Environmental Economics & Policies; Economic Theory & Research; Banks & Banking Reform; Free Trade; Municipal Financial Management
Summary: Policymakers typically assume that trade liberalization and foreign aid ultimately reduce international migration - that is, that trade and aid are substitutes for migration. In the Heckscher-Ohlin framework, too, trade liberalization (by reducing international price differentials between factors) leads to a decline in international migration. The author's model shows that trade liberalization in either the sending or the receiving country is likely to increase migration in the long run. In the short run, the effect is ambiguous. The author maintains the Heckscher-Ohlin framework but adds two features found in developing economies of the south and east that affect migration: migration costs and imperfect capital markets. He assumes that migration costs may be a constraint on migration, especially when combined with imperfect capital markets. Poor migrants without collateral may have trouble getting loans at reasonable rates, especially if they plan to emigrate. And for most migrants, the cost of migration is not negligible. They must pay for transportation and for living expenses until they find a job in the new country, and illegal immigrants must make payments to intermediaries for services and information (to reduce the chance of being caught). Trade liberalization in a labor-abundant economy, foreign aid, and remittances will increase income from labor and improve workers' ability to cover the costs of migration. As a result, migration will increase. (Following trade liberalization, female migrants have increasingly been employed in the textile, garment, light electronics, and agricultural processing industries in Asia, Latin America, and North Africa, for example, and their higher income has helped finance the migration of men.) What about the combined effect of trade liberalization and foreign aid, a frequent combination associated with bilateral and multilateral aid? The lower the labor income and the higher the costs of migration, the more likely trade liberalization, foreign aid, and remittances are to complement each other and lead to increased migration. (This is particularly applicable for south-north and east-west migration, as incomes in the sending countries are often low relative to migration costs.) If trade liberalization in either country is too weak to positively affect migration, adding either foreign aid or remittances is likely to increase migration. If trade liberalization is significant enough to increase migration, adding foreign aid is likely to dampen that effect, and remittances will have no effect. Migration is also affected by geography, by migration laws (in either sending or receiving countries), and by transport technology. Future work will deal with the welfare consequences of migration, including losses in social capital.
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