Is Diaspora a Goldmine?

Prof Ricardo Hausmann’s latest piece is on role of diaspora. It is much more than remittances:

The relationship between diasporas and their homelands often encompasses a broad palette of sentiments, including distrust, resentment, envy, and enmity. Colloquially, people describe a bout of emigration as a period in which a country “lost” a certain proportion of its population.

But people who leave a country have not disappeared. They are alive and socially active. As a result, they may become an invaluable asset not only to their country of destination but also, and importantly, to their country of origin.

One important connection is remittances, which add up to some $500 billion a year worldwide. The largest recipients are India, Mexico, and the Philippines. For countries such as Armenia, El Salvador, Haiti, Honduras, Jamaica, Kyrgyzstan, Lesotho, Moldova, Nepal, and Tajikistan, expatriates remit the equivalent of more than one-sixth of national income – an amount that often exceeds exports. And this money can do a lot of good, as the World Bank’s Dilip Ratha has highlighted.

But a diaspora’s potential economic importance goes well beyond remittances. As the late historian Philip Curtin documented, from the beginning of urban life, millennia ago, trade typically involved networks of co-ethnic merchants living among aliens. Greeks, Phoenicians, trans-Saharan traders, the Hanseatic League, Jews, Armenians, overseas Chinese, and the Dutch and British East India Companies organized much of world trade through such networks. Although these alien traders were sometimes politically powerful in the host countries, they were often weak and faced discrimination.

The economist Avner Greif argues that these co-ethnic networks’ durability and resilience throughout history reflects their ability to enforce contracts at long distances when the existing institutional framework could not do so reliably. They could establish trust between exporters and importers because they could punish opportunistic behaviors. For a tight-knit community, reputational costs and other forms of social punishment transcend geography: not paying for goods might mean not being able to marry your children well. Legal institutions have since evolved to facilitate impersonal trade. Exporters and importers no longer need to know one another, because they can write a contract that a court will enforce.

And yet the impact of co-ethnic networks may well be as important as ever. As Hillel Rapoport of the Paris School of Economics and his co-authors have shown, controlling for other determinants of trade, countries trade more with, and invest more in, the diasporas’ home countries. In recent work with Dany Bahar, Rapoport has also shown that countries become good at making the products that their migrants’ home countries are good at making.

I interpret these results as the consequence of tacit knowledge or knowhow. To do things, you need to know how, and this knowhow is mostly unconscious. After all, most of us know how to ride a bicycle, but we are not really aware of what our brain does to achieve that feat, or how it develops that ability through practice.


Well, there is just one problem with such analysis. There is a strong belief that those who migrate abroad are superior to those who stay at home. So, one should allow all kinds of flows apart from money to come from diaspora without any questions. Ten years of working say in India is considered inferior to five years working in US. The one in US is likely to be preferred based solely on the western experience. One is not so sure and such discrimination should be avoided.

Other than that, one should try and make policies for citizens and diaspora so that they are complementary to each other..

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