13th annual Municipal Finance Conference


13th annual Municipal Finance Conference


Migrants and refugees: The unlikely key for economic development

Franschhoek valley, a small town in the Western Cape province of South Africa, is known today for its beautiful scenery and high-quality wineries. In fact, it is also known as the source of an important share of the wine exported by South Africa. The origin of this town goes back to the late 17th century, when French Huguenot refugees settled there after being expelled from France following King Louis XIV’s revocation of the Edict of Nantes. Coincidence?

Not really. These refugees were a source of knowledge, brought from France, which eventually made Western Cape the first-class wine exporter that it is today, competing in global markets with wineries from all over the world. This is precisely what we’ve documented on a global scale: Migrants are a driver of knowledge across borders. This knowledge translates into higher productivity for industries in their country of destination, and even in their country of origin (through return migration or even diaspora networks) and destination countries.

This piece of research together with my ongoing work on the topic shows that migrants and refugees, in fact, are a key element in economic development and in closing the gap between the rich and the poor. Why is that? Economists have long known that differences in productivity is what explains the largest portion of cross-country income differences; yet, we know less about what makes a country, a firm, or a worker more productive. But we know that countries, firms, and workers are more productive because they know how to do more with the same resources. For example, high productivity is achieved by workers who know how to use equipment more efficiently and by managers who know how to apply best practices.

But, if knowledge is the key component of productivity, how come there are still rich and poor countries, or low and high productivity shoemakers? In other words: How come those who are less productive cannot learn from those who are very productive?

The answer has to do with understanding what knowledge is, which can be divided in three different types. First, there is the knowledge embedded in goods (often called technology). For instance, having a calculator exempts a person from knowing how to add or subtract, as the knowledge is embedded in the product. Yet, as this type of knowledge can be shipped around the globe at very low costs, it cannot really explain differences in productivity.

Second, there is the type of knowledge that can be codified, such as a patent or information that can be written down. This type of knowledge can also be transmitted around just by sharing at very low costs the paper or website on which it is written, and thus it can neither explain differences in productivity.

Third, there is knowledge that resides in people’s brains: tacit knowledge or know-how, for which its transmission requires human interaction, as well as time and effort. The ability of a worker to become more productive has to do with his or her accumulated experience and his or her ability to learn from others while on-the-job. It is know-how that explains why a worker or manager is more productive than their peers: The knowledge they have on how to do their job cannot be easily transferrable. The only way we can learn from others, say a surgeon or a plane pilot, is not by reading a textbook or having access to their equipment, obviously. Rather, excelling in many professions implies years of learning from others who have been doing the same task for years and years beforehand.

This is why migration is an important vehicle in the process of knowledge transfer across locations, which is key for the development of nations. Foreign workers serve as a “revolving door” for knowledge: They bring new knowhow to their destination as well as transfer such knowhow back to their home countries, resulting in productivity shifts in both locations. Precisely because of this, it is migration and international worker mobility —more than trade and capital—the flow from the world has more to gain at the moment, as pointed out by the renowned economist Dani Rodrik.

This has important implications for scholars and policymakers. First, the need to keep investing in research on migration and refugees as drivers of knowhow across borders, and the need to spread these findings in spite of the existent negative perceptions on the topic. Second, the need for governments and legal systems all over the world to have better ways to deal with permanent and temporary migrants and refugees, allowing them to integrate into the labor force to both contribute with the knowledge they bring, and to transfer back home the knowledge they could gain while abroad.

Naturally, as with any other economic reform such as trade or capital liberalization, integrating migrants into the labor force might result in some losing even when the aggregate gains are positive. Thus, these policies must be accompanied by the proper safety nets to protect those who might lose because of migration flows. This should be key to reduce negative perceptions towards migrants and all forms of xenophobia.

As we see horrendous humanitarian crises resulting in massive flows of migrants and refugees from places such as Syria, Myanmar, and Venezuela, among others, it is important to remember that these people who today are fleeing, if given the opportunity to be resettled, will be a key ingredient for the reconstruction of their countries down the road.

Thus, the best way for nations of the world to assist poor countries in their process of economic development is to receive their migrants and refugees, and through them, let the knowledge flow.