Financial Constraints and International Migration: The Role of Social Policy and Financial Development

Financial constraints may prevent people from migrating even in the presence of positive net benefit from migration. It is so because they -typically the poorest members of the society- can neither use their own savings to internally finance migration nor to borrow funds from external sources because they lack the collateral to borrow against. Improvement in economic development at home should provide less incentive to migrate. However, it also relaxes the financial constraints of those in the lower income distribution, thus increasing their capability to migrate. Therefore, in theory the effect of financial constraints relaxation is ambiguous, at best.

This paper investigates the impact of financial constraints on international migration. Typically, it aims to analyse the role of external sources of financial constraints relaxation (social policy and financial development). I conduct an empirical analysis utilizing the bilateral migration stock data from 1960-2000. I use various indicators of social spending and financial development to see how these channels of financial constraints relaxation affect international migration. I also address any bias resulting from multilateral resistance to migration. We expect our findings to shed light on the theoretically ambiguous relationship between financial constraints and migration.