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Effects Of International Migration On The World Economy Economics Essay

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The act of moving from one region to another in search of a better life is one which is central to human nature. Man in his earliest form has been known to move from regions of scarce food supply to regions of abundant supply. Today this act is still very prevalent, with individuals moving mainly from developing to developed countries of the world. The United Nations in its 2002 international migration reports that about 175 million people are currently living outside the country in which they were born, with 60% of them living in the more developed regions of Europe, Asia and North America. Migration is one of the major concepts at the heart of globalization. As people move from one place to another they carry along with them cultures and norms which they introduce to host communities. Also returning migrants introduce the norms of host countries to their country of origin. Beyond that the increasing demand for transportation services by migrants has also led to the development of flight routes which were hitherto non-existent. These issues coupled with advancement in technology, international trade and finance have made the world a global village.

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There are a number of positive impacts of migration on source countries. Remittances have been shown to be one of such, primarily through their ability to reduce poverty levels and thus help improve a number development indicators. Remittances help to increase child enrolment as well as retention in school; they help to improve the health status of the children in households which receive remittances with significant positive spillover effect on households that do not receive remittances. Also they have significant impact on the acquisition of physical capital, many households who receive remittances have been known to spend these monies in starting up small scale businesses and acquiring landed property.

The supply of migrant labour helps to meet labour shortages in industrialized nations which contribute to economic growth. Despite the many claims that migrant labour leads to negative labour market outcomes for natives, there is little empirical evidence to support it. Overall the impact has been seen to be positive and even in cases where there are negative effects it is minimal and often a short-run impact which dies down in the long run. (Krugman and Brezis, 1996)

Migration has consequences both for the source country as well as the country of destination, so much so that issues of migration are becoming increasingly important for growth, development and policy making. It is therefore important for us to have a good understanding of the impact of migration so that we are not misled by claims which have no basis in economics but in politics.

Theories of International Migration

There have been a number of enquiries which have sought to explain the reasons why people migrate and why such norms persist. The earliest of such theories is the Macro theory of neo-classical economics which states that migration occurs as a result of wage differentials between source and destination countries. This wage differential is caused by differences in the supply and demand for labour, countries with large supply relative to demand have lower wages while countries with lower supply relative to demand have higher wages. Hence individuals will tend to move to regions with higher wages until equilibrium is reached and differentials are eliminated. The micro theory of neo-classical economics on the other hand explains that individuals migrate if the discounted benefits of such a decision outweigh the associated costs. However newer theories point to the fact that individuals in less developed countries migrate not only to maximize benefits but also to minimize risk. The structure of developing economies is such that citizens are not adequately insured against various forms of income risk, therefore individuals migrate in order to diversify such risks and overcome market failures which are prevalent in such economies (Massey, 1999). Yet another theory called the Dual labour market theory is often put forward. This theory states that migration occurs as a result of pull factors from advanced industrialized nations. This demand will continue to grow because migrants are more willing to work for lower wages and in less healthy conditions unlike the citizens who may seek higher wages and consider certain jobs as not befitting of their social status. Another famous theory is the World system theory which explains that migration is the offshoot of the capitalist movement. As capitalist move from developed to developing nations in search for markets, raw materials and labour supply, transportation systems are developed, social ties are formed, factors which all encourage migration. (Massey, et al 2002)

Beyond explaining the reasons for migration a set of relevant theories as to why migration persists have also been put forward. First among them is the Network theory which explains that migrants from a particular region often create a close network in their destination country. As this network grows the costs and risks associated with migration declines making it easier for new comers to migrate. Also the growth of a black market which helps to provide services that aid illegal entry into various developed countries as well as voluntary organizations which rise to protect the interests of such migrants in host nations are a major cause of persisting migration. This is the major thrust of the Institutional theory. Though these theories are not coherent they all point to various issues which are of grave importance for policy makers wishing to solve migration challenges. (Massey et al, 2002)

The impact of migration on Source countries

Remittances and the Economy

The most researched and probably the most important impact is that of remittances on household income in the source country. This impact should in no way be under-estimated as Ratha(2005) showed that remittances are the second largest source of external funding for developing countries after foreign direct investment; with values in 2004 exceeding US$126 billion which is more than half of total Foreign Direct Investment(FDI) flows. United Nations(2002) also reported that remittances form an important addition to GDP as they accounted for more than 10% of the GDP of countries such as Samoa Albania, and Herzegovina, Cape Verde, Jamaica, Jordan, Nicaragua, Bosnia, El Salvador and Yemen in 2000. In Egypt remittances at certain times have been known to be higher than the sum of foreign exchange earnings from oil importation, dues collected at the Suez canal and tourism; remittances as a proportion of GDP in morocco is about 5-8% and remittances as a proportion of merchandise export is about 84% in Jordan and 41% in Morocco.( Glytsos, 2002) Remittances have also been shown to have positive macroeconomic effects for source countries, large flows help to improve a nation’s credit worthiness thereby making it able to access the international capital market. (Acosta et al 2007). Remittances have important implications for poverty in receiving households, a number of studies have been carried out in order to examine this impact both at national as well regional levels. For instance Adam(2006) carried out such a study aimed at investigating the impact of internal and international remittances on poverty in Guatemala. It was discovered that remittances reduce the “level, depth and severity of poverty in Guatemala”. Also Yang and Martinez (2005) showed how exchange rate fluctuations impacted on poverty through remittances in the Philippines during the Asian financial crisis. Evidences show that a 10% appreciation in the currency of the host country led to a 0.6% point fall in poverty rate with significant spillover effects on non-migrant households as well. [1]

Remittances and development indicators

The studies in the previous section all point to the fact that migration does reduce poverty levels and hence improves the living standards in source countries. However the concept of development goes beyond just increases in income, but also includes improvements in health standards, educational achievements, and nutrition and so on. Acosta et al (2007) carried out a more robust analysis of the impact of remittances on income as well as other development indicators for 11 Latin American countries namely : Bolivia, the Dominican Republic, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Mexico, Nicaragua, Paraguay, and Peru. The study found that remittances to have an overall positive impact on income, educational achievements as well as health indicators; even though the results from this study were milder when compared to previous studies because it took into consideration a number of counterbalancing effects associated with migration. The loss of income associated with a migrant’s departure as well as the fall in income as a result of travel expenses are examples of such counterbalancing effects which if not taken into consideration can overestimate the poverty reducing impact of remittances. (Acosta et al, 2007)

The impact on income has been shown to also have significant positive effect on other areas of life such as education. In theory the impact of migration on educational achievement is however not clear, this is because in some cases remittances do lead to higher educational attainment while in others the disruption to family life which occurs as a result of migration often leads to a fall in educational achievements in children. Such disruptions include increased participation of older children in supporting and taking care of younger one’s which hinders their ability to focus on schooling. (Hanson and Woodruff, 2003) These issues notwithstanding a number of researches show a positive impact of remittances on educational achievement. Cox and Ureta (2003) showed that remittances have a very significant impact on school retention in El-Salvador, where about 14% and 15% of rural and urban households respectively receive remittances from friends and relatives abroad. The mass exodus of citizens during the civil war of the 1980’s has made remittances a major source of income in El- Salvador. (Cox and Ureta, 2003) Also in Mexico where about 7.8% of the population are migrants residing in the United states, it was shown that remittances have the greatest impact on educational achievement when income constraint is the reason for not attending school. The research showed that the impact on households with less educated mothers was higher(an extra 0.35-0.52 years for girls and 0.22-0.42 for boys) than that of households with more educated mothers, though on average children of more educated mothers accumulate more schooling. (Hanson and Woodruff, 2003) This effects are consistent with the study carried out my Mansuri (2007) in rural Pakistan which is adequately suited for such a research because as was stated more than one in four persons report to have a migrant in the family, most migrants are from poor backgrounds who would be faced with severe poverty had they remained, migrants stay in close contact with family members back home and send substantial remittances. The study showed that despite the fact that migration of the male head of the family can lead to family disruptions that could significantly dampen the positive effect on educational attainment, evidences for rural Pakistan show that children from migrant household are more likely to attend and remain in school. Enrollment rates were shown to increase by 54% and 7% [2] for girls and boys in migrant homes respectively. Girls in migrant homes are more likely to attend school which has significant consequences for gender equality challenges. Dropout rates were also shown to be significantly lower for children in migrant households, especially for girls where this rate falls by 55% and declines by 44% for boys. Labour force participation of such children is also very low when compared to their counterparts and in some cases absent.

Remittances have also been shown to have positive impact on health care in most developing countries. This is because the public health care system in most of these countries is poor with low levels of access especially for poor households. This result in the use of private health care systems which are more accessible but associated with higher costs. As a result households are able to afford such fees only through increased income associated with remittances. (Amuedo-Dorantes et al, 2007) This is consistent with findings of Mansuri(2007) which show that children from migrant household in rural Pakistan tend to do better in terms of the major health indicators. It was shown that girls in migrant household tend to be taller( which according to the research is a good health status indicator) when compared to their counterparts in non-migrant homes. The same applies to weight for age, it also showed that the gains to girls far outstrip that for boys which as stated is an indication that girls are often the ones who bear the brunt of constrained resources. Hence once income increases as a result of remittances the positive impact on them is often higher. The impact on health was also observed to be positive and substantial in Mexico with the impact of increases in remittance income on health care being higher than the impact of increases in non-remittance income. (Amuedo-Dorantes et al, 2007) These observed patterns are in line with the Micro theory of neo-classical economics as migration occurs because the net benefits in terms of the improved life they are able to give family members, far outweighs the associated costs.

This advantages notwithstanding there is however the problem known as ‘brain drain’ which is the emigration of highly skilled workers. This issue has for a long time going been described in the literature as a major problem for developing countries. However the new brain drain theory points to the gains for source countries associated with brain drain. Because skilled migrants are able to earn higher income abroad, there is an increase in the expected return on education which induces to increased investments in education which is a gain for the source country. However the impact of this net gain was found to be small and even negative in most cases. (M. Schiff, 2005)

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The impact of Migration on Host communities

The debate as to whether immigration has positive impacts on host communities is an ongoing one. Naturally there are fears associated with having strangers with different cultures and norms come into one’s country especially in view of economic downturns. Citizens in host nations often complain about the rising unemployment caused by the influx of migrants from less developed nations and hence clamor for tighter immigration controls. The role of finding if these complaints are founded in truth or whether these so called negative impacts are overblown by politicians who seek to use the outcomes for personal advantages, (Hirschman, 2006) is left to researchers. One of such researches was carried out by Hirshman(2006),who carried out a historical review of the impact of migrants in the United states. He pointed to the positive impacts that migrants have had in the past and the present. According to him migrants have been at the very heart of rapid growth and development in Mid and Northwest America, as a result of their contributions in construction, mining and other activities. Their role according to him is still very relevant in the US today, where local labour supply is not sufficient to meet demand. This is in line with the Dual labour market theory which explains that the very nature and structure of industrialized economies is such that it will always demand migrant labour force to fill in positions which citizens might regard as derogatory. (Massey et al,2002)

Despite the general view that migrant’s will and do have negative impacts on labour market outcomes for natives there is little empirical evidence in the economic literature in support of the argument. A research carried out by Friedberg and hunt(1995) surveyed a number of literatures on the impact of labour market outcomes for natives, pointing to the econometric mistakes that led to misleading results. It stated that most researches carried out for the US and other countries show no significant negative impact on native employment. It stated that more robust models reveal that a 10% increase in the proportion of migrant relative to naives will lead to at most a 1% reduction in wages, and that the impact on economic growth will depend largely on the human capital level of migrants.

In the United Kingdom where 9.75% of the working age population is immigrants a study on the impact of wages was shown to be positive overall for the period between 1996 and 2005. The study by Dustmann et al (2007) estimated that an increase in the proportion of migrant population to native population of 1% would lead to native wage increases of between 0.3 and 0.4%. The study also revealed that because immigrants tended to downgrade themselves and accept jobs which were below their educational level, they exerted a downward pressure on real wage growth of workers at the lower end of wage distribution. This effect was however minimal as it was estimated that real hourly wages increased by 18pence and immigration held growth back by 0.7pence. The negative impact was however compensated for by the wage increases in the middle and upper wage distribution caused by migration. This is in line with economic theory which states that the impact of migrants on wages will be positive if production uses a combination of capital and varying skill groups of labour, capital is traded on the international market and natives and migrants have different skill levels. (Dustmann et al, 2007) The impact of the recent influx of migrants from central and eastern European countries on labour market outcomes in the UK was researched by Gilpin et al (2006), and he found that there was no statistical evidence to support the claims that this influx is the cause of rising unemployment in the UK. This is consistent with Blanchflower et al (2007) which found evidences to show that immigration has actually reduced the natural rate of unemployment in the UK.

A survey of empirical evidences of the impact on migration on the host communities of Northern Europe and Scandinavia stated that the general view tends to overstate the adverse effects of migrants. Empirical evidences show no substantial negative displacement effects on natives while the claims that migrants exert large fiscal pressures on host governments has little empirical support as the impact is very little.( Kerr and Kerr, 2008) The same was found to be true according to Lalonde and Topel (1993) who found that for all migrants who arrived the United States before 1975, the amount paid in taxes by migrants outweighed the transfers they received from social welfare programmes by $1400 per family.

A research which studied the impact of migration on local labour markets showed migration to have no detrimental effect on the wages of natives. This was contrary to the a priori expectation of large negative impacts because of the rigid nature of wage setting structures and significant roles of labour unions in Germany.(Velling and Pishke, 1997)

Another significant area where host communities benefit is in the supply of highly skilled migrants. Empirical evidence has shown that these migrants contribute significantly to technological advancements in the United States. It was shown that a 10% increases in the proportion of foreign students led to a 4.8% increase US patent applications, 6.0% increase in patents grants earned by universities and a 6.8% increase in patent grant earned by non-university establishments such as firms. This shows a contribution across all sectors of the economy. (Chellaraj, G. et al, 2005)


Migration is at the heart of present political debates across the globe, and many times the claims that migrants have a negative effect on the economy of host nations especially as regards employment and wages are unfounded. The empirical evidences in support of positive or at worst weak negative effects on labour market outcomes for natives are overwhelming. One other area that is often overlooked is the revenue that industrialized nations generate from migrants seeking entry in Visa offices across the globe. Theory points to the advantages of the free flow of labour, goods and capital which are crucial for the creation of a truly competitive world economy. For source nations there are also strong evidences which point to the positive impacts of migration. The greatest being the impact of remittances on such economies, these have helped to reduce poverty levels and improve developmental indicators in the health and educational sectors. There is also the positive impact that return migrant have on their economies in terms of the acquired skills and enlightenment which they put into use upon return. Beyond economics there is also the positive impact of cultural mixes which have helped to create increased acculturation and a break down old prejudices. Given these evidences it is important for Governments across the globe to study carefully and without bias the real impact of migration on their nation and take steps which help to ensure that all sides are treated fairly.

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