Migration, Remittances and Growth
This paper analyzes the effect of migration and remittances on a small, open, migrant-sending country in the context of an endogenous growth model with technology transfers. The paper demonstrates that, due to a dynamic feedback effect from economic conditions to migration and from migration to economic development in an economy exposed to migration, initial conditions can determine its long-run steady state, leading to the rise of vicious or virtues circles of development. Countries with a low level of technological development may end up in a poverty trap, in which a low level of development results in low wage rates and consequently high migration rates. The high migration and loss of manpower in a general equilibrium generates less demand for the adoption of leading technologies, reducing incentives to invest into new technologies. This reduced incentive effect in turn leads to low output and low wages and even higher migration next period. Potentially, as in the case of depopulated countries and regions the economy diverges from the world’s growth rate and eventually ends up being emptied out. The poverty trap with migration is possible even with the possibility of transfer of foreign technologies and for an economy that was converging to the world’s growth rate absent migration. Altruistic remittances as an important by-product of migration allow people to share the benefits of technological advances developed elsewhere and dampen the negative impact of migration. In particular, remittances remove the limiting case of emptying out of the economy and reduce the chances of ending up in a poverty trap.
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