Quote of the Day: Importance of Human Capital

How important is this human capital? According to recent estimates, the stock of human capital is over $750 trillion. According to a research report from JP Morgan called “U.S. Recession and Repression Are Only in Our Minds,” this is much greater than the roughly $70 trillion of physical and financial assets owned by American households.

As important as human capital is to economic success, it is not evenly distributed around the world. There is ample human capital already in the United States, but there are also enormous stocks of human capital—and potential capital—found overseas.

That’s from Nick Schulz who argues for the opening of skilled immigration in the US. [hat tip Professor Arnold Kling]

The way to enhance human capital is through economic freedom.

Economic freedom is not just about trade freedom, but also of freedom of movements (or social mobility)—where people can choose places on where to live and work or do business.

A liberal migration environment provides greater chances for people to discover on their abilities and to work on these for them to realize their fullest potentials as productive citizens.

And increasing human capital translates to a deepening society’s division of labor which should mean better chances to attain economic prosperity, as well as, social stability.

Also a liberal migration environment that would allow people to vote with their feet, would compel governments to become competitive and increasingly foster receptiveness to civil liberties which likewise reduces repressive political actions.

Japan to Ease Requirements for Foreign Workers

I’ve been saying that the current unsustainable demographical trends in Japan will require the liberalization of migration policies which would allow inflows of foreign workers to offset the nation’s swiftly declining fertility rate (negative population growth).

Chart from Wikipedia.org

So far, rigid bureaucratic requirements has posed as a stumbling block, but this seems likely to change.

From Japan Times,

Non-Japanese applicants hoping to become certified nurses could see the government's notoriously rigorous exams get easier with the inclusion of English-language tests and a new set of communication exams based on basic Japanese.

Non-Japanese hoping to become care workers took the certification test for the first time Sunday, while those aspiring to become certified nurses have been applying for the exam since fiscal 2008.

But the low pass rate is prompting the Health, Labor and Welfare Ministry to consider changing the system.

As I wrote last year

I’d bet cultural inhibitions extrapolated through politics will eventually pave way to embracing reality.

And reality check translates to policy changes.

Restricting Social Mobility Equals Poverty

Economist Bill Easterly commenting on the incidences of ghost towns in the US makes a point where restriction of social mobility leads to impoverishment.

I quote Bill Easterly, (bold highlights mine)

What if we had a law that everybody had to stay in their home state? What if North Dakotans had to stay in North Dakota despite the collapsing economy there? Then wages would collapse and we would have very poor North Dakotans. Happily no one would dream of such a stupid law. Instead we have middle class North Dakotans moving to other places voluntarily, where employers want to hire them voluntarily. And so (former) North Dakotans stay middle class.

For states…but not for countries. We treat migration usually as a non-option if Zambia has an economic decline, so Zambians stay there and get even poorer as the economy declines.

This is the great point made by Lant Pritchett in a classic article and in a CGD book. Why can’t we start treating Zambians like North Dakotans? If their home economy is declining, let them move to other places voluntarily, where employers want to hire them voluntarily. Why do we recognize the right to live wherever you want for North Dakotans and not for Zambians?

I guess the Philippines should be a worthy example.

Had many of our countrymen (kababayan) been prohibited from finding greener pastures around the globe, then we’d be worst off economically considering the relatively unfree political and economic environment that continues to beleaguer us.

That’s why anyone who claims that the exodus of people results to “brain drain” is no less than prescribing poverty for us.

Regional share of Philippine remittances (ADB)

Bottom line:

Freedom should encompass people’s mobility or to move around or migrate in accordance with their perceived interests.

We should allow people to come in, in as much as to go out. Where free markets is about voting with money on products and services, freedom of movement is about voting with the feet.

As Ludwig von Mises wrote, (bold highlights mine)

The principles of freedom, which have gradually been gaining ground everywhere since the eighteenth century, gave people freedom of movement. The growing security of law facilitates capital movements, improvement of transportation facilities, and the location of production away from the points of consumption. That coincides, not by chance, with a great revolution in the entire technique of production and with drawing the entire earth's surface into world trade, The world is gradually approaching a condition of free movement of persons and capital goods. A great migration movement sets in. Many millions left Europe in the nineteenth century to find new homes in the New World, and sometimes in the Old World also. No less important is the migration of the means of production: capital export. Capital and labor move from territories of less favorable conditions of production to territories of more favorable conditions of production.

The Brain Drain Nonsense

In reading media, it’s just amazing how incurably specious their treatment of social issues are.

Take for example the recent issue on supposed “brain drain”. It’s been emphasized that the Philippines appears to be helpless in the exodus of manpower as a result of demand from abroad.

This from the Inquirer.net,

Scientists, engineers, doctors, IT specialists, accountants and even teachers are among the English-speaking talent heading to foreign lands, leaving the government and private companies scrambling to find replacements.

"There is a skills haemorrhage. We are losing workers in the highly professional and skilled categories," Vicente Leogardo, director-general of the Employers' Confederation of the Philippines, told Agence France-Presse.

While they (government and business groups) don’t exactly say it (as this would construed as politically incorrect since OFWs are now an important political force!), the undertone suggests that these should be stopped. How? By Fiat!

I may be wrong but the following seems to be a clue.

More from the same article, (emphasis mine)

The government has been seeking ways to upgrade salaries and benefits, according to Myrna Asuncion, assistant director of the government's economic planning department.

"But local salaries can only go up by so much before they start hurting the competitiveness of local industries," Asuncion told AFP.

"We want to provide employment opportunities in the Philippines but there are some sectors that say salaries are already too high," she said.

You see the problem?

On the supply side, these anecdotes only reveal that the government and Filipino companies are “afraid” or "reluctant" to engage in market competition by paying market rates for these skills. With foreign companies willing to pay local skilled workers enough to tilt the latter’s (cost benefit tradeoffs) choice, thus, they decry the “brain drain”.

In short, this is simply demand and supply or Economics 101 at work.

Of course, media, politicians and their coterie (business interest groups, politically blind academicians and experts) loathe demand and supply. They believe in Santa Claus or free lunch economics.

And here are very important factors which they don’t say:

From TradingEconomics.com

First of all, they don’t tell you that the lowered standards of living have been the result of past collective policies that has resulted to inflation or the loss of purchasing power of the Peso.

Over the years, this has significantly contributed to the reduction of competitiveness. Think capital flight.

Chart from the BSP

Next, they don’t tell you that a lower Peso (falling from an exchange rate against the US dollar at 2 in the 1960s to 55 in 2005) doesn’t necessarily fuel an export-industry boom.

So policy manipulations (such as welfarism) to diminish the Peso’s worth only sustains distortions in the economic system, via protectionism -which favors select political groups (think cronyism). And these exacerbate the outflows of labor force.

In other words, protectionism is mostly a zero sum game and hardly contributes to goods-services value formation.

Chart from the OECD

Another, from the demand side, the demographic imbalances or falling fertility rates in developed economies will sustain the need for labor manpower from emerging markets. And the Philippines given the current political economic setting is likely to be a major participant for a long time.

Importantly, with increasing technology based globalization, skilled jobs will be a major contribution to the “labor” aspect of globalization.

Chart from the TradingEconomics.com

Essentially the so-called “brain drain” is a symptom of an underlying disorder.

And one of the primary variable is lack of desire to compete.

So even at relatively low wages (compared to OECD), the market’s response to price signals set by the downtrodden Peso have been undercut by the regulatory, bureaucratic, legal, (property rights) and tax environment.

According to Trading Economics, ``The Ease of doing business index (1=most business-friendly regulations) in Philippines was reported at 141.00 in 2008, according to the World Bank. In 2009, the Philippines Ease of doing business index (1=most business-friendly regulations) was 144.00. Ease of doing business index ranks economies from 1 to 181, with first place being the best. A high ranking means that the regulatory environment is conducive to business operation.”

The Philippines is shown as one of the world’s least business friendly environments in the world, thus, resonating the signs of refusal to adjust to the global market climate. Instead, these interest groups seek political cover—which doesn’t change the nature of economics.

Finally, it’s equally nonsense to imply that brain drain will suck out the heck out of our skilled workers. This will only be true if you think the Philippines is immune to the basic laws of economics.

Why?

Because price signals say supply will adjust to demand!

Chart from TradingEconomics.com

Exploding remittances and net migration trend reveals how these dynamic would unfold.

The fertile population of the Philippines should “naturally” respond to these dynamic by having more Filipino youth take on more specialized courses that would meet global demand. Hence restrictions on these adjustments should be avoided.

Unless Filipinos are daft, which I don’t think we are, except in the eyes of politicians and media, I trust that the law of economics would prompt “brain drain” to result to a net positive benefit for the Philippine society, because it is a purposeful choice made by millions of individuals (our countrymen) in response to the current environment.

If we truly want to reverse “brain drain”, then we need to build capital.

And how do we that?

By sloughing off protectionism, cronyism, paternalism and embracing competition, free trade and economic freedom.

As Ludwig von Mises once wrote,

Under a system of completely free trade, capital and labor would be employed wherever conditions are most favorable for production. Other locations would be used as long as it was still possible to produce anywhere under more favorable conditions. To the extent to which, as a result of the development of the means of transportation, improvements in technology, and more thorough exploration of countries newly opened to commerce, it is discovered that there are sites more favorable for production than those currently being used, production shifts to these localities. Capital and labor tend to move from areas where conditions are less favorable for production to those in which they are more favorable.

That’s what media and the mainstream won’t likely tell you.

Update:

Outside business administration the major growth area in Philippine education is practically where the skilled exports has been taking place (red arrows)--namely, Medical Sciences (strongest), Math and computers sciences and engineering (growing but variable), that's from NSCB data (see below)

Bottom line: The law of economics works!

Demographic Nightmares 2

George Magnus writes,

``capitalism rewards scarcity, and as labour supply fades relative to the availability of capital, returns will shift towards the former...

Huh?

If capitalism rewards scarcity then why at all risk precious capital to invest in order to produce?

What could Mr. Magnus be smoking?

Capitalism is an economic or resource distribution system which operates on the platform of property rights, voluntary exchange, and the profit and loss system in a world of scarcity. And the reason capitalism exist is to satisfy the unease or the pain of consumers from scarcity, hence the incentive to invest to produce.

I am reminded that once we argue using false premises then the conclusion would obviously wrong.

Mr. Magnus is apparently anxious about the world’s demographic trends echoing Pimco’s Bill Gross [see William Gross’ Demographic Nightmare]

His concern is that a smaller labor force would result to reduced corporate earnings and a lower economic growth. Hence, he recommends numerous “policy levers” or interventions to solve these predicaments.

Yet how valid is this?

True, the global rate of population growth has been falling as shown above, but it is still mostly positive (ex- Japan).

However, what is not seen is that the crucial reason why the rate growth has been falling is due to the relatively high nominal levels of world population which has already reached 6.697 billion (!), in 2008, according to the World Bank.

Another important variable in the present global demographic trends is that while population growth rate has slowed in developed economies, the bulk of the growth now comes from emerging markets.

Chart from Oppenheimer Funds

The implication is that this puts to risk the cumbersome welfare system of developed economies, aside from crimping “aggregate demand” (we dealt with this earlier).

Although I would be agreeable to one of Mr. Magnus’ suggestion that changes be made in the welfare system, I’d take a more radical approach.

Since it is to my opinion that welfare systems signify as unsustainable political PONZI programs that had been designed to buy votes of the population and to keep people dependent on politicians, welfare systems should be phased out or trimmed to the essentials.

The reduction or elimination of which would entail diminished financial burdens for the future generations, which should allow our children more room to deploy resources to their interest or pleasure, thereby reduce the barriers to investments.

This should also instill the culture of savings and personal responsibility and importantly advance the cause of personal liberty—where lesser redistribution translates to more efficiency of resource allocation and freedom of choice.

And there is another possible solution which could compliment this: ease immigration barriers to allow for free movement of people or enhance social mobility.

So globalization shouldn’t be limited to trade and finance, but also to migration flows, which at present constitutes only an estimated 3.1% of the global population, according to the International Organization For Migration (IOM).

These two structural reforms will greatly ease the concerns over reduced economic and corporate earnings growth, thus, needing less government activist (boom-bust) policies which would only worsen whatever demographic nightmare envisaged by interventionists.

Brain Drain Is Freedom And Choice

There is this popular impression that brain drain (migration outflows) signifies as a social cost.

A UN study by Michael A Clemens refutes this notion and suggests that brain drain dynamics function similar to domestic urbanization trends and is a net benefit to society.

From Mr. Clemens, (bold emphasis mine)

``All of these “best practice” policy levers have two things in common:

First, they expand the choices available to skilled workers. For example, rural service incentives reduce the tradeoff between serving underserved populations and personal hardship.

``Second, they are more effective than shaping professionals’ migration choices per se because they address the underlying causes of those choices. For example, removing barriers to professional employment at home can change decisions freely made by potential emigrants. The common trait of “worst practice” policies is that they seek to limit skill flow itself, which is to say, to limit choices by skilled workers.

``It is time to bury the unpleasant and judgmental term “brain drain”."

Read the rest of the study here

In short, the pejorative term "Brain drain" serves to allocate labor where it is needed most. And it gives people the freedom to work for personal or career advancement. Moreover, brain drain could also be seen as an escape valve from unfree economies.

Filipinos Killed In Afghan Chopper Crash Manifestation Of Failed Migration Policies

The recent deaths of 10 Filipinos in a helicopter crash in Afghanistan is a conspicuous example of the failed policy of migration controls.

This from the Associated Press (bold highlights mine) ``Ten Filipino workers were among the civilians killed in a helicopter crash at NATO's largest air base in Afghanistan, officials said Tuesday.

``All 16 people aboard the Russian-owned civilian Mi-8 helicopter died Sunday when it slammed into the tarmac at Kandahar Air Base shortly after takeoff....

``The Philippines has banned its overseas workers from Afghanistan, but many still end up employed at military bases there.

``A Filipino carpenter at Kandahar Air Base was killed in a rocket attack in March.

``The Filipinos killed Sunday had been working at the NATO base for several years. They did not return to the Philippines because the government had imposed a ban on travel to Afghanistan, the head of the Overseas Workers Welfare Administration, Carmelita Dimzon, told the Philippine Star daily"...

``Last week, Manila airport authorities intercepted 13 workers bound for Afghanistan. Vice President Noli de Castro said they had been recruited illegally as carpenters, plumbers and electricians at the Kandahar base for a monthly salary of $1,300 — about 10 times what they would make back home...

``Apart from Afghanistan, Filipino workers are not allowed to seek jobs in Iraq, Lebanon and Nigeria. About 6,000 were thought to be working illegally at military bases across Iraq.

Another from the Philippine Inquirer,

``[Philippine Vice President] De Castro agreed with the OWWA that the fatalities were not entitled to full benefits from the government for being undocumented workers.

``However, he said the DFA and the Department of Labor and Employment (Dole) would follow up their benefits from their employers...

``Asked why the Filipino workers were lured to work in this war-torn country despite the deployment ban, De Castro said it could be due to the withdrawal of American forces from Iraq.

“The problem is the concentration of jobs has shifted to Afghanistan because Americans are withdrawing from Iraq,” he said, adding that most of the foreign workers in Afghanistan were employed by US bases and NATO.

``He said the Task Force on Illegal Recruitment, which he heads, has decided to go after the recruiters of the Filipino fatalities."

Our comments:

-the ban on the deployment of Overseas Filipino Workers to places considered as dangerous has not stopped or prevented local laborers in search of "greener pastures" in spite of the increased risks.

This means OFWs in prohibited areas had opted on their own accord to assume security risks in exchange for higher pay.

-It also exposes the impossibility to control people's desire to seek ways to improve one's well being, aside from exposing institutional inefficiencies despite the tomes of regulations and maze of procedures aside from charges and fees slapped on OFWs allegedly for their supposed benefits.

-Because there is a demand for our OFW, a labor black market has emerged.

-And if the demand for local labor in high risk places comes mostly from official institutions as the US or NATO military bases then all the directives to contain illegal recruitment seems like a pretentious witchhunt.

Our regulators appear barking at the wrong tree! Official channel coordination and not a ban should be the answer.

-So instead of helping aggrieved OFWs, the ban has only deprived OFWs of the so called death benefits.

Government policies designed to help the OFW turn out to only punish them.