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The Impact of the Mode 4 Liberalization of Services on Economic Growth, and Policy Options

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HN Thenuwara

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Abstract

This paper develops a model based on realistic assumptions of international movement of natural persons such as the heterogeneity of and private information on agent types, and outlines the scope for national policy and the role of private agents. The paper argues that it is always beneficial for a country to have a liberal policy on the acceptance of natural persons, and admit high quality human capital. However, due to private information on the quality of human capital, professional organizations and private agents may maintain certain standards of observable attributes of would-be migrants. Those standards are costly to adhere to, thus serve as a screening device for choosing high quality human capital.

The model demonstrates that high quality human capital in a poor country tends to migrate under Mode 4 liberalization to rich countries. However, if the poor country is above a threshold poverty level, actual migration may or may not take place, i. e. there could be multiple equilibria. The source of multiple equilibria is the strategic complementarity and failure in coordinating actions of a large number of agents. Therefore, a poor country, while having a liberal policy on movement of natural persons, could strengthen economic and social infrastructure to avoid herd behavior and mass migration of high quality human capital.

Liberal policies on movement of natural persons could reduce welfare of a host country if not accompanied by costly screening mechanisms. With such costly screening, movement of natural persons always increases welfare of the all agents in host countries, as well as welfare of migrants, but reduces the welfare of agents with low quality human capital in source countries. (JEL F 22, 015, 040)  

DOI: 10.4038/ss.v34i1.1238

Staff Studies Volume 34 Numbers 1& 2 2004 p.13-50

How to Cite: Thenuwara, H., (2009). The Impact of the Mode 4 Liberalization of Services on Economic Growth, and Policy Options. Staff Studies. 34(1), pp.13–50. DOI: http://doi.org/10.4038/ss.v34i1.1238
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Published on 15 Oct 2009.
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