Demand the Supply
by Jacob Funk Kirkegaard, Peterson Institute for International Economics
Op-ed in the Hindustan Times
March 27, 2008
© Hindustan Times
On April 1, US immigration authorities will receive perhaps as many as 200,000 applications for H-1B visas for foreign high-skilled workers for 2008. However, well over half of these applications will be rejected due to the annual US quota of up to 85,000 H-1B visas, while a simple lottery will determine which companies get access to these visas and which do not. A degree of business uncertainty is hereby introduced in which India's premier information technology (IT) and IT-enabled services (ITES) companies will continue to struggle to retain crucial access to their largest export market.
More seriously, Indian IT companies' expansion into ever higher valued-added services—which will likely require increased on-site client interaction—will be progressively more restricted by any such limitations in their ability to seamlessly place personnel with US-based customers. With Indian IT services companies by far the most intensive users of the H-1B visa program—in both 2006 and 2007 they accounted for the majority of the top-10 of company H-1B recipients—the randomness of the status quo in US high-skilled visa allocation will become increasingly untenable for India.
Meanwhile, despite the current American election-year gridlock on any immigration related topic, imminent structural changes in the US economy makes it necessary that at least US immigration legislation for high-skilled workers will be reformed soon. The reason is straightforward; 2008 marks the first year in which American baby-boomers become eligible to retire with a public pension. This matters profoundly for several reasons. Apart from being numerous, these baby-boomers also make up the first truly well-educated US generation to retire. The United States stands at the cusp of an unprecedented transfer of high-skilled workers into retirement.
Combined with 30 years of educational stagnation in the United States—college graduation rates among the 25-34-year olds today are similar to those of retiring baby-boomers aged 55-64 years—this means that America will soon be faced with a situation where as many high-skilled workers exits the labor force as enters it from the country's domestic institutions of higher education. As even a successful overhaul of the US public education system will only yield qualitative improvements in the labor force in the long run, only reforms of America's high-skilled immigration laws can hope to alleviate the looming large-scale skill shortages in the US economy and salvage its economic vitality. High-skilled immigration reform in the United States will happen simply because it is necessary for it to happen.
These two simultaneous developments make it urgent that Indian policy-makers take several concrete actions to move the current state of international high-skilled migration regulation forward. First, it must be recognized that it is simply unrealistic that an issue as politically charged as immigration can ever be meaningfully reformed through a multilateral agreement. No WTO member has submitted any proposals for GATS Mode 4 trade since mid-2001 and the chances for a Doha Round agreement, which would include a liberalization hereof of any consequence are now surely zero.
The most constructive way for India to acknowledge the end of the multilateral option is—in the spirit of competitive liberalization—to push harder for bilateral liberalizations in the international framework for the movement of high-skilled persons. Given the prominence of the US market for Indian services exporters, America is the natural partner to initially target for bilateral Indian high-skilled policy initiatives.
The challenges to an Indo-US agreement on high-skilled migration would undoubtedly be formidable and its successful conclusion would require immediate and careful consideration of its possible scale. Make no mistake—any realistic Indo-US bilateral high-skilled migration pact will be relatively limited in scope. This partly, of course, reflects US domestic politics. However, it must be equally clear that a bilateral "high-skilled migration" pact of "carefully managed migration flows" is also very much in India’s economic interest. Why? Because recent extreme high-skilled staff attrition rates and average wage increases in the Indian IT and ITES sectors of 15 percent annually are clear economic indications that skill shortages are already materializing themselves in the Indian economy. And especially so among the occupational groups making up the bulk of high-skilled workers certain to be most directly affected by any future bilateral pact.
What would the contours of a feasible India-US migration pact be? It would have a dual principal aim—to facilitate the guaranteed expeditious and flexible access of Indian high-skilled workers to the US market, but to do so without potentially aggravating skill shortages in India. Hence any deal should assume the return of high-skilled workers and concern itself only with temporary migration, while not including any provisions for facilitating permanent migration. The goal would be to strengthen the continued two-way flow of high-skilled Indians and Americans—the fostering of brain chains and not risk brain drains.
Crucially, a precedent for the inclusion of high-skilled migration issues in successful American bilateral free trade agreement (FTA) negotiations already exist from the US agreements with Australia, Chile, and Singapore. Among the three, the most appropriate model would be Australia, which negotiated the creation of an entirely new temporary visa category—the E-3 visa—available only to high-skilled Australians. India should work towards the creation of a similar new visa category, exclusively available to high-skilled Indians and on a scale consistent with the overall dual purpose of the agreement.
A bilateral pact must further avoid the trap of using politically inviting annual quotas for the number of high-skilled visas specifically available to Indians. As any economist knows, and is blatantly evident in today’s H-1B system, quotas distort markets and generate rents (in this case, in the form of immigration lawyer fees). Instead, any quantitative restrictions must be implemented at the firm-level. Here the preferred format ought to be a set-up that would maximize the opportunities for beneficial organizational exchanges between Indian and American high-skilled workers. This could, for instance, be achieved by limiting the share of visa-holders in companies' total workforce present in the United States to a certain fraction of this total workforce, with American workers making up the remainder. Hereby, the ever-present US concerns for "American jobs" would also be tackled head on.
India's globally integrated economy of the 21st century demands a proactive bilateral Indian approach on high-skilled migration issues with the United States. But how does one get there? It still takes two to tango and America’s Congress regretfully is an increasingly insular international economic partner. To achieve this goal, India should not shy away from using as stepping stones other complementary international opportunities already being pursued. With India-EU FTA negotiations already under way, and with the European Commission itself increasingly sounding the alarm about existing large-scale skill shortages in the European economy, a successful conclusion of a comprehensive bilateral high-skilled migration accord between India and the European Union in relation to these FTA negotiations will be possible in the short term. This would greatly assist any future India-US negotiations, as history has proven that nothing focuses the minds of American policymakers more than if their international partners pursue other options too.