Emigration, Tax on Remittances and Export Quality

Abstract

We examine the implications of the emigration of unskilled workers for the quality of a skill-based good exported by a small open economy. This issue is relevant in the context of quality constraints faced by the developing countries like China and India in promoting their exports, on the one hand, and the significantly large emigrations of workers, particularly unskilled workers, which lower their productive capacities, on the other hand. We show that even though unskilled workers are not directly used in the production of quality-differentiated export goods, their emigration would lower export quality when quality upgradation requires more intensive use of skilled workers relative to capital. This result follows from the complementarity between skilled and unskilled wages in a competitive general equilibrium model. A quality-content production subsidy in such a case can mitigate the adverse effects of emigration. The significantly large remittances received from unskilled emigrants create scope for taxing such remittances to finance the subsidy. JEL Classification: F16, F20, F22, F24

Reverse migration and exports at extensive margin: case of a small dependent economy

“…Of late, similar in spirit of the evidences put forward by Brambilla et al ( 2012 ), Brambilla et al ( 2014 ), Schott ( 2004 ), and Brambilla and Porto ( 2016 ) on the intensive use of domestic inputs such as skilled labour and/or capital in producing higher quality export goods, Ganguly and Acharyya ( 2021 ) have shown that emigration of both skilled and unskilled labour “may” lower the quality of export goods produced by the origin country when quality upgrading requires more than proportionate increase in use of skilled labour than capital per unit of output. Their result can be interpreted as reverse migration improving export quality, conditionally though.…”

“…Thus, quality dimension of export baskets of countries are becoming more important than price-competitiveness for their export-led growth strategies to be successful. But, in general, qualities of goods that the developing countries export are far below the quality levels of goods produced in the developed countries (Ganguly & Acharyya, 2021 ; Henn et al, 2013 ). Such low-quality phenomenon is constraining their export performance in the developed country markets and consequently causing export-led growth effects insignificant for their domestic economies.…”

“…However, the present paper extends their analysis in two important directions. First, while Ganguly and Acharyya ( 2021 ) suggest taxing remittances sent by the unskilled emigrants to their families in the origin country to finance the quality-content production subsidy, they overlook the demand-reducing effect that such a tax may have on the export quality, and this is captured here through production of a non-traded good. For example, remittances received by India, China and Mexico were as large as US$ 83.1 billion, US$ 68.4 billion and US$ 38.5 billion, respectively, in 2019.…”

“…Whereas reverse migration of unskilled workers lowers national income and consequently demand for home produced goods due to loss of remittances; reverse migration of skilled workers may cause their investments in productive capacities of the origin country fall significantly. We take into account these dimensions here, which were not looked into by Ganguly and Acharyya ( 2021 ). To best of our understanding, implications of these demand and productive-capacity effects of fall in remittances and investments made by emigrants in their native countries as a result of reverse migration for export quality have been largely left unexplored in the existing literature mentioned above as well.…”

“…At the same time, the channels through which this paper tries to study these effects, i.e. making investments by skilled emigrants a part of the capital stock, introduction of the non-traded good also differentiates the analytical structure of this paper from that used in Ganguly and Acharyya ( 2021 ). This investigation also draws relevance from the current Covid-19 pandemic that has been affecting both lives and livelihoods all over the world in an unprecedented manner.…”