In a free capital and labour market mobility of capital and labour is desirable in order for employment and capital to adjust favourably due to changing demand conditions. The cross border labour and capital flow in the long run and in the medium term within the European Union has been as a result of the speed at which the entire region has been progressing economically as well as the demand for migrants and capital.
The continued economic growth and social development that has taken place over the past 10 years in many European countries has drastically reduced the number of people who have been crossing borders in search of jobs, good working terms such as higher wages, good infrastructure and business undertakings.
Even without the full convergence of wages the social development and the broad based economic growth in most European Union countries has resulted into diminishing pressure of migration. The available data on migration across the 25 European Union countries has indicated that the overall number of people who have been crossing the borders has been low. (www.ecb.europa)
In 2000 only 0.1 percent of the entire population which translates into 225000 of the total population in the European member states changed their official residence between any two member countries. In addition only 0.4 percent of the population in the European Union commutes across the member country’s borders to work. (Markey, 2007)
Despite the legal provision of free movement of people between the members countries of the European Union there have been a recorded low numbers of migrants in the region. Several reasons have been cited that have resulted into low migration rates. The first is the existence of the administrative and legal barriers between the member countries, lack of familiarity with different languages within the region housing markets that are inefficient, moving costs, pensions rights limited portability, lack of transparency in the area associated with job openings and finally the lack of recognition especially to those who hold various educational professionalism. (Jacob, 2006)
There are several economic reasons that have either hampered or necessitated the migration of citizens as well as capital within the region. Firstly, the costs of migration which encompasses the income losses in the process of migration, transport costs and also the psychological costs. Migration has been interpreted as an investment because the costs incurred by the citizens in the process of migration are paid off in the future.
Secondly, the citizens in the European Union have been moved by the expected income from work and also the probability of getting a job. This has meant that even if the probability of getting a job in another country is small the wage differences have also necessitated the migration. Thirdly, social security systems in different countries are another economic determinant that has necessitated migration of citizens in the European Union. (Stephen, 2004)
Most citizens in the region have preferred to migrate to countries where social securities are favourable than work in their own countries where social securities are unfavourable. Fourthly, a large portion of the population in the European Union region is ageing and this has hampered the free movement of labour and capital because the ageing population has decided to stay at home and peacefully enjoy their resources instead of spending more resources in the process of migrating because the new economics of migration has stated clearly that households are the core decision makers before migration takes place.
The young people who depend on their parents for resources such as finances have also found it hard to spend their resources migrating and this explains the reason as to why the extent of migrating in the European Union region has been low.
For countries to reduce labour mobility, it is important to put up some measures. The central Europe has a high affinity for skilled labour. People from other countries move to look for employment. The main reason is because of the working conditions available for employees and the high wages offered. For there to be minimal labour movement, countries should ensure there is competence wage level in the various sectors of the economy.
In Europe the service industry is the largest followed by the industrial sector. There is stiff competition however that exists between the member countries. People migrate more to the more stable countries with consideration of other factors. Germany for example has a cool political environment which motivates other countries to invest there. Wage however remains the major reason for labour mobility in European Union as all members are developed but at different levels of economy.
Apart from income differences, differences in levels of unemployment can also induce people to migrate. However, labour movements in the European Union are almost impervious to differences in the unemployment rate. In real sense, mobility is very expensive for unskilled workers, who generally suffer from a high unemployment rate. Skilled workers are in a better position to cover such costs, although they have less reason to look for a job in another member state because of the increasing demand for skilled labour all over Europe. To some extent however, the member states are facing the same problems in the labour market, and that has made it hard to arrive at a better allocation of labour by the means of cross boarder labour mobility.
The use of a common currency in the European Union, Euro, has some impact on labour and capital mobility. People would prefer to move to a country where their is high value currency. In case of EU the common currency does not give any one within the Union to move to another country in search for a job. In fact it would be more of a waste of time or travelling to look for a job as there are similar offers in the member countries. Although the work policies may differ from one member country to another, it remains virtually the same in wage level.
Investors on the other hand would prefer to put their capital in a reliable place. The policies governing capital markets in EU are favourable and universal in all the member states. This is the reason why capital mobility may not be significant within European Union member states.
According to SER, labour mobility in the EU must be increased and any impediments to this mobility must be waived at all costs.
Higher cross boarder mobility will influence the functioning of the labour market and hence make Dutch and European trade and industry more competitive. Waving away any impediments to mobility of labour also play an important role in enforcing the rights of workers to move freely within the Union.
The SER has also observed a number of weaknesses in the European legislation which govern the free movement of labourers and the way such legislations are implemented. These shortcomings, which impede mobility of labour are related to the rights of workers on short term contracts and people seeking jobs to reside in another member country, the exclusion of non-EU countries from the free worker movement, access to certain jobs owing to problems with the mutual recognition of qualifications, information provision of labour supply and demand in the European Union, and the co-ordination of alternative pension schemes in Europe.
Whereas the mobility of labour is significant in development of the less developed countries, it has greater influence in the EU economy. In the recent there Euro has gained more power over the major currencies in the world in the money market. This is purely because of the free movement enjoyed within Europe by the EU members. Capital mobility is also a major factor in the high level of development in the EU.
Each country tries as much as possible to meet the required standards for investors to be able to invest comfortably. Markets are also available for any products due to labour mobility. The EU has for a long time enjoyed free trade which has positive influence on the economy of each member state. With continued increase in labour and capital mobility, there is a greater advantage in the member countries over non member countries because they have more sources of labour and capital which flow freely from other members.
The influence of globalization on growth and wages depends crucially on the labour market structures of the countries which are involved. Bargaining and perfect competition should be contrasted. Under a perfect capital market, convergence of capital and income per capita occurs always despite different labour market structures. A different labour market structure however prevents convergence of the income shares, with countries that are unionized such as the European Union showing a lower wage rate and consequent capital inflows. Therefore unionization is the major cause of discrepancies in the country income-distribution patterns. Openness in this case is preferable to autarky for a small growing economy, independently of its labour market structure.
Foreign Capital in the Transition Economies of Central Europe
Global financial landscapes have changed in the last two decades through increased capital flows between developed countries and developing countries emerging markets. The emerging markets were influenced by five main factors in Europe. These factors include;
- Liberalization of international capital transactions
- Regulatory reforms of capital markets, both in the OECD members and emerging markets
- Improvements in the macroeconomic performance of many developing and transition countries
- Rapid progress in communication technologies and European Monetary Union preparations, which were reflected in interest rate reductions in the EU, and a search for alternative sources of higher yields by the portfolio managers of large institutional investors
- Privatization and structural economic policies the emerging markets.
The changes in the capital markets are observed in the emerging markets of Central European transition countries which include the Czech Republic, Slovak Republic, Poland and Hungary.
Economic development in the centrally planned economies in Europe was based on extensive use of domestic labour and capital. As a result, they generated high growth rates from 1950 to late 1960 after which this relationship weakened. Domestic labour inputs were possible initially because of mass rural-urban migration in the European countries, feminisation of labour force, and the increased population growth rates.
Capital sources on the other hand forced capital accumulation. It also reflected in a limit in consumption of consumer goods and services and could not offset capital deficit. Some state socialist regimes sought capital inputs in 1970 from developed capitalist countries. This was successive from loans and grants provided by Western governments and other big institutional investors, instead of portfolio investment or direct foreign investment.
The loans provided to Poland and Hungary in the 1970s and 1980s were allocated to development projects that were inefficient or to imports of consumer goods. Both countries however, had substantial foreign debts by 1970,s and 1980’s with burdensome repayments.
The outflows of capital from Poland meant that, the central European countries faced massive capital outflows in the late 1980s and early 1990s. The four transition economies received only $ 420 million of net foreign investment, 1990-1994, as compared to the net $ 142.1 billion received by the following Latin America countries Mexico, Brazil and Argentina as well as the $ 111.9 billion received by three Asian countries that is, Thailand, Korea and Thailand. In the second half of 1990s, the situation changed and the four Central European transition economies had $ 43.6 billion of net capital inflows between 1995-1997.
Capital Flows and the Macroeconomic Environment
While capital flows fluctuated for a short term in the year 1990s, the emerging markets received substantial capital inflows from the developed economies over the longer term.
The flows in capital can be explained through various theoretical approaches. The neo-classical approach which is based on benefit maximisation, perfect information, assumes efficient markets and rational behaviour explains the mobilization of capital in the European countries. The efficient markets theory for example is an approach that starts from an analysis of capital asset pricing. Decisions to invest are based on profit and risk factors.
Investors in Europe must weigh the present value of returns from relatively risk-free assets against streams from assets in emerging markets in developing countries, taking into consideration the country’s risk premium. Fully elaborated neo-classical models also take into consideration various types of investment, for which foreign investors differ in both time horizons and objectives.
There are strategic investors, with varying objectives. An investor in a car factory, for example, is basically interested in acquiring a new market for his product, such that purchasing power and labour market features are likely to become more crucial than stockma rket regulations. Speculative investor usually focuses on short-term movements with the interest of foreign exchange rates. The margins between returns in the host country and international markets.
Considering the level of development of different European countries, there has been need for mobilization of capital. The unification of the Europe to a union made policies regarding business investment better fro the member countries to benefit. The free trade market in the region enjoyed by the member states are beneficial and has influenced both capital and labour mobility. Capital flow from the twenty five member countries of European Union is vibrant. The other parts of Europe also have got advantages of being non members of European Union.
Financial Sector Development
The role of foreign capital in a small economy is determined by the volume and structure of capital flows as well as the capacity to use these capitals effectively. This always requires an efficient capital market, a healthy banking sector and a better macroeconomic policy. These conditions were not there in the transition economies, and instead there were non-transparent and illiquid capital markets, high shares of non-performing bank loans, weak banking and poor capital market supervision, and a lack of effective protection for investors. These are the factors that hindered the mobility of capital. However, after all the weaknesses were streamlined for the improvement of the capital markets, mobility of capital in Europe took place and unionisation is a fruit of mobility of labour and capital.
Banking reform became important for financial system reform. Except for the United Kingdom, where capital markets account for the major capital share flows, banks dominate investment financing in several developed countries’ economies. Banks have other roles in financial markets such as clearing, settlement and foreign exchange operations.
References
Cross border capital and labour migration in the European Union. Web.
Jacob, A. (2006), reinstated barriers to capital mobility can undermine the growth of European Union, (Oxford, Oxford University Press).
Markey, K. (2007), the extent of migration of capital and labour in the European Union, (Oxford, Oxford University Press).
Stephen, W. (2004), in the European Union it may well be that capital and labour are substitutes, (New York, Macmillan Press).