Free Trade 31: FTAs, EPAs and the Heckscher-Ohlin Theorem

In the new facebook group that I created and moderate, Government and Taxes, Liberty and Responsibility, a friend, Dr. Yolanda "Yolie" Robles (former Dean, UP College of Pharmacy, Director at the Philippine Pharmacists Association, PPhA), posted in early December last year. The exchanges that followed were nice. Posting the exchanges as is. I just added the diagram of the Hechscher-Ohlin Theorem (HOT) here, not part of the original exchanges.
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December 4-6, 2013

Yolanda Robles HI Nonoy. Thanks for adding me to the group. I just attended an AIM-KOICA event in Makati with the theme: Korea as a Partner of ASEAN, Furthering Cooperation for Enhanced Partnership and Common Prosperity through ODA. In this, the NEDA Representative gave a concise report on what the present government does in terms of poverty reduction and employment generation. Comments from the participants include: "the focus of employment generation is still on services, and which may require more college graduates rather than those with lower educational attainment. The greater number of poor and unemployed are those in the latter group. Why not also reinvigorate manufacturing which could employ more people of different educational attainments." Well, what's your say on this?

Nonoy Oplas Thanks Yolly. I am not sure if there is an existing Japan-ASEAN EPA (Econ. Partnership Agreement), sort of a soft Free Trade Agreement (FTA). So S. Korea should be initiating a Korea-ASEAN EPA too.

About the comment, I think it is a misconception that those in the services sector are mostly the college graduates. Not true. The services sector include (a) trading, wholesale and retail including ambulant and public market vendors; (b) Transpo, storage and communication which includes airlines, buses, jeepneys, taxi, shipping lines, pump boats for hire, etc.; (c) real estate, renting and business activities that include hotels, inns, lodging houses; (d) public administration including LGUs, and (e) other services like restos, karaoke bars, etc.

It is not good to dichotomize the economy as "manufacturing and agriculture are crucial, services are non- or less-productive". Food manufacturing will become hollow if there are no supermarkets, convenience stores, sari-sari stores (all under the service sector).

Yolanda Robles Thanks for your comment. I think the surplus college graduates take also jobs intended for high school and vocational graduates. That's why less jobs are less available to the latter group. The surplus of college graduates reflects the greater preference for white collar jobs, the mismatch between education and human resource needs, among others. As for trade agreements, there is such a thing as ASEAN + 3. The 3 refers to China, Japan and Korea which ASEAN countries have trade agreements with 

Nonoy Oplas Yes, there is an ASEAN + 3, but it is only during the annual ASEAN summit, and not an EPA or FTA. So those 3 north Asian countries China, Japan, S. Korea initiate their own EPA or FTA with ASEAN as a bloc. Thus, a China-ASEAN FTA (I think to materialize by January 2015), a Japan-ASEAN EPA, and a S. Korea-ASEAN EPA/FTA. Since dealing with ASEAN as a bloc is more bureaucratic and more time consuming, some countries strike a bilateral EPA or FTA, that is why we have a Japan-Philippines EPA (JPEPA) and so on.

Yolanda Robles Yes, you are right. It was mentioned that Japan, South Korea, and China have country-specific agreements with some ASEAN countries and the current direction is to deal with ASEAN as a block 

Nonoy Oplas Meanwhile, here is an old graph that I developed in a talk on free trade, Atlas-FNF conference in Kuala Lumpur in 2005. Trade protectionism penalizes consumers and protects local producers, that is why free trade is being pushed to remedy the price distortion caused by protectionism.

I saw Dr. Poch Macaranas of AIM this afternoon, he's the former Director of the AIM Policy Center. He said he is helping in the ASEAN FTA (AFTA), ASEAN Economic Community (AEC) and related issues, which should materialize by January 2015 (12 1/2 months from now) but has been moved to December 2015 or 2 years from now. I thanked him for that piece of info. 

Being an advocate of free trade, I can only say that once trade is politicized and bureaucratized, instead of having free, unconditional trade between and among people, it becomes "trade with permission" from government.

Bonn Juego Noy, again, your kind of economics does not know how to create a wealthy nation in the PH context, how capitalism itself can lead to productivity explosions for the benefit of the entire economy. Good that NEDA understands the qualitative differences that different economic activities - manufacturing, agriculture, services - have for economic growth and the whole socioeconomic development process. My approach, of course, combines, among others, Marx, Schumpeter, and Keynes. As I said, I find yours more like the 'libertarianism' of Ayn Rand and the Koch Brothers, than the 'liberal' economics of Smith, Ricardo, Hayek, and Friedman who at least have a sense of moral philosophy. Anyway, greetings from stormy Scandinavia!  

Migration 20: Overseas Employment, Positives Outweigh the Negatives?

Overseas employment, do the positives outweigh the negatives?

A friend asked that question in facebook and my quick answer is Yes. The positives outweigh the negatives. Overseas employment is a voluntary and private contract between the foreign employers and Filipino employees. People have the option to stay home and look for jobs here, but they opted to go outside because the perceived benefits are larger than the costs. If our constitution, economic and bureaucratic policies are friendly to foreign investments and entrepreneurship in general, many of those foreign employers would have been here, employing Filipinos in the Philippines, not abroad, and subjected to Philippine laws. 

The World Bank released its Migration and Development Brief 21 dated October 02, 2013, a 29-pages long paper. I am posting some figures from that paper here.

Going back to Econ 11 (elementary econ) or Econ 102 (micro econ), when some workers leave and work abroad, the domestic labor supply curve shifts to the left and if domestic labor demand remains the same, that raises the equilibrium wage rate, say from P300 to P350. The local job seekers will have fewer competition from other Filipino job seekers as they go abroad. It should be considered as a plus to society.

Then many of those OFWs are not exactly a "brain drain". After their contract ends, or renewed contract ends, many of them come back, often not as ordinary workers but as micro or small entrepreneurs  having their own jeepney or taxi or sari sari store, or rice thresher machine in the barrios. They then create local jobs aside from hiring themselves. There are many other plus for people who work abroad. If we have to demonize anything or anyone, it is the protectionist Constitution, the tax-hungry government and the various business bureaucracies. Those foreigners abroad may consider put up their company here and hire Filipinos here but they don't, so Filipinos seek work abroad.

 Does going abroad raise unemployment? No. If the labor demand curve stays at the same level while labor supply curve shifts to the left, there is no corresponding rise in unemployment while equilibrium wage rises. It is when labor demand curve also shifts leftwards (say due to endless government business bureaucracies, local and national, some entrepreneurs are closing or at least not expanding while population rises) that unemployment can increase and the equilibrium wage decreases.

If many Filipinos cannot accumulate enough savings to become start up entrepreneurs someday if they will remain working here, and working abroad can provide that opportunity, then they will work abroad. It's a plus thing.

In the factor price equilibrium (FPE) theorem, when factors of production (capital, labor, technology) are freely mobile worldwide, over the long term, factor prices (interest rates, wages, tech costs and patent, etc.) will tend to equalize. Not worldwide immediately, but at least over a region.

A friend noted that there is "7 percent unemployment and roughly 21 percent underemployment happening side-by-side with growth in OFWs and their remittances over the years, and almost 30 percent poverty rate."

Precisely that the job creation capacity of the local economy is limited, that overseas employment helps reduce more unemployment and underemployment here. Many countries abroad are labor deficient, they need migrant workers like Filipinos. Labor demand meets labor supply in a voluntary contract, and that is how the OFWs phenomenon continues, not because of any government policy to promote or discourage it. The role of the government via POEA, OWWA other agencies, is mainly to collect more fees from Filipinos before they fly out. so be it.

A friend says he has high respect for the officials of the 3 institutions I mentioned above. No problem with that, but leadership and institutions are two different things. You put angels to a government office that says, "You cannot start a barber shop, you cannot cut anyone's hair unless you produce these documents and permits 1... 20. No bribes or shortcuts will be allowed whatsoever." And that's one way to transform angels into devils.

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See also:
Migration and Freedom 14: Shrink or Abolish the POEA, January 01, 2012
Migration and Freedom 15: Visa Free for Filipinos, January 02, 2012
Migration and Freedom 16: Mobility and the Heckscher-Ohlin Theorem, February 03, 2012
Migration and Freedom 17: US Taxing Nationals Abroad, May 16, 2012
Migration and Freedom 18: Getting a Philippine Passport, July 18, 2012 
Migration and Freedom 19: PH Immigration Bureaucracy, September 08, 2012

Migration and Freedom 16: Mobility and the Heckscher-Ohlin Theorem

(This is my article for the online magazine last night. I did not put the graphs in the original article, I only added them here, from a web lecture, The Heckscher-Ohlin Model,  http://www.valt.helsinki.fi/katal/opiskelu/ka6a/heckscher-ohlin.pdf)

http://www.thelobbyist.biz/perspectives/less-gorvernment/1269-migration-mobility-freedom

Migration = Mobility = Freedom

THURSDAY, 02 FEBRUARY 2012

Migration, whether short-term or long-term, allows an individual or a household, to pursue their dreams in other places or countries which they think they may not be able to pursue in their current work and residence. Thus, migration represents mobility across regions, countries or continents and hence, expands individual freedom.

The expensive welfare system in many rich countries though results in one bad policy: migration paranoia by their governments and certain organized sectors in the destination countries. They think that in general, new migrants are just welfare seekers, and the labor unions think that new migrants are out to steal their jobs even if many of them are not willing to do "dirty work" at lower pay.

In international trade economics, if factors of production (labor, capital, technology, etc.) are mobile and free to move across countries, there will be factor price equalization (FPE) among countries, the FPE theorem. A labor-deficit or shortage country cannot always use robots and machines to do certain jobs, they need to import workers and managers from other countries. Taking care of the sick and aged for instance, cannot easily be done by robots, an economy must import nurses, caregivers and other health professionals from other countries. The migrant workers will receive higher pay (high compared to the prevailing wages and benefits in their home countries, but may be low temporarily in the host countries). The outflow of some workers will result in reduction in labor supply and hence, partial increase in wages in the country of origin. When this process continues over the long term, and skills training keeps improving in labor-surplus economies, like the ocean around the world, wages and benefits will somehow equalize worldwide.

If there will be FPE, poverty will be eradicated. Only the lazy and highly irresponsible people will become poor, and they need not be bailed out or subsidized with various welfare programs because they have willingly chosen the path of laziness and irresponsibility. Then all the complaints and advocacies of the bleeding heart activists, trying-hard and hidden socialists, and social equality campaigners will be answered. No need for higher or new taxes, new UN and foreign aid central planning like the MDGs, new government bureaucracies and their endless global junkets.

A cousin concept of FPE is the commodity price equalization (CPE) theorem. If goods and services are free to move across countries, then products that are produced abundantly in one country resulting in cheaper prices can be exported to countries which have small or zero production of those goods and hence, prices there are high. Again, like the ocean around the world, commodity prices will somehow equalize worldwide. Whatever price differential across countries will just be due to transportation or shipment, storage, insurance and related costs. The existence of local trading monopolies and oligopolies can also account for such price differential but we will assume that such practices are kept to the minimum.

Both FPE and CPE are offshoots of the Hecksher Ohlin model of comparative advantage (CA). It took off from David Ricardo’s theory of CA and the model says that “countries will export products that use their abundant and cheap factor(s) of production and import products that use the countries' scarce factor(s).” (Wiki definition)

Migration paranoia, like climate paranoia and population paranoia, are of the same ideological DNA. All of them hate spontaneity and natural path of nature and human evolution, so all of them have one solution: more or big government. So government will control migration, and visa, more than a dozen types of visa -- migrant, dependent, student, working, visitor, training, etc. -- was invented by many governments. This is a big milking cow for many governments as there are plenty of direct and indirect fees to get a visa, lots of revenues that go to the governments’ treasury. And lots of possible extortion opportunities are opened up for the different government migration bureaucracies, like the Bureau of Immigration, POEA and OWWA.

In the US, both Republicans and Democrats, both socialists and democrats (and greenies, etc.) in Europe, other dominant political parties in rich countries in Asia, have invented various migration controls and regulations. There is discrimination and double standard, of course for their migration policies. European countries may impose strict and rigid migration and visa granting policies to many Africans, South Americans and mainland Asians, but not from oil-exporting Middle East Asia and North Africa. My Venezuelan friend was jokingly bragging his passport to us in our training in Sweden in 2003, he said that he does not need any visa to go to France, Germany, Italy, etc. because of Venezuelan oil, petroleum.

I got my second, multiple entry 10 years US (visitor) visa in April 2010. My first US visa was given in 2000. When I went to the US embassy for the interview for my second visa, I noticed that about 95 to 100 percent of the interviewees that day were smiling after the short interviews, usually only about 2-3 minutes on average. Meaning the US embassy was literally giving away (i.e., approving) US visa that time (or until now?) as the US was in deep economic recession then. So one lesson here is that economic hardships can prod a slightly migration paranoid economy to relax its visitor/migration restrictions to encourage more foreigners to visit their country and spend money there.

My last trip to Europe was in October 2008, I attended an FNF political seminar in Germany for 8 days, then I applied for 4 days extension to visit a friend in Bavaria (who then brought me to a glacier in Austria, nice), total of 12 days. The German embassy here gave me a Schengen visa for exactly 12 days, single entry.

One fear of the locals in host or destination countries is that migrants might abuse their expensive welfare system. While one long-term solution is to reduce the lenient welfare and subsidies given by the government to the sick, the unemployed and the young, the locals should also realize that migrants are taxpayers too, they contribute to the fund that their governments use for their welfare and pension. Migrants are usually willing to work on tasks that the locals would shun. Where there is more production of goods and services, there is more wealth in the economy. Both the migrants and the locals will benefit.
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See also:
Migration and Freedom 8: Denmark's immigration policy, May 17, 2011
Migration and Freedom 9: Immigration bureaucracy, July 19, 2011
Migration and Freedom 10: Multiculturalism and the Norway massacre, July 25, 2011
Migration and Freedom 11: Two migration theories, September 03, 2011
Migration and Freedom 12: Visa-free entry in Asia, October 24, 2011
Migration and Freedom 13: Travel Tax Robbery, December 06, 2011
Migration and Freedom 14: Shrink or Abolish the POEA, January 01, 2012
Migration and Freedom 15: Visa Free for Filipinos, January 02, 2012