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Some implications of external labour mobility for the development of micro-states.

Introduction

The aim of this paper is to examine some aspects of the role that external or international labour mobility may play in the economic development of micro- or mini-states. External labour mobility is an issue of relevance mainly to those micro-states and territories that already possess a migration outlet to a metropolitan power, usually because of a past or present dependent political relationship and because their tiny populations offer little threat of disturbance to metropolitan labour markets, social security systems and mass cultures. However, the issue has wider significance. Tisdell (1990), for example, has argued that countries that supply aid to underdeveloped micro-states lacking significant or permanent migration outlets may find the provision of such outlets an option worth considering as a means of both increasing per capita income in these micro-states and economizing on aid.

In the last decade the MIRAB approach (MI - migration, R - remittances, A aid, and B - bureaucracy) has occupied a prominent position in the analysis of developing micro-states. Formulated by Bertram and Watters (1985) and Bertram (1986), this approach seeks to identify the principal driving forces behind the transformation of a number of tiny Pacific island states from commodity-exporting economies into rent-based economies. (The term "rent" is used to refer to any income such as aid and remittances that is not the result of directly productive activity by the recipient.) The present paper draws on the MIRAB approach in assuming the existence of a migration outlet that permits substantial external labour mobility. It incorporates this assumption into a simple one-sector economic model of a micro-state that has antecedents in the work of Corden (1984) and Treadgold (1992). The model is used to investigate how the existence of linkages between the domestic and foreign labour markets, via external labour mobility, affects the economic performance of micro-states.

Real wages, employment and output

Following Corden (1984), it is assumed that all output is tradeable. Justification of this useful simplification is provided by Khatkhate and Short (1980), who identify the economic characteristics of a mini-state in the following terms:

...goods which are produced tend to be exported, goods which are sold in the mini state tend to be imported, and the commodities which are both produced and consumed within the mini state tend to be services. Even a substantial amount of these services may be purchased by foreigners in a mini state which specializes in tourism, offshore banking, offshore insurance or tax avoidance facilities (Khatkhate and Short, 1980, p. 1018).

It is further assumed that the economy is a price-taker in world markets for goods and services (the usual small country assumption). This assumption has several implications. First, different tradeable products (exportables and importables) can be treated as forming a single composite commodity. Second, ignoring transport costs, indirect taxes and subsidies, the domestic price level is determined by a given world price level and the exchange rate[1]. Third and relatedly, aggregate demand for output is perfectly price elastic. This relationship, which is depicted in Figure 1(a) as the horizontal line AD, rules out the possibility of Keynesian unemployment.

On the supply side of the economy, we assume that output is governed by a well-behaved, continuous, constant returns to scale, aggregate production function involving two factor inputs, capital and labour[2]. Thus, treating capital as given, the relationship between employment and output involves diminishing marginal productivity of labour [ILLUSTRATION FOR FIGURE 1(c) OMITTED]. Using this relationship, we can derive a conventionally sloped demand for labour curve, shown as [N.sup.d] in Figure 1(d). This curve implies that, given the capital stock, an increase in real wages will reduce the demand for labour. Figure 1d also shows a supply of labour curve [N.sup.s]. This depicts the supply of labour offered by citizens of the micro-state as a positive function of the real wage. The main conclusions of the analysis are not affected if labour supply is alternatively treated as totally inelastic with respect to the real wage.

Next we need to consider the determination of the real wage. Here we introduce external labour mobility. Specifically, we assume that citizens of the micro-state have a migration outlet in the form of unrestricted access to the labour market of another country where the real wage is substantially higher than that which would prevail in the micro-state in the absence of an emigration outlet. We also assume that the other country is demographically much larger than the micro-state so that citizens of the micro-state seeking employment in the foreign labour market are price-takers facing a given real wage. In other words, there is a perfectly elastic foreign demand for their labour. It follows that, abstracting income taxes, the domestic real wage in the micro-state is exogenously determined by the foreign real wage adjusted downwards for annuitised migration costs[3].

In Figure 1(d) the domestic real wage is [W.sub.0]. At this wage, the supply of labour [N.sub.1] exceeds the domestic demand for labour [N.sub.0] in the micro-state. The surplus labour [N.sub.1] - [N.sub.0] is employed abroad, while domestic employment is equal to only [N.sub.0]. Through the total product curve shown in Figure 1(c) this employment yields a domestic real output of [Y.sub.0]. When transferred through the 45 [degrees] line in Figure 1(b), [Y.sub.0] identifies in Figure 1(a) the horizontal intercept of the vertical aggregate supply curve for real output AS. Aggregate supply is shown as completely inelastic with respect to the price level because of the predetermined real wage. A change in the price level will induce an equi-proportionate change in the money wage, leaving the real wage unchanged, and hence also leaving employment and output unchanged.

Construction of the aggregate supply curve completes the basic model. Clearly, output and employment are determined solely by supply-side forces, specifically the given real wage and the factors governing the nature of the demand curve for labour. There is therefore no scope for demand management or exchange rate policies to influence output and employment.

Economic expansion

Since external labour mobility pre-determines the domestic real wage, growth of the labour supply (a rightward shift in [N.sup.s]) cannot induce expansion of domestic employment and output. It simply results in an increased export of labour (emigration). With a pre-determined real wage, growth of employment and output requires an increase in the domestic demand for labour in the form of a rightward shift in [N.sup.d]. This, in turn, requires either an improvement in the terms of trade or an increase in the marginal physical productivity of labour.

The impact of an improvement in the terms of trade is most readily illustrated by assuming that all output consists of exportables and all absorption, including the goods and services consumed by wage-earners, consists of importables. It follows that an improvement in the terms of trade caused by a rise in export prices will raise the value of the marginal product of labour in money terms. This will lead to an increase in the demand for labour, and hence employment and output, because there will be no accompanying change in money wages, given that the real wage is measured in terms of purchasing power over importables. Correspondingly, an improvement in the terms of trade caused by a fall in import prices will also lead to an increase in employment and output because although the value of the marginal product of labour in money terms will not be directly affected, money wages will fall in proportion to the fall in import prices, leaving the real wage measured in terms of importables unchanged.

Improvements in the terms of trade, however, will not serve as source of long-run expansion in employment and output unless they are in the form of a long-term or secular upward trend. In practice, the international business cycle means that most improvements in the terms of trade of micro-states are likely to be short-run phenomena which are followed by deteriorations that lead to downturns in domestic activity. Capital accumulation and/or technical progress which bring increases in the marginal physical productivity of labour at the existing capital-labour ratio are potentially more reliable means of achieving sustained expansion in employment and output.

If capital accumulation and/or technical progress in an appropriate form occur on a scale large enough to increase the demand for labour at the given real wage by more than any exogenous increase in the supply of labour, the quantity of labour sold abroad will decline. However, with the real wage unchanged, the expansion of employment will ensure that the marginal product of labour adjusts back to this level. This outcome means that there cannot be any strong presumption of an increase in the average product of labour. It can increase with some types of technical progress, albeit at the expense of a shift in the functional distribution of income away from labour; but with other types of employment-expanding technical progress the average product of labour will return to its original level or experience a net decline. Moreover, where the expansion of employment is solely the result of capital accumulation, the unchanged marginal product of labour must mean a constant capital-labour ratio, and thus a constant average product of labour. Since the average product of labour can be taken as equivalent to output per worker, it follows that in these circumstances aggregative economic expansion will not result in per capita economic growth (as conventionally measured by a rising level of domestically generated income per head of resident population), except to the extent that it brings an increase in the ratio of domestic employment to resident population.

If the micro-economy continues to expand to a stage where it experiences a demand for labour in excess of the supply offered by its citizens at the given real wage, it will cease to be a net exporter of labour services. What happens next depends on the micro-state's own policy with respect to inward migration. If the micro-state is unwilling to admit foreign workers, the link between foreign and domestic real wages will be broken. Assuming a competitive domestic labour market, the domestic real wage will increase endogenously so long as the domestic demand for labour grows faster than the domestic supply. This rising real wage will reflect a rising marginal product of labour. If the latter is accompanied by a rising average product of labour (as for example will be the case if the rising marginal product of labour reflects a rising capital-labour ratio), there will now be an increasing level of domestically generated income per head, at least as long as there is no offsetting fall in the ratio of domestic employment to resident population.

On the other hand, the micro-state could react to an excess demand for labour by itself becoming a net importer of labour[4]. If it is willing to accept an unrestricted inflow of immigrants or "guest-workers" and if (maintaining the price-taker assumption) foreign labour is in perfectly elastic supply at a real wage equal to the foreign wage adjusted upwards for migration costs, the domestic wage will not rise above this level. Thereafter, any continued expansion of domestic output and employment will again involve a constant marginal product of labour and no strong presumption of growth in the average product of labour. However, even though domestically-generated income per head of resident population, including immigrants, may therefore fail to increase, this failure will not necessarily rule out growth in the per capita domestic income of the non-immigrant or indigenous component of the resident population. Provided ownership of the capital stock remains predominantly in the hands of the non-immigrant resident population, and provided this population does not increase too rapidly, the increasing flow of profits and other non-wage income from domestic productive activity will lead to growth in the per capita domestic income of the non-immigrant resident population.

Of course, whether this growth brings widespread improvements in living standards among the non-immigrant population is an open question, the answer to which is dependent in part on the degree of concentration of ownership of capital. If the ownership is widespread, the benefits of per capita growth will also be widespread. But if ownership is heavily concentrated, growth will bring increasing inequality in income distribution, with living standards for most of the non-immigrant population locked into the constant real wage.

Economic contraction

Hitherto we have assumed that the exogenously determined foreign real wage is constant. We now relax this assumption, and use the above analytical framework to examine the implications for a labour-exporting micro-state of increases in the real wage available in the foreign migration outlet.

In terms of Figure 1(d), an increase in the foreign real wage will result in a matching increase in the domestic real wage within the micro-economy. The domestic demand for labour will fall, supply will increase, and the resulting additional surplus labour will find employment abroad. Bemuse of the fall in domestic demand, there will also be a fall in domestic employment and a consequent reduction in real output (the aggregate supply curve in Figure 1(a) shifts left). Thus the economy contracts in size. However, the movement up the demand for labour curve [N.sup.d] as a result of the increase in the real wage will induce an equal increase in the marginal product of labour. As this will be associated with an increase in the capital-labour ratio, it can be inferred that the average product of labour will also increase. If emigration results in the total resident population decreasing proportionately with domestic employment, the outcome is an increase in the domestically generated income per head resident population that is proportionate to the increase in the average product of labour. If, however, emigration is largely confined to workers who have hitherto been locally employed, the population is likely to decline by a smaller proportion than domestic employment, and growth in domestically generated income per head will be correspondingly smaller.

From this analysis it follows that if there is a continuously increasing real wage in the large country which provides the migration outlet, then other things being equal, the micro-state will experience long-term economic and demographic decline. Output, employment and population will all fall steadily, although that part of the declining population which continues to find jobs within the micro-state will benefit from rising real wages. The situation is analogous to that of a town or region that is declining within an economically growing nation state because the rising wage levels available in the wider economy lead to out-migration from the town or region while simultaneously putting continuous upward pressure on local wages to the detriment of local jobs.

A rising foreign wage is not the only possible cause of economic contraction and depopulation under conditions of external labour mobility[5]. The same effects could also result from a secular decline in the terms of trade or the exhaustion of a particular natural resource. (The latter phenomenon may be viewed as a decline in the capital stock, leading to a downward shift of the production function of Figure 1(c) and a leftward movement of the [N.sup.d] curve of Figure 1(b).)

Of course, within our analytical flamework, all such contractionary factors can be offset and overridden by expansionary forces. It is the balance of these forces that determines the viability and development path of the micro-economy. In the next section we explore the role that foreign aid may play in influencing this balance.

Foreign aid

Aid is assumed to be entirely in the form of untied inter-governmental grants, an assumption which, at least for the developing micro-states of the Pacific, accords reasonably closely with historical experience. The impact of the aid funds can be analysed in terms of demand and supply-side effects. The demand-side effects can be expected to take the form of an increase in domestic absorption of goods and services, either for investment or consumption purposes. However, the structure of the model implies that real output will not respond to this increase in the domestic component of aggregate demand. Since the balance of trade in goods and services is by definition the difference between absorption and output, it follows that the extra absorption will mean simply an equal deterioration in the balance of trade. In other words, extra absorption will generate a matching real inflow or transfer of goods and services from abroad.

The supply-side effects of aid depend on how it is spent. Assume first that the aid is used entirely for conventional development purposes, that is for investment or a transfer of technology that directly increases the marginal productivity of labour. Other things being equal, and after the usual gestation lags, the results will be upward shift in the production function of Figure 1(c), a rightward shift in the domestic demand for labour curve in Figure 1(d), and a rightward shift in the vertical aggregate supply curve of Figure 1(a). Employment and output will rise, with an accompanying decline in the net export of labour. However, as already established, there can be no strong presumption of an increase in the average product of labour (output per worker).

A second possible use of aid is to subsidize production or employment. As with aid used for investment or technology transfer, there will be positive supply-side effects on these aggregates. Indeed, for a given annual inflow of aid, the positive effects of subsidies on production and employment may be greater in the short-run than those of aid-financed investment or technology transfer. However, this situation could be expected to reverse itself in the long run. Moreover, other things being equal, subsidies would mean a fall in output per worker, valued at international prices because the expansion of employment would cause the marginal product of labour to fall below the given real wage.

We consider next the supply-side effects of aid when it is used to finance additional government consumption of goods and services. This may contribute directly to some rise in living standards of the resident population; but by its nature it will not affect the production function, and therefore will not affect employment, output or output per worker. It follows that this form of aid will not serve to counteract long-run economic contraction caused by increasing foreign wage levels, declining terms of trade or exhaustion of natural resources. Nevertheless, through improving public consumption levels, it may make some contribution to retarding emigration and demographic decline, provided the population has access to offshore sources of personal income to finance private consumption.

Other possible, if unlikely, uses of aid are to fund tax cuts or provide unrequited transfers of income (such as social security benefits) to resident households. If the micro-state imposes an income tax, the effects in the labour market of an aid-financed cut in tax rates will be a reduction in the pre-tax domestic wage but no change in the domestic after-tax wage. The latter will remain at a level determined by the foreign real wage net of foreign tax and migration costs. Thus the domestic demand for labour will increase, while the total supply of labour will be unaffected. Output and employment will expand, bringing declines in the marginal and average products of labour; and the volume of labour sold abroad will also decline.

The use of aid funds to make government transfers (gifts) of income to resident households cannot affect the wages paid by domestic employers, and therefore will not directly affect output, employment or output per worker. However, to the extent that the receipt of unearned income by households leads to a reduction in the supply of labour, there will be a leftward shift in the supply of labour curve of Figure 1(b). Thus aid-financed transfers to households will also lead to a reduction in amount of labour sold abroad.

In general, it appears that, depending on how aid is used, it can contribute to an expansion in the aggregate size of the economy. However, within our analytical framework, it is difficult to make a case for aid on the conventional grounds that it will promote growth in labour productivity and hence growth in output per capita. In any event, where the potential aid donor is also the migration outlet for the micro-state, and where migration costs form the only difference between real wages in the micro-state and real wages in the potential donor state, such a case is unlikely to be judged compelling by the potential donor.

Nevertheless, there may be an another justification for aid. If the economy of the micro-state is exposed to contractionary forces (for example, an increasing foreign real wage), aid that has an expansionary impact on the demand for labour can serve to counteract the effect of these forces in reducing output, employment and ultimately population. This may well be an influential consideration for an aid donor for whom the demographic survival of the micro-state is seen as desirable, perhaps for geo-political or cultural/historical reasons.

Remittances

A well-documented consequence of the emigration normally associated with the export of labour from micro-states is the substantial flows of remittances or unrequited transfers from expatriate workers back to households in their countries of origin. For many developing micro-states these flows constitute the largest single source of foreign exchange, greater than receipts from exports or foreign aid (Connell, 1988, p. 27).

In terms of our analytical framework, the easiest way of introducing remittances is to treat them as equivalent to an aid inflow disbursed by a recipient government as transfers to households. Thus, on the supply side, remittances form a source of additional non-labour income for residents. Remittances can therefore be expected to lead to a reduction in the total supply of labour and hence a reduction in the amount of labour sold abroad[6]; but, given the real wage, they will not affect domestic employment, output and output per worker. On the demand side, they will raise household income above the level originating in domestic production, and they can consequently be expected to boost absorption of goods and services; but this also cannot directly affect domestic employment and output. Instead, there will be a matching deterioration in the balance of trade.

The complexity of the analysis increases once it is recognized that in some circumstances remittances may affect the domestic real wage. This will occur if expatriate workers feel themselves to be under some kind of unavoidable obligation to provide, through remittances, a level of economic support for family or relatives in the micro-state that they would not be obligated to provide if they held employment within the micro-state[7]. This form of obligation would amount, in effect, to a form of private taxation on the export of labour services. Given that the foreign demand for these services is perfectly elastic at the prevailing foreign wage level, the effect would be to reduce the domestic wage relative to the level that would have existed in the absence of the obligation. Hence, the obligation of expatriate workers to provide remittance inflows would mean that the domestic demand for labour, employment and output would all be higher than they would be in the absence of this obligation. Correspondingly, the marginal and average products of labour would both be lower. Depending on what happens to the ratio of domestic employment to resident population, domestically generated income per head of resident population would probably also be lower, although the inflow of remittances would of course supplement total household income per capita.

A migration quota

A key assumption of the preceding analysis is that citizens of the micro-state have unrestricted access to a high-wage foreign labour market. While this is a reasonable approximation of reality for some labour-exporting micro-states and territories, for others it is more appropriate to depict access to foreign labour markets as limited by immigration quotas imposed by host countries.

The introduction of a binding quota into our model can be most readily handled by assuming that the host country sets a maximum limit on the number of micro-state workers who can hold jobs within its borders at any given time. This restriction requires some simple reconstruction of the demand side of the labour market diagram. Specifically, in Figure 2 we assume that at the given foreign wage (net of migration costs) of [W.sub.0] and at all lower wage levels the quota imposed by the host country constrains the effective foreign demand for the services of micro-state workers to a fixed quantity AB, while (maintaining the price-taker assumption) at higher wage levels foreign demand is zero. Adding AB to the domestic demand for labour curve [N.sup.d] yields the "stepped" total demand for labour curve [N.sup.d+quota]. The intersection of [N.sup.d+quota] with the supply of labour curve [N.sup.s] gives a domestic real wage of [W.sub.e] and a level of total employment of micro-state labour of [N.sub.1]. Of this total, [N.sub.0] is employed within the micro-state at the wage of [W.sub.e] and [N.sub.1] - [N.sub.0] is employed abroad at a wage (net of migration costs) of [W.sub.0]. Because the domestic real wage [W.sub.e] is assumed to be flexible (i.e. to adjust via money wage flexibility to clear the labour market), other aspects of the model are unchanged and can continue to be represented by Figure 1(a-c).

Compared with a situation of unrestricted access to a high-wage foreign labour market, a quota results in a lower domestic real wage and thus higher domestic employment and output in the micro-state. However, output per worker will be lower so that, subject to the behaviour of the ratio of domestic employment to resident population, output per head of resident population is also likely to be lower.

A quota means that domestic employment and output become responsive to growth of the labour supply (a rightward shift in [N.sup.s]). If this reflects population growth, then (other things being equal) it will lead not only to a fall in the real wage but also to a reduction in output per capita. Thus, in contrast to the situation of unrestricted access to a high-wage foreign labour market, population growth can be a threat to living standards.

Under a quota, as under unrestricted access, an improvement in the terms of trade will have expansionary effects on domestic employment and output. These will come about through a rightward shift in [N.sup.d] which will be reflected in a similar shift in [N.sup.d+quota]. Capital accumulation and technical progress that brings an increase in the marginal productivity of labour at the existing capital-labour ratio will have similar expansionary effects. However, again in contrast to a situation of unrestricted access to a foreign labour market, all these forms of expansion will lead to an increase in the domestic real wage, moving it closer to the given foreign real wage. In addition, in at least the case of capital accumulation, the average product of labour will rise, suggesting the likelihood of growth in domestic income per capita.

We have seen that under conditions of unrestricted access to a foreign labour market an increase in the foreign real wage will have a contractionary impact on the economy of the micro-state, possibly leading to depopulation. Under a quota the micro-state will be insulated from these effects. An increase in the foreign real wage will raise the height of the step in the total demand for labour curve, but this will not affect the domestic real wage, and thus it will not affect domestic employment and output. (It will also leave the average product of labour and domestic income per capita unchanged.)

Under a quota the demand-side effects of foreign aid will be confined, as under unrestricted access, to the balance of trade. On the supply side, a quota will mean that aid used for investment or a transfer of technology which increases the marginal productivity of labour will raise the domestic real wage, as well as increasing employment and output, and will offer a much greater prospect of an increase in domestic income per head than would have been the case under unrestricted access to a foreign labour market. Under a quota, aid used to subsidize production or employment will also raise the domestic real wage, although in this case (as with unrestricted access) output per worker will fall.

The existence of a quota does not change the earlier conclusion that there is an absence of supply-side effects on economic performance when aid is used to finance additional government consumption. Also a quota does not change qualitatively the conclusion that an aid-financed cut in income tax will reduce pre-tax wages and thereby stimulate output and employment, with the increase in employment bringing falls in the marginal and average products of labour. However, a quota does change the supply-side effects of aid used to make transfers to residents. The resulting leftward shift of the supply of labour curve [N.sup.s] (which under conditions of unrestricted access to a foreign labour market had no effects on domestic economic performance) will now result in falls in employment and output, and increases in the domestic real wage and the average product of labour. Moreover, despite accompanying increases in marginal and average labour productivity, output per capita must decline for a given resident population.

A quota can obviously be expected to result in a smaller inflow of remittances than would occur under conditions of unrestricted access to a foreign labour market. Hence, to the extent that remittances reduce the supply of labour through providing non-labour income for residents, the reduction is likely to be smaller than under conditions of unrestricted access. Its effects will be of a similar type to the effects of a reduction that occurs as a result of aid disbursed as transfers to residents.

Finally, it has been noted that if remittances are viewed as an obligatory private export duty on labour services, their effects under conditions of unrestricted access would be to reduce the domestic real wage and thereby stimulate domestic economic activity. However, these effects will not occur under a quota so long as the amount of obligatory remittances per unit of labour sold abroad is less than the amount by which the foreign wage (net of migration costs) exceeds the domestic wage that would prevail in the absence of these remittances. More specifically, in terms of Figure 2, obligatory remittances will not reduce the domestic real wage so long as the effective foreign wage (i.e net of both migration costs and "export duty") remains above [W.sub.e].

Conclusion

Because the one-sector model used in this paper does not allow for the production and absorption of non-tradeable goods and services, it cannot offer any insights into the effects of external labour mobility on the internal economic structure of micro-states. Relatedly, it is unable to contribute to an analysis of the "Dutch disease" phenomenon from which some aid-receiving, labour-exporting micro-states apparently suffer and which is a prominent feature of the MIRAB approach. Nevertheless, the model serves to identify key elements in the role that external labour mobility can play in the economic development of micro-states.

This role is most influential when there is a complete absence of restrictions on labour market flows between the micro-state and a much larger economy. In this situation the micro-state becomes virtually an extension of the larger economy, equivalent in terms of its development problems and prospects to a demographically tiny (and perhaps remote) region within the larger economy. Although this interpretation is subject to a variety of qualifications, not least those relating to socio-cultural factors, they are to a large extent matters of degree rather than absolutes. The economy of the micro-state may expand or contract in total size relative to the larger economy, and gain or lose population accordingly; but the fact that its level of real wages is linked to the level of the larger economy must constrain the opportunities for independent growth in output per worker and hence in output per capita.

The economic development of a labour-exporting micro-state inevitably becomes a more autonomous process when there are restrictions on access to the foreign labour market. In particular, a binding quota on emigration detaches the domestic real wage from the foreign real wage and thereby provides greater opportunities for independent growth in output per worker and hence in output per capita. However, per capita growth is likely to be off a lower base because the domestic real wage and hence labour productivity will be lower than under conditions of unrestricted access.

Finally, we return to Tisdell's argument that where an underdeveloped, aid-receiving micro-state lacks a migration outlet, an aid donor may find that at least to some extent the provision of such an outlet forms an alternative to aid as a means of raising the per capita income of the micro-state. As Tisdell (1990, p. 154) points out, an aid donor contemplating the saving in foreign aid that may result from pursuing the migration option should also allow for the impact of emigration from the micro-state on its own economy. Beyond this, it is necessary to recognize that, although aid and emigration may be substitutes for the purpose of increasing living standards in the micro-state, in most circumstances they tend to have opposite effects on the total volume of economic activity. This may be a critical issue if the size and indeed, ultimately, the survival of the micro-state are judged important by either the aid donor or the recipient.

Notes

1. In reality, many micro-states do not have their own currencies but either use the currency of another country as the domestic medium of exchange or, as members of a monetary union, share a common currency. These arrangements are, of course, equivalent in effect to a rigidly fixed exchange rate.

2. Capital is defined to include land and other natural resources.

3. These costs include travel expenses, psychological costs and, in practice, an allowance for the probability of unemployment in the foreign country (Bertram, 1986, pp. 811, 814). Although the concept of a perfectly elastic foreign demand for the labour of citizens of micro-states is not, strictly speaking, compatible with unemployment, the probability that not all migrants will immediately find jobs in the foreign country is still consistent with the domestic real wage being exogenously determined, provided that this probability is not affected by the volume of migration to the foreign country.

4. This scenario may seem remote from the situation and prospects of most developing micro-states, but it is not without historical precedent. For example, within the Pacific region the Australian external territory of Norfolk Island was a net exporter of labour to Australia and New Zealand in the early post-war period, but as a result of rapid tourism-led economic growth it became a net importer of labour from both these countries in the 1960s and 1970s (Treadgold, 1988).

5. See Ward (1989) for an examination of the possibility of depopulation of some Pacific islands.

6. Ahlburg (1991) provides evidence from American Samoa suggesting that receipt of remittances is likely to reduce labour force participation.

7. See Ahlburg (1991, pp. 5-7) for an examination of the view that remittances are motivated by contractual arrangements between migrants and their families.

References

Ahlburg, D.A. (1991), Remittances and Their Impact: A Study of Tonga and Western Samoa, Pacific Policy Paper No. 7, National Centre for Development Studies, The Australian National University, Canberra.

Bertram, G. (1986), "Sustainable development' in Pacific micro-economies", World Development, Vol. 14 No. 7, pp. 809-22.

Bertram, I.G. and Watters, R.F. (1985), "The MIRAB economy in South Pacific microstates", Pacific Viewpoint, Vol. 26 No. 3, pp. 497-519.

Connell, J. (1988), "Sovereignty and survival: island microstates in the Third World", Research Monograph No. 3, Department of Geography, University of Sydney, Sydney.

Corden, W.M. (1984), "Macroeconomic targets and instruments for a small open economy", Singapore Economic Review, Vol. 29 No. 2, pp. 27-37.

Khatkhate, D.R. and Short, B.K. (1980), "Monetary and central banking problems of mini states", World Development, Vol. 8 No. 12, pp. 1017-25.

Tisdell, C.A. (1990), Natural Resources, Growth and Development, Praeger, New York, NY.

Treadgold, M.L. (1988), "Bounteous bestowal: the economic history of Norfolk island", Pacific Research Monograph, No. 18, National Centre for Development Studies, The Australian National University, Canberra.

Treadgold, M.L. (1992), "Openness and the scope for macroeconomic policy in micro-states", Cyprus Journal of Economics, Vol. 5 No. 1, pp. 15-24.

Ward, R.G. (1989), "Earth's empty quarter? The Pacific islands in a Pacific century", The Geographical Journal, Vol. 155 No. 2, pp. 235-46.
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Author:Treadgold, Malcolm; Laplagne, Patrick
Publication:International Journal of Social Economics
Date:Apr 1, 1996
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