Trade in services under the Euro-Mediterranean partnership: An alternative to migration?

Bernard Hoekman, Çağlar Özden

High unemployment among the young and low skilled is fuelling anti-immigration sentiments across the OECD. This column argues that, in Western Europe, demographic trends are such that demand for many workers will exceed supply. It proposes a framework that enables the temporary movement of services providers, a policy that could address Europe’s labour needs while placating public resistance.

Recently released data show that the US population has increased 9.7% since 2000, reaching almost 309 million (US 2010 Census). While low by US standards, this growth rate far exceeds European rates. Europe is facing a demographic dilemma. Low fertility rates and increased life expectancy mean that labour forces are shrinking as dependency ratios are rising.

Declining youth populations imply this is not a temporary pattern but a reflection of long-term trends. The implications for labour markets, welfare policies, and fiscal balances are significant. In contrast to Europe, southern Mediterranean countries have a temporary bulge in their young working-age populations. They will complete their demographic transition within one generation, but current excess labour supply is creating social and economic challenges.

Current demographic trends suggest that the EU will face a severe labour shortage over the next decade while Mediterranean countries will continue to experience significant growth in their labour forces (Figure 1). The recession is reducing migration incentives somewhat and economic growth and demographic transitions in developing nations will reduce long-run pressures to migrate (Hatton and Williamson 2009). But in the short to medium term, the diverging labour market trends in the EU and its neighbours imply substantial incentives for migration.

The policy challenge is how to manage these pressures in a way that allows flows of workers to occur. Boeri (2009) has argued on this site that one element of doing so is through greater selectivity and making welfare eligibility conditional on payment of contributions. In this column, we argue that the trade agreements between the EU and its neighbours that are currently being re-negotiated can be used as a complementary mechanism to help balance labour demand and supply while building in elements such as those suggested by Boeri.

Source: United Nations, World Population Prospects, 2009.

Temporary movement as a partial solution

In 2004 the EU formulated a new approach towards the Eastern Europe and the Mediterranean countries that were not accession candidates. An aim of this European Neighbourhood Policy (ENP) is to support deeper economic integration with the EU. The ENP offers partner countries “a stake” in the EU internal market through the opportunity to integrate into specific elements of existing EU structures on an à la carte basis. Much of the focus has been on product markets and non-economic issues. Little has been done to meaningfully address the labour market needs of the EU and its partners. From an economic perspective, leveraging the ENP to address the labour market needs of both sides could increase the potential welfare gains from cooperation.

Public opinion surveys in EU suggest that it may be possible for European policymakers to build public support for temporary labour movement schemes that address specific labour market shortages in the EU. A temporary movement programme tied to specific sectors has many advantages.

First, temporary labour inflows will have little impact on the demographic profile of the EU, thus easing political resistance while partially addressing immediate labour-market needs.

Second, it would address the (temporary) excess supply of labour in Mediterranean countries.

Third, temporary movement is likely to reduce brain-drain losses for source countries, while generating significant remittance flows.

Fourth, returnees would help raise productivity in their home countries by bringing back human and physical capital.

Fifth, by facilitating legal and recurrent cross-border movement, temporary movement reduces the incentives for illegal migration.

The challenge of a temporary migration scheme is to ensure that movement is indeed temporary. A common view among EU voters and policymakers is that nothing is more permanent than a temporary “guest” worker. This widely held view has impeded any serious effort to negotiate or implement effective temporary movement schemes that would enhance access to the EU market. These concerns are justifiable, as incentives to ensure temporariness can be weak for both employers and migrants.

There are many policy instruments that can increase incentives for workers to return to their home countries. We should first note that unilateral migration policies are inefficient; they lead to excessive permanent migration relative to temporary movement and very little overall movement of workers (Amin and Mattoo 2005). Therefore, the objective of policymakers should be to design self-enforcing and bilateral agreements between source and destination countries that make temporary entry desirable ex post. This could be done by increasing the cost to host firms to retain workers by taxing them or by requiring temporary workers to deposit lump-sum payments into an escrow account that is refunded on their return or refunding social security taxes.

Temporary movement as part of Euro-Mediterranean services trade liberalisation

In a recent paper (Hoekman and Özden 2010), we argue that European trade agreements with Mediterranean countries offer a mechanism to support greater temporary movement of workers in specific service sectors or activities. A number of desirable components of trade agreements covering movement of natural persons can be identified (Chaudhuri et al. 2004). A central element is “contract-based”, rather than employment-based, movement of service providers that focuses on tasks. The Mediterranean partners all have bilateral trade (Association) agreements that are being renegotiated to include services (the original agreements that entered into force in the early 1990s were limited to trade in goods). Services trade agreements offer a mechanism to expand temporary movement opportunities. Many of the sectors and tasks for which there is excess demand for workers in the EU are in services activities. Thus, as part of the ongoing negotiations on the reciprocal opening of services markets, partner countries can seek better access for contract-based services provision in the EU. In addition to being beneficial to both sides in terms of matching demand and supply, the trade agreements offer an opportunity for liberalisation of inward FDI into the neighbouring countries in the services sectors that are covered in the agreements.

How might this work? Suppose that there is a specific demand for certain services (e.g., nursing care) in the EU, and that these are covered by the agreement. A firm that wins a service contract in an EU member state would then be free to source the required inputs from providers in the partner country. The service providers (workers) would be granted a visa/permit for a limited period to be negotiated[1]. These workers would be employees of the Mediterranean firm, although they might also be employed by an affiliate of an EU firm that has established in the partner country. Indeed, the affiliate may be connected to the EU firm that is buying or supplying the services (in this case the sub-contracting of service inputs would be in-house, not arms-length).

The advantage of contract-based movement as opposed to employment-based movement is that it helps to make temporariness more credible as contracts are time-bound. Although the contracts may be recurrent, once the worker reaches the maximum length of stay, he/she must be rotated. Moreover, contract-based movement allows internalisation of some objectives that otherwise require regulation. For example, a common constraint on international trade in services is non-recognition of licenses and professional qualifications. Rather than require re-certification or the negotiation of (mutual) recognition agreements – a cumbersome and time-consuming process – a contract-based approach leaves it to the buying firm or entity to establish whether foreign suppliers satisfy prevailing quality and related performance standards. Contract-based approaches can also more easily be designed to generate incentives to encourage workers to return. As the contracts are between firms, the government can hold them accountable for performance, further helping to internalise incentives.

Finally, inclusion of temporary movement of service providers on a contract-basis as part of the liberalisation of trade in services can also help catalyse needed labour-market-related reforms in both origin and destination countries. For example, it would create incentives for governments in origin countries to design educational regimes to better fit the needs of the labour market – in both the EU and at home.

References

Amin, M and A Mattoo (2005), “Does Temporary Migration Have to be Permanent?”, World Bank Policy Research Paper 3582.

Boeri, Tito (2009). “It is Migration, Stupid”, VoxEU.org, 23 June.

Chaudhuri, S, A Mattoo and R Self (2004). “Moving people to deliver services: how can the WTO help?”, Journal of World Trade,38(3):363-393.

Hatton, T and J Williamson (2009), “Global Economic Slumps and Migration”, VoxEU.org, 29 April.

Hoekman, B and C Özden (2010). “The Euro-Mediterranean Partnership: Trade in Services as an Alternative to Migration?”, Journal of Common Market Studies,48(4):835-858.

[1] A contract/sector-specific approach can also be useful in addressing the fact that there is no EU-wide immigration policy – visa/work permit regimes are national. Because under a contract-based approach the activity will generally be country (location) specific, and the firm is liable for meeting the conditions of a contract, other EU countries need not fear “leakage” if some member states liberalise access for some services.