Are trade and development substitutes for migration?

1. Are trade and development substitutes for migration? Dinesh Pathak Econ 428 Fall 2010

2. Migration- from the least developed countries(LDCs) and the developing countries to the developed countries LDCs lose skilled manpower from such migration but migrants also send remittances back home The remittances can be used for development activities and improve trade relations Thus we see that development, trade and migration are closely related We could implement appropriate trade and development policies to keep the migration rate at the desired level but for that we need to know whether trade and development are substitutes or complements for migration.

3. Development and Migration: Theoretical connections There are five main arguments suggested as explanation for an increase in migration in the course of development. (1) Dissolution of financial restrictions. (2) Population growth. (3) Destruction of traditional order. (4) Progress in communications. (5) Network effects.

4. It is possible in some ways development reduce the migration. (1) Reduction in income differential. Development and economic growth increases the income of the people in LDCs. As income in the LDCs increases then the income gap between the LDCs and the first world countries decreases. The decrease in the income gap is likely to decrease the incentives of the possible migrants. (2) Home preference. Some people might value the income at home with greater value than income abroad. In this case development can lead to less migration incentives as the number of people who prefer home is likely to rise with development.

5. Combining all these different arguments leads to a theoretical idea of an inverse u-shaped relationship between development and migration (Vogler, Rotte, 1998). As the LDCs develop in the short and the medium run dissolution of financial restrictions, population growth, destruction of traditional order, progress in communication and network effects increases the migration rate to the first world countries. In the long run reduction in income differential and home preference shall decrease the migration rate.

6. Development and Migration: Germany Experience The migration to Germany data from 1981 to 1995 from 86 different Asian and African countries was used to test the theoretical ideas on the development-migration nexus. For a given income differential there is an inverse u-shape relationship between per capita income and migration. Population growth and progress in communications which may be initiated by development has no significant effect on migration to Germany but societal change increases migration to Germany. The importance of network effects was also confirmed.

7. Trade and Migration are Substitutes Trade leads to specialization. Countries tend to produce those goods for which they have abundant supply of input factors and have a comparative advantage. Thus, trade leads to equalization of factor prices and, hence, a reduction in migration incentives. The protectionist policies in the industrialized countries have a twofold impact on the migration flows. (1) The protectionist policy encourages domestic producers to produce the good and services instead of import them. This means there is more demand of the labors in the domestic market which attracts labors from LDCs. (2) If industrial countries apply protectionism then it negatively affects the exports of the developing countries and labors in developing countries can lose jobs. This pushes labors to migrate to the industrialized countries.

8. Trade and Migration are complements The positive relation could arise from the increased income generated due to the increase in trade. An increased income relaxes financial constraints and allows more people to migrate. The analysis of the Turkish migration to Germany over the period 1963-2004 shows that trade and migration are complements. The likely reason for the outcome is the development of trade between two countries provided the additional financial support and lowered various adjustment and informational costs associated with the migration to the potential migrants.

9. Conclusion • The relationship between development and migration are complements in the short run but substitutes in the long run. Both the theoretical model and the migration experience from the 86 different Asian and African countries to Germany strongly support this relationship. • The relationship between trade and migration is slightly more complex to predict. What we could possibly argue is increase in trade brings development, and trade could be related with migration just like the way development is related with migration that is complements in the short run and substitutes in the long run.

10. References • Vogler, Michael; Rotte, Ralph (2000), "The Effects of Development on Migration: Theoretical Issues and New Empirical Evidence", Journal of Population Economics v13, n3 (August 2000): 485-508. • Assous, Laurence (2000), "Regional Integration and Migration Flows: A Critical Review of Recent Literature", Globalisation, migration and development (2000): 59-72 OECD Proceedings. Paris and Washington, D.C.:, 2000, pp. 59-72 • Akkoyunlu, Sule and Boriss Silverstovs, (2009), "Migration and Trade: Complements or Substitutes? Evidence from Turkish Migration to Germany", Emerging Markets Finance and Trade, vol. 45, no. 5, pp. 47-61 • Taylor, J. Edward, (2006), "The Relationship between International Migration, Trade and Development: Some Paradoxes and Findings" Paper preared for Federal Reserve Bank of Dallas