Riccardo Faini

An empirical puzzle: Falling migration and growing unemployment differentials among Italian regions

Abstract We investigate the causes behind the low and falling mobility levels in (Southern) Italy. We argue that a combination of demographic factors, high mobility costs and inefficiencies in the job matching process may account for the fall in interregional migration.

Finance and Development : the Case of Southern Italy

We look at the role of the financial sector in the context of the relatively backward regions of Southern Italy (the so-called Mezzogiorno). Commercial banks in the South typically have higher operating costs and charge higher interest rates than Northern banks. Econometric analysis on a large set of individual loan contracts suggests that borrowers in the South are considerably riskier than those elsewhere in Italy. It also indicates, however, that risk accounts for only half of the 200 basis points average North-South interest differential. The rest is largely accounted for by differences in operating costs. We argue that these findings reflect a situation in which Southern banks have a monopoly of information concerning local firms, with outside banks forced to resort to rationing practices to avoid attracting the worse borrowers. To support this interpretation, we analyse loan contracts of Southern firms who borrow at the same time from local and external banks. We also show that geographical proximity tends to raise interest rates in the South. We then turn to the issue of allocative efficiency and argue that Southern banks tend to perform their screening function less efficiently than banks in the rest of Italy. We finally show that in the South, risk exerts a significantly larger effect on borrowing and that Southern firms whose earnings are more variable are more likely to be liquidity constrained in their investment decision.

Increasing returns, migrations and convergence

Abstract The paper investigates the link between convergence and factor mobility. It contrasts the predictions of exogenous growth models (where factor mobility is found to promote convergence) with endogenous growth models (where factor mobility invariably leads to a cumulative process of regional divergence). The paper develops a simple model of regional growth with mobile factors, increasing returns to scale and diminishing returns to the reproducible factor. It also tries to provide more solid microfoundations to the specification of the migration choice. Because of diminishing returns to the reproducible factor, the economy will not be able to generate endogenous self-sustaining growth. Nevertheless, the results suggest that, even in the context of an exogenous growth model, convergence is not warranted. However, convergence may occur, for some particular constellations, despite the presence of increasing returns to scale. More precisely, it is shown that convergence is more likely the greater is the scope for scale economies and (somewhat paradoxically) the lower is the degree of labor mobility.

Trade unions and regional development

Abstract We focus on the role that labour unions play in the context of a two-region dual economy. We show that (unskilled) unions will increase the wage of unskilled workers and depress growth in both the backward and the advanced regions. The growth effects will be felt more strongly in the relatively poor region. If skilled workers are allowed to migrate and unions recognize that a more aggressive wage-setting policy may foster migration, unions will moderate their wage requests. However, regional unions would then have a strong incentive to coordinate their wage demands across regions. This would further raise the unskilled wage, and more so in the backward region. We conclude that labour market policies designed to foster regional convergence should seek both to discourage centralized wage-setting and favour (skilled) labour mobility.

Remittances and the Brain Drain

In most destination countries, immigration policies are increasingly tilted toward the most skilled individuals. Whether this shift hurts economic prospects in sending countries, as argued by the traditional brain drain literature, is somewhat controversial. The most recent literature has focused on the link between skilled out-migration and educational achievements. In this paper, we emphasize a different channel. It is often argued that skilled migrants raise economic welfare at home thanks to a relatively larger flow of remittances. Skilled migrants typically earn relatively more and, ceteris paribus, will therefore remit more. However, they are also likely to spend a longer span of time abroad and also are more likely to reunite with their close family in the host country. Both factors should be associated with a relatively smaller flow of remittances from skilled migrants. Hence, the sign of the impact of the brain drain on total remittances is an empirical question. We first develop a simple model showing that skilled migrants may have indeed a lower propensity to remit home out of a given flow of earnings abroad. We then derive an empirical equation of remittances and estimate it on a large panel of developing countries. As a measure of the brain drain, we use the dataset by Docquier and Marfouk (2004) that in turn builds on the pioneering work of Carrington and Detragiache (2004). We find considerable evidence that the brain drain is associated with a smaller flow of remittances.

Where Do Migrants Go

In this paper, we study migration decisions taken by risk-averse households. Aggregate data from the regions of Southern Italy are used to test whether risk is a significant determinant of the decision to migrate abroad or inside the country. This indeed appears to be the case for both foreign and domestic migrations, after controlling for unemployment and wage differentials and other plausible control variables. We interpret our results as evidence that, whereas financial markets are absent or malfunctioning, migration provides a shelter against uncertain income prospects. Copyright 1999 by Royal Economic Society.

Is the Brain Drain an Unmitigated Blessing

Increasingly, immigration policies tend to favour the entry of skilled workers, raising substantial concerns among sending countries. The ‘revisionist’ approach to the analysis of the brain drain holds that such concerns are largely unwarranted. First, sustained migratory flows may be associated with an equally large flow of remittances. Second, migrants may return home after having acquired a set of productive skills. Finally, the ability to migrate abroad may boost the incentive to acquire skills by home residents. This paper takes a further look at the link between skilled migration, education, and remittances. It finds little support for the revisionist approach. First, a higher skilled content of migration is found to be associated with a lower flow of remittances. Second, there is little evidence suggesting that raising the skill composition of migration has a positive effect on the educational achievements in the home country.

Import demand and non-tariff barriers: The impact of trade liberalization: An application to Morocco

Abstract Prediction of import response following liberalization measures is a particularly arduous task when extensive quantitative restrictions on imports are present. Quotas affect the responsiveness of imports to real exchange rates, tariffs and activity levels, and the combined effects of quotas and other variables are hard to gauge when data are only available for the constrained regime. In this paper, we show that theoretical results cannot unambiguously sign the effect of quotas on import responsiveness. We also estimate on Moroccan data import demand equations that take explicit account of the presence of quotas. The results suggest that quantity restrictions had a significant impact not only on the level of imports, but on their sensitivity to income and price variations as well. By estimating the demand for foreign goods under rationing we are also able to predict the behavior of imports in response to the elimination of tariff and non-tariff barriers to trade.

Foreign Aid and Fiscal Policy

Foreign aid has been on a downward trend since at least the early eighties. Despite the commitments of donor governments, the GDP share of foreign aid for DAC countries has fallen to slightly more than 0,2% in the early part of this decade. The purpose of this paper is to explore the macro determinants of the amount of foreign aid. Surprisingly enough, not much attention has been devoted in the literature to this issue. Most of the research has focussed either on the effectiveness of aid (“does aid promote growth and help alleviating poverty”?) or to the cross country allocation of a given amount of foreign aid (“is foreign aid motivated by donor’s political and commercial interests or by recipients’ needs?”). In both cases, the total aid budget is taken as given and its determinants remain therefore unexplored. Our main finding is that the size of the budget aid is a function of the donor country’s fiscal situation, even after controlling for the government’s political orientation, the cyclical position of the donor economy, and its income per capita level. In light of these results, we argue that advocates of foreign aid should strongly lobby in favour of fiscal discipline. The alternative strategy of pushing for a more lenient budgetary treatment of foreign aid may be loaded with risks, and even turn to be counterproductive, particularly if the list of “virtuous” exceptions becomes exceedingly long. This is exactly what seems to have happened with the revision of the Stability and Growth pact.

Early trade patterns under the Europe Agreements: France, Germany and Italy

Abstract In the sphere of trade preferences, The EAs have largely amounted to a ratification of the status quo reached between the EU and the CEECs following prior trade liberalization by both sets of partners. It is widely accepted that this cautious approach reflected fears of large adjustment costs among EU members. The paper examines the CEEC-EU trade pattern over 1990–1993, finding no evidence in support of these fears. Detailed regional-level calculations of likely job displacements for France corroborate the findings from aggregate trade flows.