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

We analyse the implications of reverse migration on export quality upgrading by the origin country. Other than a favourable endowment shock by raising the native country’s labour supply, reverse migration cause loss of remittances from unskilled emigrants and capital investments made by skilled emigrants. Resulting loss of national income and correspondingly domestic demand affect local factor prices and consequently the competitiveness of exports, when the economy produces non-traded goods. In a competitive general equilibrium model of a small open economy, we establish that reverse migration of unskilled workers will cause upgrading of quality of the skill-based export good only if higher qualities require more capital relative to skilled labour. Reverse migration of skilled workers has just the opposite effect. Lower contribution to capital investment thereby lower capital stock and lower repatriation of returns to such investment further magnify such effects. Finally, the results are robust to a more generalised demand structure.