Economic Effects of Emigration on Sending Countries

Oxford Handbooks Online

Economic Effects of Emigration on Sending Countries
Devesh Kapur and John McHale
Oxford Handbook of the Politics of International Migration
Edited by Marc R. Rosenblum and Daniel J. Tichenor

Print Publication Date: Jun 2012 Subject: Political Science, International Relations
Online Publication Date: Nov 2012 DOI: 10.1093/oxfordhb/9780195337228.013.0006

Abstract and Keywords

This article surveys the economic consequences of international migration on sending

countries. It first provides a broad overview of recent research on migration and
development, beginning with the sizes of the emigrant/immigrant stocks and the
possibilities for migration-related income gains, both direct migration-related impacts
and the resulting remittance flows. Recent advances have led to a reassessment of the
effects of migration on development, often leading to a more sanguine view compared to
earlier work on the “brain drain.” However, the state of knowledge is still too rudimentary
to identify when migration is beneficial for development. This uncertainty is particularly
pronounced for skilled migration, which is increasingly the object of rich-country policies.

Keywords: economic impact, international migration, immigrants, remittance, brain drain

Introduction
This chapter surveys the economic consequences of international migration on sending
countries. Despite the massive potential income gains from poor-to-rich-country
migration, just 3 percent of the world's population lives outside their country of birth. The
aggregate numbers, however, mask great diversity in emigrant shares across countries,
with more than half of the native-born populations of some small island countries living
abroad.

In addition to the numbers of people who leave, the effects of emigration on the sending
country depend critically on the selection effects of who leaves—and who returns.
Although education obviously matters, a number of other variables, from age, gender, and

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Economic Effects of Emigration on Sending Countries

ethnicity, to where they go and why, all impact the degree and nature of the economic
effects.

At the systemic level, these flows are shaped by (and therefore have consequences for)
the sending country and the international migration architecture. In sharp contrast to the
liberal, multilateral, institutional architecture governing international financial and trade
flows, the structure governing international migration is restrictive, selective (favoring
the highly skilled), and rigid in its bias against temporary labor movements, and includes
a tacit tolerance toward less-skilled illegal residents performing dirty, dangerous, and dull
(“3D”) tasks.1

(p. 132)The linkages between migration and development have become an active area of
research in recent years. Much of this research emphasizes the dynamic nature of
international migration, and the previous pervasive pessimism about “brain drain” has
given way to a more nuanced optimism about “brain circulation.” The dynamic effects
that have received attention include those of migration prospects on human capital
investments, the value of the diaspora as economic partners and global bridge builders,
and the potentially transformative effects of returnees. Notwithstanding these advances,
the trade-offs between the costs of absence and the benefits of dynamic migration flows
are still not well understood. For instance, in the context of skill-selective immigration
policies, it is possible that the long-term effects of the loss of institution builders and
innovators could swamp the immediate static income gains of financial remittances.

The size, growth, and stability of remittance flows have also motivated research on the
links between remittances and development. Particular attention has focused on the links
between remittances and poverty reduction; the value of remittances in the context of
absent insurance and credit markets; and the propensity to invest remittances in health,
education, and entrepreneurial ventures. An older view that saw remittances as transfers
that are “frittered away” is also giving way to a more nuanced one that sees migration
and remittances as an integral component of household income and risk management
strategies.

This chapter first provides a broad overview of recent research on migration and
development, beginning with the sizes of the emigrant/immigrant stocks and the
possibilities for migration-related income gains, both direct migration-related impacts
and the resulting remittance flows. Recent advances have led to reassessment of the
effects of migration on development, often leading to a more sanguine view compared to
earlier work on the “brain drain.” However, the state of knowledge is still too rudimentary
to identify when migration is beneficial for development. This uncertainty is particularly
pronounced for skilled migration, which is increasingly the object of rich-country policies.

Overview of Migration and Development

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Economic Effects of Emigration on Sending Countries

Until recently, the lack of good data severely hampered understanding of the complex
links between international migration and development. A series of initiatives over the
last decade has improved data quality and has encouraged new research on the subtle
effects that migration (and remittances) can have on poor-country development, although
many issues remain unsettled.2

(p. 133)

The United Nations (UN)

estimated the total
emigrant stock—the total
population living outside
their country of birth—at
191 million in 2005. This is
Click to view larger
roughly two and a half
Figure 6.1 Evolution of the World Emigrant Stock
times the emigrant stock
Source: United Nations. 2006. Trends in
International Migration Stock. 2005 revision.
in 1960. Figure 6.1 shows
the evolution of the stock
between 1960 and 2005.
Expressed as a percentage of the world population, the world emigrant stock has been
remarkably stable. It was 2.5 percent of world population in 1960 and 3 percent by 2005.
Although small as a share of world population, as a share of source-country population it
is extremely high for a number of small (typically island) countries. Emigrant stocks as a
fraction of domestic population tend to peak at a purchasing-power-parity-adjusted
income per capita of between $15,000 and $20,000 (measured in 2000 dollars) and are
significantly positively selected on educational attainment.

The income gains associated with poor-to-rich-country migration are substantial. Clemens
and Pritchett (2008)3 provide numbers indicating that the relationship between average
income gains and source-country per capita income is substantial for most poor countries.
Clearly considerable improvements in productivity and living standards are possible when
individuals leave failing institutions behind. There are large differences between GDP per
capita and income per natural for a significant number of (typically smaller) countries.4
However, notwithstanding the sizeable average income gains (and the large gaps
between GDP per capita and income per natural for a number of countries), the overall
effect of migration on average world income is modest. Kapur and McHale (2009)
calculate that the total gain in world income per capita from international migration is
just above 1 percent. The limited upside gain is largely because emigrants make up just 3
percent of the world's population.5

(p. 134) Migration and Development: A Framework

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Economic Effects of Emigration on Sending Countries

The varied effects of migration on development work through multiple channels. The
framework used in this discussion was developed by Kapur and McHale (2005a) and
identifies four principal channels: prospect, absence, diaspora, and return.

The Prospect Channel

The prospect channel captures how the prospect of migration affects initial human capital
investment decisions. A straightforward extension of the model allows human capital
investments to depend on domestic and foreign prices for skills. If the foreign skill price
is higher than the domestic skill price, a higher emigration rate will raise the return on
human capital investment and increase the level of investment. For a strong enough
induced investment effect, it is possible that a higher emigration rate will actually raise
the steady-state domestic human capital stock. In other words, the direct loss from higher
emigration is more than compensated for by the increased incentive to invest in human
capital.

The possibility of such an investment-induced “brain gain” has been a major focus of the
recent theoretical literature on migration and development (e.g., Stark et al. 1997; Beine
et al. 2001).6 More recently, the possibility of an overall positive effect on domestic human
capital has received qualified empirical support. Beine et al. (2008) find that countries
with low levels of human capital and low emigration rates experience a “beneficial brain
drain,” but that more countries are net losers than net gainers. Boucher et al. (2005)
report that, in the case of internal migration in Mexico, the dynamic investment effect
from a higher return on human capital outweighs the static depletion effect of out-
migration. However, they find that emigration to the United States does not significantly
affect human capital formation. Chand and Clemens (2008) examine a quasi-natural
experiment from Fiji, where after 1987 the Indian population fell to 40 percent below its
pre-1987 level because they were forced to emigrate by political events they saw as
adverse to their interests. Although Clemens and Chand find the high emigration rate for
Indians was associated with increases in the stock of Indian human capital in Fiji, this is
likely an artifact of the duration of analysis. With time, as more and more Indians leave,
their human capital stock will inevitably decline, because few will be left. This analysis is
cautionary in that it highlights the sensitivity of the effects of emigration to the time
horizon of the analysis.

The Absence Channel

The absence channel focuses on the effects that migration has on those left behind in the
community of origin; this channel clearly depends on the characteristics of those who
leave. This is particularly important in multiethnic societies, where differential rates of
migration across social, religious and ethnic groups can alter the demographics germane
to critical political cleavages. The social, economic (p. 135) and political implications in
turn will depend on the structure of institutions and cleavages already present in society
and the reasons the migrants left their place of origin.

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Economic Effects of Emigration on Sending Countries

The most obvious effect is that the country's labor supply falls, a trend that should result
in increased wages for those left behind. The great transatlantic migrations of the late
nineteenth century were the single most important factor in wage convergence between
Europe and the United States (O'Rourke and Williamson 2009). Needless to say, the
effects of the absence channel are strongly mediated by the characteristics of who leaves,
but also by how many leave, from where (sectors, regions, communities), and their
destinations. The late nineteenth century witnessed two large-scale international
migrations: one from Europe and the other, of comparable absolute numbers, from China
and India. However, the former was much larger in relative numbers, and its destination
was to other temperate countries (in contrast to the latter, in which migrants mainly went
to other tropical countries). The consequences, as Arthur Lewis (1994) argued in his
classic essay, were starkly different for the sending countries and set the stage for the
evolution of the international economic order in the twentieth century.

Nonetheless, a focus on labor markets risks missing possible systemic implications of

absence. For example, skilled international migration can adversely affect a country's
institutions in several ways. The option to emigrate could make younger people less
willing to invest in skills that are most relevant to local institutions, preferring instead to
invest in private sector skills that are more internationally marketable—for example,
becoming computer programmers rather than lawyers. Most critically, the absence of
talented individuals can affect the supply of institution builders (Kapur and McHale
2005a). In addition, absence can also impact the demand for better institutions. The very
individuals who are capable of being successful in high-quality institutional environments
are also those who have the strongest interest in seeing these institutions built.
Emigration can thus rob the country of influential voices for reform, especially those with
internationally marketable talents and those who are not in the business of rent
extraction at home.

Absence can also have direct and important political effects by simply creating political
space for new groups. If elites leave—often the case in the aftermath of revolutions—the
political space opens up for new elites, as has been the case in Cuba and Iran. Hence,
cross-national spatial mobility can affect vertical political and social mobility. It also
affects domestic spatial mobility. External migration drives internal migration, and in a
multiethnic society, if politics is organized along religious and ethnic cleavages, this will
have political ramifications.

The Diaspora Channel

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Economic Effects of Emigration on Sending Countries

The diaspora is potentially

a valuable “second” human
capital stock for the home
economy. This stock is
valuable (relative to truly
foreign human capital) to
the extent that diaspora
members retain
Click to view larger disproportionate
Figure 6.2 Remittances and Capital Flows to connections to the home
Developing Countries in Nominal U.S. Dollars,
(p. 136) economy. These
Unbalanced Panel
connections support
Source: World Bank. n.d. Migration and Remittances
Data. http://econ.worldbank.org economic transactions:
trade, direct investment,
financial investments, remittances, tourism, knowledge exchange, etc.7 They can also be
used to develop links for transactions with foreign nationals, which is especially
important in international trading environments fraught with search, monitoring, and
other transaction costs.8

Remittances and Development

Remittances have received a great deal of attention in the recent migration and
development literature.9 They represent a significant, growing, and stable flow of funds to
developing countries. Figures 6.2 and 6.3 reproduce well-known time series evidence on
the evolution of remittance and capital flows to developing countries.10 Clearly total
remittances have been growing over time, although some of the increases are a statistical
artifact, the result of better official capture of data (Kapur 2005). They are also a
relatively stable source of foreign exchange inflows, especially when compared with debt
and equity flows. Remittance flows have also outstripped official development assistance
since the mid-1990s.

Click to view larger

Figure 6.3 Total Remittances, Balanced Panel of 107
Developing Countries, 2000 International and U.S.
Dollars

Source: Remittance data are World Bank updated

and revised numbers (July 2008) based on IMF

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Economic Effects of Emigration on Sending Countries

Balance of Payments Statistics, 2008. http:// Remittance flows

econ.worldbank.org (accessed October 29, 2008).
significantly reinforce the
Conversion to PPP-adjusted dollars is based on the
LCU per US$ exchange rate divided by the LCU per
direct income gains from
International $ exchange rate. The underlying migration, because they
exchange rates are from World Bank, World allow a portion of those
Development Indicators Online.
gains to be spent at lower,
Conversion to 2000 U.S. dollars is made using the
U.S. Consumer Price Index. The countries are
developing-country prices.
selected based on availability of data for all years McHale (2009) estimates
2000–2007. High-income countries (World Bank
this gain to be roughly 20–
classification HIC) are excluded.
25 percent of the direct
gain. The direct income
gains from poor-to-rich-country migration are of obvious importance when considering
the welfare gains from migration. (p. 137) Remittances to family members remaining
behind can also be of first order importance because by allowing those gains to be spent
at developing-country prices, they augment the migration-related gain in purchasing
power.

Often remittances are viewed as an additional source of resource transfer for developing
countries. However, once the income gains from migration are measured, obviously
remittances cannot simply be added as a separate source of gain. The reason is that the
remittances come out of the migrants’ receiving-country incomes—to include them along
with the income gains would be double counting. As mentioned previously, the fact that
remittances are spent at lower, sending-country prices is an additional source of welfare
gain. This leads to looking for other remittance-related factors that increase the overall
value of migration for those born in poor countries.

Earlier literature viewed remittances as transfers that were “frittered away,” but more
recent literature sees migration and remittances as an integral component of household
income and risk management strategies. Attention has been focused particularly on the
links between remittances and poverty reduction; the value of remittances in the context
of absent insurance and credit markets; and the propensity to invest remittances in
health, education, and entrepreneurial ventures. Thus remittances have been found to
play an insurance role following natural disasters (Yang 2008a), support investments in
education (Cox and Ureta, 2003), child health (Hildebrandt and McKenzie 2005), reduced
child labor (Yang 2008b), and small businesses (Taylor and Wyatt 1996; Woodruff and
Zenteno 2001). Why might (p. 138) remittances be spent differently from other income?
The most obvious reason is that the sender conditions the remittances on their being
used for investment purposes. But a high propensity to invest remittances could also
follow from “tagging” them to household members more likely to invest (e.g., mothers) or
because of a tendency to cordon off remittances as being for longer-term purposes11 (see
World Bank 2006, ch. 5).

Lacking income-earning possibilities at home, households may send members overseas.

The resulting remittances can help to pull the remaining household members up to or
above the poverty line. A number of studies have examined the impact of remittances on

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Economic Effects of Emigration on Sending Countries

poverty, using household survey data. These studies typically do find a significant
poverty-reducing effect (see, e.g., Adams 2005; Yang and Martinez 2005). A
complementary approach is to examine the impact of remittances on poverty measures
using cross-country data. McHale (2005) and World Bank (2006) estimate poverty
regressions that relate various international poverty measures to the country's mean
income and inequality level. The empirical model is then used to simulate the impact of
remittances on poverty, given various assumptions about how remittances are distributed
across households. Because remittances are typically found to have small effects on
measured inequality in the household data, the baseline assumption is that they are
distributed in the same way as other household income. Even without reducing inequality,
the simulations show that remittances lead to substantially lower poverty rates for a
number of countries. The largest reduction in the poverty rate (one dollar per day
standard) was found for Lesotho, where remittances equal to 44 percent of GDP were
responsible for lowering the poverty rate by 34 percentage points, to 36 percent (see
World Bank 2006).

Residents of poor countries face pervasive failures in insurance and credit markets. The
international migration of family members may be a rational response. In the face of
these market failures, remittances will tend to flow at times when they have high value
(e.g., maintaining consumption in the face of natural disasters or taking advantage of
entrepreneurial opportunities despite credit constraints).12

A few notable exceptions aside (and in contrast to the vast literature on the other sources
of financial flows), the effects of remittances on political economy have been weakly
analyzed. Singer (2009) argues that remittances influence the choice of exchange rate
regimes in the developing world. By reducing the costs of forgone domestic monetary
policy autonomy, remittances increase the likelihood that policymakers will adopt fixed
exchange rates.

Remittances can also have considerable effects on macropolitical economy. For most poor
countries, foreign aid and natural resource rents have been the principal sources of
foreign exchange and financial inflows. These inflows invariably strengthened the apex
organs of the state and have led to intense competition among groups to capture the state
and hence the foreign rents accruing to it. In contrast, remittances accrue to households,
bypassing the state, and shift state-society relations in favor of the latter.13

The complex, long-term effects on political economy of migration are evident in

(p. 139)

Wood's (2000) analysis of democratic transition in El Salvador. The violence and political
instability in the 1980s led to a large outflux of uprooted peasants (especially to the
United States), and by 1991 remittances exceeded export earnings. The burgeoning
foreign exchange inflows resulted in “Dutch disease” effects, with the upward pressure
on the exchange rate undermining the competitiveness of Salvadoran agricultural
exports. This resulted in a shift of the economic interests of the country's landed
oligarchies from agriculture to services and in turn abated the severity of rural

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Economic Effects of Emigration on Sending Countries

repression, motivating elites to adopt a bargained instead of a coercive approach to

resolving conflict in that country.

Skilled and entrepreneurial immigrants who have strong connections in both home and
host regions can be a powerful source of economic advantage (Saxenian, 2006) for the
country of origin.14 Case studies on the role of diasporas in jump-starting technology
industries have been done in India, Ireland, Israel, South Korea, Taiwan, and China.15
However, relatively little work has focused on the key trade-off: Are a poor country's
scarce skilled workers more valuable at home or abroad? Or, stated in terms of the stock-
flow model, is a member of the diaspora stock more or less valuable than a member of the
domestic stock? Desai et al. (2009) explore this trade-off by examining the fiscal cost of
moving from the domestic stock to the diaspora stock by looking at the net fiscal impact
of Indian emigration to the United States. Although the Indian-born in the United States
were roughly 0.1 percent of the domestic Indian population, their absence represented a
net fiscal cost to India equal to 0.5 percent of the Indian GDP, or roughly 2.5 percent of
total Indian fiscal revenues. Agrawal et al. (2008) develop a model in which innovation
depends on knowledge access, and knowledge access partly depends on membership in
networks. The authors allow for both colocation and diaspora networks. A necessary
condition for the movement of an innovator to the diaspora to increase knowledge access
of Indian innovators is that the diaspora knowledge-access effect be stronger than the
colocation effect.16 This could happen if emigration is associated with positive
productivity effects combined with continued strong ties with those remaining at home.
Agrawal et al. find, however, that the diaspora effect is actually considerably weaker than
the colocation effect. This suggests that emigration harms knowledge access; that is, the
diaspora effect does not make up for the effect of thinning local knowledge access.17
Finally, in ongoing work, Li and McHale (2009) explore the relative effects of domestic
and diaspora human capital on the quality of home-country institutions. Using an
instrumental variables approach, they find that diaspora human capital is more valuable
for measures of the quality of “political” institutions, based on the World Bank
governance indicators (political stability, voice, and accountability), but domestic human
capital is more valuable for “economic” institutions (government effectiveness, regulatory
quality, rule of law, and control of corruption). Putting the various pieces together, there
is no doubt that the diaspora can be a valuable resource for the home economy. However,
this does not necessarily mean that skilled emigration is good for the home economy.
Though the case studies are certainly (p. 140) suggestive of the value of a larger diaspora
under certain conditions, research on the broader diaspora/domestic trade-off is still in an
early stage.

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Economic Effects of Emigration on Sending Countries

The Return Channel

Return migration is an inevitable concomitant of migration (Dustmann 2001). Even for

permanent immigrants to rich countries, recent work has revealed return rates of
between 20 and 50 percent (OECD 2008). While emigration and return rates affect the
level of the domestic human capital stock, they also influence the foreign experience of
the domestic stock. For any given return rate, a higher emigration rate means both more
time spent abroad and more recent foreign experience. If time spent abroad is valuable,
this opens a third channel through which migration can positively affect development.

Central to the return effect is how time spent abroad affects productivity relative to time
spent at home. This in turn depends on where an individual spent time abroad and what
he or she did there, because (a) opportunities to acquire general capital (skills, savings,
and social connections) vary across countries; (b) opportunities to acquire home-country-
specific capital also vary across countries; and (c) simply spending time in developed
economies changes expectations and motivations that affect how individuals behave when
they return. Again, although there are many case studies of individuals returning and
having transformative effects on their home economies, systematic evidence is limited.

The picture that emerges from available studies is generally suggestive of a modest
positive impact of time spent abroad. Barrett and O'Connell (2001), for example,
demonstrate a 5 percent wage premium for returning Irish emigrants that is robust to
controls for selection effects. A number of studies have found a high propensity for
returnees to engage in entrepreneurship. For example, using data about Turkish
returnees from Germany, Dustmann and Kirchkamp (2002) report that a majority are
economically active, most engaged in entrepreneurship.18 Similarly, McCormick and
Wahba (2003) find a higher rate of “entrepreneurship” among return migrants to Egypt
than in the same sample prior to international migration.

Notwithstanding that some individuals do return and have transformational effects,19

some studies suggest that returnees are negatively selected from the emigrant stock (see,
e.g., Husted et al. 2001 and Klinthall 2003). Borjas and Bratsberg (1996) find a more
nuanced result: that return tends to augment the effects of initial selection, with
returnees negatively selected where the emigrant pool is positively selected. But Grogger
and Hansen (2008) report that positive emigrant selection is the norm. Using patent
citations as an indicator of inventor quality, Agrawal et al. (2008) find that Indian
returnees from the United States tend to be negatively selected from a highly positively
selected emigrant pool.

Whether returnees have modest or transformational impacts may also be a historically

contingent question. Foreign education, especially in Western universities, (p. 141) has
been a key mechanism for the transmission of ideas of modernity, whether political
regimes or economic systems. Although foreign-educated individuals are a very small
fraction of their native populations, nevertheless, there is evidence to suggest that they
promote democracy in their home countries, but only if the foreign education is acquired
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Economic Effects of Emigration on Sending Countries

in democratic countries (Spilimbergo 2009). In the early part of the twentieth century,
returning Chinese students who had studied in U.S. universities played important roles in
China (Ye 2001). In India, returning elites educated in England played a key role in laying
the foundations of a liberal democratic polity imbued with socialist ideas. Four decades
later, returning elites educated in economics in the United States reoriented India's
economic policies to be more pro-market (Kapur 2010).

Effects on Political Economy

The growing literature on the economic effects of migration has largely focused on the
direct effects. But it is at least possible that the indirect effects—working through the
impact on politics—may be greater. The literature on economic development in recent
years has focused on the centrality of institutions and governance as the sine qua non of
long-term growth. Consequently, if international migration affects these variables, its
economic impact could be large as well.

The canonical analytical framework in this regard is Hirschman's classic Exit, Voice and
Loyalty, wherein he argued that the “willingness to develop and use the voice mechanism
is reduced by exit, but the ability to use it with effect is increased by it” (Hirschman 1970,
83). Later on Hirschman was less sanguine, worrying that emigration was depriving the
“geographic unit that is left behind … of many of its more activist residents, including
potential leaders, reformers or revolutionaries,” and “weaken[ing] [its] voice and thus
reduc[ing] the prospects for advance, reform, or revolution in the unit that is being
left” (Hirschman 1992, 90).

The prospect of exit has been seen as a restraint on rulers, who have to compete with
other jurisdictions for potentially mobile subjects (North 1981, 27). But global experience
suggests that this is valid only under restrictive conditions of voluntary migration and not
in the case of forced migration, whether the slave trade in Africa (see later discussion) or
ethnic cleansing (of which history records many sordid examples).

In Hirschman's formulation, exit and voice are exclusive binary choices that act as
substitutes. Absence can also have direct and important political effects by simply
creating political space for new groups. If elites leave—which often happens in the
aftermath of revolutions—the political space opens up for new elites, as has happened in
Cuba and Iran. Thus cross-national spatial mobility affects vertical (p. 142) political and
social mobility. It also affects domestic spatial mobility. External migration drives internal
migration, and in a multiethnic society, this has political economy ramifications at the
subnational level. Kapur (2010) finds that in today's world they can act as complements,
reinforcing rather than undermining each other. Exit, in the form of international
migration, is affecting voice through a variety of mechanisms.

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Economic Effects of Emigration on Sending Countries

In Mexico the prospect of migration appears to have affected the political attitudes and
behavior of those left behind. Voter turnout rates are lower in high- migration
municipalities, and individuals in high-migration areas report lower levels of political
efficacy and participate less in politics than their counterparts in less migratory towns
(Goodman and Hiskey 2008).

A second mechanism is the exercise of voice across borders. Fox and Bada (2008) find
that migration from Mexico to the United States has increased public accountability.
Though migrants chose exit, they continue to express loyalty by exercising cross-border
pressures on local governments for accountability and a greater voice in their home
communities. This construction of a transnational public sphere is the result of migrants
organizing themselves politically in the destination country and using that experience to
effect political change in the country of origin.

A third mechanism is the role of financial remittances in loosening patronage systems.

Using data from municipal elections in Mexico, Pfutze (2009) finds that remittances
significantly increase the probability of an opposition party winning in a municipal
election. He argues that the nontaxability of remittances reduces an incumbent
government's ability to maintain political patronage systems, resulting in more
competitive elections.

A very different mechanism through which diasporas can affect the political economy of
the country of origin is their role in abetting conflict. Diasporas have long been known to
practice long-distance nationalism, ranging from civic nationalism to virulent ethnic
nationalism. Whereas the former ranges from lobbying the government of the adopted
country about foreign policy to sending funds during a natural calamity, the latter can
manifest itself in ethnic violence and civil wars in the country of origin. Collier and
Hoeffler (2000) find that, all other factors being equal, the risk of conflict starting after at
least five years of peace is six times greater in nations with the largest diasporas than in
those with the smallest. Moreover, “after peace has been restored, the legacy of conflict-
induced grievance enables rebel movements to restart conflict by drawing on the support
of their diasporas” (Collier and Hoeffler 2000, 2). Their relative importance in this arena
appears to have increased especially since the end of the Cold War. One survey of
insurgent movements covering seventy-four active insurgencies between 1991 and 2000
found that about a fourth received significant support from diasporas (Byman et. al.
2001). However, though diasporas appear to be an important factor in fueling domestic
conflict, their interaction with other factors continues to be disputed.

Diasporas can also affect the quality of governance in the country of origin through their
involvement in global criminal networks.20 Several factors underlie (p. 143) the growing
role of diasporas in international criminal activities. Much like any international industry,
many criminal networks rely on expatriated populations to facilitate their activities
abroad. As with any business, international criminal activity also requires enforcement
mechanisms and trust, and diasporic networks can more easily internalize these
mechanisms. Forced repatriation of felons (e.g., from the United States to Central

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Economic Effects of Emigration on Sending Countries

America) has also strengthened international criminal networks. These transnational

links provide domestic criminal groups in source countries with substantial financial
resources, which are often large enough to allow the groups to emerge as significant
political actors with the power to destabilize weak states. The profits from drugs, often
funneled through diasporic networks, have played an important role in Haiti's narco-coup
in 2004, the ongoing violence in Colombia, and the warlordism in Afghanistan. Virtually
all international criminal networks—whether Albanian, Italian, Colombian, or Chinese—
rely on their respective diasporas as a base for their activities.

Historical evidence of large-scale migration from Africa and Europe to the New World in
the eighteenth and nineteenth centuries and from China and India in the nineteenth
century provides insights into the long-term effects of international migration on sending
countries. In particular it highlights the importance of two neglected variables in the
impact of international migration on the sending country: the critical importance of why
people leave and where they go. Are they leaving voluntarily, or are they being pushed or
pulled out? Do they leave for political or economic reasons?

The great migrations from Europe to the New World (especially from 1870 to the
beginning of World War I) were largely for economic reasons and contributed to a
convergence of wages between origins and destinations, particularly between the
countries of Western Europe and the United States. Between 1870 and 1910 emigration
raised wages in Western Europe by 9 percent and lowered them by 8 percent in the
United States (Williamson and Hatton 2005).

In contrast, the large migrations out of Africa, as millions of Africans were carted off to
slavery, had a very different impact on that continent. Historians have argued that one
major consequence was to reduce the supply of labor. In contrast to Western Europe,
which had low land-to-labor ratios when migration began (one reason that it was
voluntary), Africa had a high land-to-labor ratio. Consequently, control over a factor that
became increasingly scarcer—labor—emerged as the key to power. Kings and village
headmen, bound to their followers by complicated networks of mutual obligation and
exchange, fell from dominance. External conflicts centered primarily on the various
struggles to exercise control over a people, and captives became the principal spoils of
war. The deep social disruption led to the increasing practice of holding slaves within
Africa's borders, thereby intensifying their exploitation and exemplifying what has come
to be known as the “transformation thesis.” The institutional effects were manifold.
Slaves were used by political elites to increase their power, which led to the development
of increasingly centralized and also more autocratic states. Household dynamics changed
as well. High-fertility regimes became institutionalized to ensure large families of
potential (p. 144) workers. Women married young and were valued by the number of
children they bore. The social status of men was similarly based on the number of wives
and children to whom they held claim (Inikori 1982; Iliffe 1995; Thornton 1998).

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Economic Effects of Emigration on Sending Countries

Recently economists have begun examining this issue. Nunn's (2008) study of the impact
of forced migration—the slave trade—found significant negative long-term political and
economic effects for Africa. The parts of Africa from which the largest number of slaves
were taken are today the poorest parts of Africa, and this cannot be explained by
selection effects. The least-developed societies were not the ones selected into the slave
trade. Instead, the more-developed and more densely populated societies supplied the
largest numbers of slaves.

If the deep determinants of long-term economic growth are indeed domestic institutions,
then how does migration affect them? The combined evidence from Gennaioli and Rainer
(2007) and Nunn (2008) is consistent with a chain of causality wherein the slave trade
resulted in a deterioration of domestic political institutions, which in turn had a long-term
adverse impact on the provision of public goods. Nunn and Wantchekon (2009) examine
whether the transatlantic and Indian Ocean slave trades were responsible for a culture of
mistrust within Africa and find a very strong negative relationship between an
individual's reported trust in others and the number of slaves taken from that individual's
ethnic group during the slave trade period. The slave trade appears to have adversely
affected trust by both altering the cultural norms of the ethnic groups exposed to the
trade, making them inherently less trusting, and weakening legal and political
institutions, with the former channel having approximately twice the magnitude of the
latter.

How Policies Affect the Impact on Sending

Countries
Public policy—in both source and destination countries—can have an independent effect
on the impact of international migrations on sending countries.

International Architecture and Destination Country Policy

The large income gains associated with poor-to-rich-country migration point to the
potential for significant reductions in world poverty. However, actual movements are
conditioned by an international migration architecture that is poorly designed to realize
this potential. The architecture is restrictive—too few poor-country residents have the
opportunity to emigrate; it is selective—what (p. 145) opportunities exist are heavily tilted
toward the highly skilled; it is rigid—the system is biased toward permanent flows and
against circulation; and it is (often) ambivalent—a near absence of legal access routes for
the less skilled sits uneasily with forbearance toward illegal residents.

Sending-Country Policies

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Economic Effects of Emigration on Sending Countries

Although entry controls put in place by rich countries obviously play a key role, the
benefits of international migration for sending countries depend on a broader set of
policies. McHale (2008) provides a succinct summary of policy goals that matter in this
area:

1. Connections: policies affecting the development value of diasporas

2. Circulation: policies to induce and integrate returnees
3. Creation: policies relating to human capital investments
4. Compensation: policies that improve sharing of migration-related benefits with
sending countries
5. Competition: policies to attract and retain talent

Successful examples, such as the roles played by the Chinese, Indian, Israeli, and
Taiwanese diasporas in Silicon Valley in jump-starting home-country technology
industries—have led other governments to try to create programs to coordinate their
diasporas.21 Examples are Globalscot, ChileGlobal, and the South African Network for
Skills Abroad (SANSA). Although these coordination efforts have yielded successes, the
overall results have often been disappointing (Kuznetsov and Sabel 2006).22 Indeed,
successful diaspora networks seem to have been largely the result of voluntary and
decentralized interactions, with governments as subsidiary players in a supportive role
rather than as the main drivers (Newland and Patrick 2004).

Governments have played a more important role in developing policies and infrastructure
to reduce the high costs of engaging in financial transactions across borders. These
include increasing competition between institutions involved in international payments,
carefully considering the trade-offs in stricter security-driven regulation of cross-border
transactions, and supporting electronic payment systems (see World Bank 2006, ch. 6 for
a detailed treatment). Although programs such as the Mexican government's Tres Por
Uno (three for one) program have been breathlessly discussed, their impact has been
modest, with the amounts barely a few percent of total remittances to Mexico.23

Receiving-country governments have also sought to put in place programs to increase

return rates. Receiving-country policies that encourage circulation, for example by giving
confidence to potential returnees that they will be able to re-emigrate at a later date, can
be helpful in this regard. Another (partly) return-motivated policy has been entering into
totalization agreements so that the qualifying rules for social security benefits do not act
as a barrier to return. The (p. 146) European return fund, meant to help participating
countries institute integrated return management, is a recent example of a multilateral
effort to encourage return. The fund has a five-year budget of ₠676 million. This includes
identifying and evaluating groups of potential returnees, the logistical and legal
constraints in the EU, and the situation in the country of return. The evidence, however,
does not inspire confidence that these programs have been particularly successful (OECD
2008).

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Economic Effects of Emigration on Sending Countries

Sending countries have sought to encourage return by providing targeted inducements to

their highly skilled citizens. A good example is Taiwan, which attracted back more than
40,000 overseas Taiwanese between 1986 and 1996, by instituting policies such as the
elimination of the capital gains tax in 1990, which made Taiwan attractive to individuals
who had achieved substantial technology-related wealth (Saxenian 2006).24 But by far the
most critical factor is a positive economic and political outlook in the sending country. A
great example of the effects of a radically changed domestic environment on return
migration is Ireland's Celtic Tiger economy of the 1990s.25 The economic turnaround
brought back thousands of emigrants who had left during the depressed decade of the
1980s. And conversely, the economic travails of Ireland after 2008 have again led many
Irish to emigrate. Taiwan, South Korea, and more recently China and India are all
examples of how rapid economic growth in the sending country is the best inducement
for return.

An interesting new policy shift has been an increase in dual citizenship laws, which grant
expatriates the right to naturalize in the receiving country without losing their nationality
of origin. Mazzolari (2009) examines the effects of dual citizenship on naturalization rates
and labor market outcomes in the United States and finds that it increases both the
propensity to naturalize as well as relative employment and earnings gains. This suggests
that for the country of origin, dual citizenship might be a mixed blessing. If dual
citizenship results in greater naturalization, which in turn leads to better economic
opportunities, this should help the country of origin as well. However, naturalization will
result in lower return rates, possibly denying these countries access to talent.

Conclusion
In contrast to research on international financial and trade flows, analytical work on the
third leg of globalization—international migration and its effects on sending countries—is
relatively recent. In analyzing the likely economic effects, this chapter attempts to
address a range of questions. Why should we expect diasporas to play a role that is
different or distinct from any other foreign investor? To paraphrase Deng Xiaoping in a
different context, does it matter if an investor is from the diaspora or not? And to the
extent that members of a diaspora do play a (p. 147) distinct role, in what areas or sectors
is their role likely to be greater? What characteristics of the migrants, the diaspora, and
the countries of origin and destination matter most for economic consequences?

This chapter suggests that the effects of international migration are much more complex
and sensitive to very precise selection effects on not just who leaves and who returns, or
how many and where, but why and how. But these are precisely the data that are most
difficult to get. Kapur (2010) argues that international migration poses a paradox:
although it is both a cause and consequence of globalization, its effects on the country of

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Economic Effects of Emigration on Sending Countries

origin depend largely on factors internal to that country. Thus, understanding why people
leave in the first place may be the key to understanding migration's long-term effects.

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Notes:

(1) The term was first coined by Michael Piore (1979).

(2) See, for example, the report prepared by the Commission on Migration Data for
Development Research, Migrants Count: Five Steps Towards Better Migration Data
(Washington, D.C.: Center for Global Development, 2009).

(3) Clemens and Pritchett (2008) use U.S. census data to estimate average income gains
for immigrants to the United States from various countries. They then use bilateral data
on U.S.-sending country pairs to estimate a prediction model for income gains. This model
is then used to estimate the income gains from migration from any sending country to all
receiving countries. What Clemens and Pritchett actually report are estimates of the
difference in income per capita and income per natural (see n. 4).

(4) A “natural” of country x is a person born in country x, irrespective of where he or she

currently resides.

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(5) Moreover, much of the emigration we do observe does not lead to large income gains:
rich-to-rich movements, poor-to-poor movements, and (less often) rich-to-poor
movements.

(6) See Commander et al. (2004) and Schiff (2005) for critical reviews of the brain gain
hypothesis.

(7) Gould (1994) and Head and Ries (1998) use a gravity equation framework to show
that larger diasporas are associated with greater trade.

(8) See Kapur and McHale (2005a).

(9) See Ozden and Schiff (2005) for excellent critical surveys.

(10) See World Bank (2006) for a detailed treatment.

(11) See Thaler 1990 for a discussion of mental accounting

(12) On remittances as insurance, see Clarke and Wallsten (2004), Yang and Choi (2007),
and Yang (2008a).

(13) Kiren Chaudhry (1989) examined the contrasting effects of these two types of
external capital in the Middle East and found that financial inflows into Yemen in the form
of labor remittances initially weakened the Yemeni state by bypassing both state
institutions and the formal banking system and going directly to millions of Yemeni
migrants. On the other hand, oil rents strengthened the Saudi state by creating a huge,
financially autonomous distributive bureaucracy. Thus, the different sources and channels
of external financial inflows differentially affected state-society relations.

(14) Annalee Saxenian (2006, 5) terms them “the new Argonauts” (after the Greeks who
sailed with Jason seeking the Golden Fleece).

(15) See studies in Arora and Gambardella (2005).

(16) These effects are empirically identified using patent citation data. Members of the
Indian diaspora are in turn identified using an Indian name database.

(17) An additional finding gives us pause, however: the diaspora effect increases in
importance with the value of the resulting innovation (as proxied by subsequent citations
to the patent). Thus diaspora relationships may be critical for the most valuable
innovations.

(18) Ammassari (2003) reports on interviews with “highly skilled elite” emigrants and
returnees from Côte d'Ivoire and Ghana. An interesting finding is that whereas the older
cohorts of emigrants were more concerned with nation-building tasks, more recent
cohorts are likely to make their impacts through entrepreneurship. She also documents
particular examples in which returnees were instrumental in introducing new work
practices, technologies, and investment. On the negative side, access to capital and

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Economic Effects of Emigration on Sending Countries

regulatory constraints on private sector enterprise restricted the entrepreneurial efforts

of returnees, as did the conflicting perspectives of the returnees and longer-term
residents.

(19) See, e.g., chapter 5 in Kapur (2010), on the role transformational returnees to India.

(20) According to UN estimates, international crime is a $1–$1.5 trillion annual industry,

with drug trafficking, illegal arms trade, human trafficking, and money laundering
constituting the principal activities.

(21) See, e.g., McHale and Kapur (2005b) and Saxenian (2006).

(22) An example of bilateral cooperation is the United States–Mexico automated

clearinghouse, which was created under the U.S.-Mexico Partnership for Prosperity. The
goal is to reduce the cost of sending remittances between the two countries. The system
has been successful in lowering costs, but international banks have been slow to join,
given their own proprietary payment systems (World Bank 2006).

(23) The key feature of the program is that different levels of government match the
collective remittances of Hometown Associations (HTAs), with the HTA remittance being
matched by the federal government, the state government, and the municipal government
—hence the three-for-one name.

(24) The OECD (2008, 201–202) provides additional examples of sending-country policies
to encourage return. The countries noted include Jamaica, the Philippines, Argentina,
Colombia, Tunisia, and China.

(25) See Kapur and McHale (2005b).

Devesh Kapur

Devesh Kapur is Madan Lal Sobti Associate Professor of Contemporary India and
Director, Center for Advanced Study of India, University of Pennsylvania.

John McHale

John McHale is Established Professor and Head Of Economics at the National

University of Ireland, Galway.

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