resource runs out the economy has no other good/service to fall back on.
However it is the fall in commodity prices that is now hitting these countries that have, in the past, been plagued by the resource curse. As a lot of commodities tend to be inelastic in demand so a drop in price means a fall in total revenue since the the proportionate drop in price is greater than the proportionate increase in quantity demanded.
The regional growth rate for 2016 is approximately 1.4% but it is not looking good for commodity driven economies:
- Nigeria – oil – 2016 GDP = -2%
- Angola – oil – 2016 GDP = 0%
- South Africa – gold – 2016 GDP = 0%
In 2016 resource rich countries will only grow by 0.3% and commodity exporting countries have seen their exports to China fall by around 50% in 2015. Furthermore, public debt is mounting and exchange rates are falling adding to the cost of imports. With less export revenue the level of domestic consumption has also decreased.
It is a different story for the non-resource countries of sub-Sahara. It is estimated by the IMF that they will grow at 5.6%. By contrast they have been helped by falling oil prices which has reduced their import bill and public infrastructure spending which has increased consumption.
As is pointed out by The Economist numbers should be read wearily as GDP figures are only ever a best guess, and the large informal economy in most African states makes the calculation even harder. Africa may have enormous natural reserves of resources, but so far most Africans haven’t felt the benefit. In Nigeria, for instance, what’s seen as a failure to spread the country’s oil wealth to the country’s poorest people has led to violent unrest. However, this economic paradox known as the resource curse has been paramount in Africa’s inability to benefit from resources. There is a gravitation towards the petroleum industry which drains other sectors of the economy, including agriculture and traditional industries, as well as increasing its reliance on imports. What is needed is diversification.
Remittances come up in the CIE A2 Economics Syllabus under Developing Economies. The Economist in their ‘Economic and Financial Indicators’ sections has an informative graph and commentary of 2015 remittances. Key points for 2015:
- Migrants from developing countries sent home $439bn
- 25% of GDP in Haiti is made up of remittances
- Flows into Europe and central Asia fell by 23% in 2015 mainly due to the weak Russian economy
- India received $69bn in remittances – the most of any country.
The figures quoted might even be higher as it is a lot harder to track transactions from smaller money shops. Below are some examples of the importance of remittances in some developing countries:
- Sri Lanka – remittances > tea exports receipts
- Nepal – remittances > tourism receipts
- Morocco – remittances > tourism receipts
- Egypt – remittances > revenue from the Suez Canal
Advantages of Remittances
- money goes directly to the people it is intend for which means is less opportunity for waste or corruption
- money can be spent by the individual on areas like education and healthcare which may not be possible with official aid
- the consumer has considerably more sovereignty
- the sender is confident that the money will be used effectively which might not be the case with official aid.
Limitations of Remittances
- the development of infrastructure projects need sizeable funds which individual remittances cannot provide. For instance schools, hospitals, roads, bridges etc. need concentrated funds.
- relying on remittances may mean that you lose some of your skilled labour force, although money does flow into the economy. However, some suggest that this should motivate others into the same job.
- they tend not to target those who are desperately in need – both countries and individuals.
some countries are too isolated for their population to go and find work and ultimately they earn very little from remittances. To them foreign aid is essential.
Although remittances do generate substantial income they will never replace aid as some poorer countries will always require assistance from their developed counterparts. A challenge to those countries that receive remittances is to guide this flow of money into projects that will benefit their country as whole rather than just the individual.
Jeffrey Sachs wrote a very good piece in the Boston Globe regarding the way forward for the US economy. Some interesting data:
- 1.4% GDP between 2009-2015 when it was projected at 2.7%
- 81% of Americans experienced flat or falling incomes between 2005-2014
- 1980 – top 1% earn 10% of income
- 2015 – top 1% earn 22% of income
- 10% unemployment in October 2009 – dropped to 4.9% today. Mainly caused by those of working age leaving the labour force entirely.
- Employment relative to working age (25-54) in 2000 was 81.5%. In 2015 it was 77.2%
- US Treasury debt owed:
- – 2007 = 35% of GDP
- – 2015 = 75% of GDP
- – 2026 = 86% of GDP – forecast
- – 2036 = 110% of GDP – forecast
Issues with the US Economy
US manufacturing jobs have shifted overseas – remember NAFTA. Northern Mexico saw a huge influx of US companies as they took advantage of cheaper labour costs.
Automation – the advent of smart machines seems to be shifting income from workers to capital, driving down wages and leading to frustration of low wage workers.
As well as debt sustainability the US economy needs to shift its reliance on carbon-based energy to non carbon energy sources – hydro, wind, solar etc. Some have argued that the US has simply run out of big new inventions to sustain growth levels but ultimately the world has got to change its model as resources will eventually run out. We can’t keep relying on people buying more and more stuff to maintain growth or the Chinese building more cities and blowing up and rebuilding bridges.
Jeffrey Sachs argues that sustainable development works best when it focuses simultaneously on 3 big issues:
- Promoting economic growth and decent jobs
- Promoting fairness to women, the poor, and minority groups
- Promoting environmental sustainability.
US growth has tended to focus on economic growth and neglect inequality and environmental issues. Future growth needs to focus less on current consumption but investment in future knowledge, education, skills, health, infrastructure and environmental protection. Furthermore if the investment is carried out efficiently the economy can growth in an environmentally safe as well as being fair. Good investment requires two things:
- Planning – need to overcome complex challenges for our future – e.g. energy
- Public investment – replacement of a crumbling infrastructure – roads, bridges, water systems, seaports etc
Jeffrey Sachs recent research measured how 150 countries performed with regard to sustainable development and the progress that countries will need to make to achieve the recently adopted SDGs – see image below. The Scandinavian countries came in top – Sweden, Denmark, Norway – the US was 22nd out of the 34 high-income countries whilst Canada was 11th.
Click the link below for an article on income inequality from the Boston Globe by Jeffrey Sachs
Leaders around the world increasingly recognize that GDP alone cannot give a full picture of a country’s performance. The well-being of citizens is an even more important measure. The Boston Consulting Group’s Sustainable Economic Development Assessment (SEDA) is a powerful diagnostic designed to provide leaders with a perspective on how effectively countries convert wealth, as measured by income levels, into well-being. SEDA also helps identify specific areas where a country is lagging behind others, even after taking into account its income level and growth rate.
SEDA defines well-being through three fundamental elements that comprise ten dimensions.
- Economics – Income, Economic Stability and Employment
- Investments – Health, Education and Infrastructure
- Sustainability – Income equality, Civil Society, Governance and Environment
The wealth-to-well-being coefficient compares a country’s current-level SEDA score with the score that would be expected given the country’s GDP per capita. The expected cur- rent-level score is based on the relationship between GDP per capita and current-level well-being scores among all countries in our analysis. (See Exhibit 2.) The coefficient thus provides a relative indicator of how well a country has converted its wealth into the well-being of its population. Countries that sit above the solid line in Exhibit 2 —meaning that they have a coefficient greater than 1.0—deliver higher levels of well-being than would be expected given their GDP levels, while those below the line deliver lower levels than expected. New Zealand sits above Japan in the Exhibit 2.
To understand how countries stack up in terms of well-being, and to see whether they are gaining ground or falling behind, it is helpful to examine both current-level and recent-progress SEDA scores. Countries in the upper-left quadrant of Exhibit 5 below have high current-level scores for well-being, but their recent-progress scores are below the median—meaning that they are in good shape but have been losing ground relative to the rest of the world. Those in the upper-right quadrant have scores that are above the median for both current level and recent progress— their well-being levels are relatively high and have been improving. Those in the lower-right quadrant have relatively low current-level scores but recent-progress scores that are above the median—what we describe as weak but improving. Those in the lower left are the most challenged: they have poor current-level and recent-progress scores, meaning that they have relatively low well-being already and have been losing more ground.
Check out the website:
China’s economic miracle is under threat from a slowing economy and a dwindling labour force. The FT investigates how the world’s most populous country has reached a critical new chapter in its history.
The abundance of cheap labour in China is coming to an end. Since the 1980’s low cost Chinese labour has supplied the developed world with cheap goods, which, to some extent, make up for stagnate wages. When China became more industrialised it grew very fast by importing foreign technology and employing capital and plentiful, cheap, unskilled labour from the rural areas. However, a point is reached when no more labour is forthcoming from the underdeveloped, or agricultural, sector and wages begin to rise. As well as wages increasing China has also experienced labour strikes and shortages, prompting many researchers to debate whether the Lewis turning point has been reached. Below is a very good video clip from the FT on this topic.