Wednesday, June 06, 2007

The brain drain of Mexico 

Frank Stephenson calls this paragraph from the Investors Business Daily "the silliest sentences I've read today."
Illegal immigrants in the U.S. are paying for Mexico's consumer binge. Currently, some 10% of all Mexican households get remittances from the U.S. Foreign workers now make up 16% of the Mexican work force. If they stayed home and worked in Mexico they would be building Mexico's economy � not that of the U.S. Instead, they live in poverty here, overwhelming U.S. social services agencies and making Mexico's economy much weaker than it should be.
I spent time a few years ago in Armenia thinking about remittances, and wrote two papers on the topic with my colleague Bryan Roberts. I haven't thought as much about the question of whether or not they are a burden on the U.S. economy on net (Stephenson says they probably are not, but I don't know that.) What intrigues me is the last line -- do the remittances help or hurt the economy of the home country of the immigrants?

IBD mentions one of the negative effects, the strengthening of the peso due to the inflow of dollars into Mexico. This is a version of Dutch disease, insofar as exports are now relatively expensive, but it's only a problem in my view if the government and central bank are fixing the exchange rate or otherwise mismanaging currency policies. (See this recent FRB Atlanta paper for more.) In short, if remittances are a problem for the peso, it's the fault of the central bank. We did not see there being much of an effect in Armenia.

There are other demand-type impacts of remittances that I could get into, but the IBD quote suggests a brain drain on Mexico. Most often it is the more educated of the sending country that choose to immigrate (as they face the largest wage differentials between sending and receiving countries), but that's not necessarily true for unauthorized immigrants. See, for example, this paper by Mora and Taylor on migration from rural villages in Mexico. When we looked at data for Armenia, we found that over half of emigrants had more than twelve years education (note that there are almost no restrictions on Armenian emigration to Russia, which is where less educated Armenians would seek work in construction, for example.)

There's the possibility of benefits. Emigrants may return home and bring new skills and financial capital with them. They may stay in the receiving country but create trade networks with the sending countries, helping both. But the balance of the evidence I've read indicates that the net effect on Mexico is negative.

Last, thinking about supply a little more, what's the effect of remittances on the work effort of the families receiving them? Imagine the family deciding it will send one of its children overseas to earn money, remit the funds back to the home family, and allow the home family to supply less labor. Is it "nonsense on stilts" to think this is a bad thing? How will Mexican productivity improve to the point that its educated workers will be better employed in Mexico if human capital is continually shipped abroad? The answer depends on whether you think there are positive externalities to human capital development. I don't think that's a settled question.

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