metadata: authors: 0: author: Schiff,Maurice
count: World
docna: 0: docna: Small state regional cooperation,
            south-south and south-north migration, and international trade
docty: Policy Research Working Paper
subtopic: Human Migrations & Resettlements,Private Sector Economics,Urban Solid Waste Management,Private Sector Development Law,International Trade and Trade Rules,Trade and Services,Marketing
teratopic: Conflict and Development,Macroeconomics and Economic Growth,International Economics and Trade,Health, Nutrition and Population
abstracts: cdata!: This paper provides a different basis
            than previous analyses for regional bloc formation and
            regional migration. Due to low bargaining power and fixed
            costs, small states face a severe disadvantage in
            negotiations with the rest of the world and might benefit by
            forming a regional bloc. The study a) presents a general
            equilibrium model where bargaining power, international and
            regional negotiation costs, number of issues negotiated, and
            accession rule to the bloc determine its size and welfare
            impact; and b) examines the impact of international
            migration as well as the migration-trade relationship. The
            main findings are: i) the likelihood of regional bloc
            formation, its size and welfare impact, increases with
            international negotiation costs and the number of issues
            negotiated, and decreases with regional negotiation costs;
            ii) bloc size is optimal (below the optimum) if an accession
            fee is (is not) charged; iii) South-South migration raises
            bloc size and welfare; iv) South-South migration and trade
            are complements under market access negotiations and are
            substitutes under negotiations for unilateral transfers as
            well as under migrant remittances; and v) South-North
            migration and bloc formation, and South-North and
            South-South migration, are substitutes for the states that
            benefit from membership in the bloc.
repnme: repnme: Small state regional cooperation,
            south-south and south-north migration, and international trade
display_title: Small state regional cooperation,
            south-south and south-north migration, and international trade
listing_relative_url: /research/2010/05/12214236/small-state-regional-cooperation-south-south-south-north-migration-international-trade
topicv3: Private Sector Development m1326060 1921,Trade m1326924 698,Trade in Services m1326928 780,Human Capital Flight m1504170 2845,Regional Integration m1504278 2576
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Conflict and Development,Macroeconomics and Economic Growth,International Economics and Trade,Health, Nutrition and Population
no_of_pages: 20
author_keys: 0: author_key: 92053
model_extractions: WPS5297 Policy Research Working Paper 5297 Small State Regional Cooperation, South-South and South-North Migration, and International Trade _Maurice Schiff_ The World Bank Latin America and Caribbean Region Office of the Chief Economist May 2010
Policy Research Working Paper 5297

# **Abstract**

This paper provides a different basis than previous analyses for regional bloc formation and regional migration. Due to low bargaining power and fixed costs, small states face a severe disadvantage in negotiations with the rest of the world and might benefit by forming a regional bloc. The study a) presents a general equilibrium model where bargaining power, international and regional negotiation costs, number of issues negotiated, and accession rule to the bloc determine its size and welfare impact; and b) examines the impact of international migration as well as the migration-trade relationship. The main findings are: i) the likelihood of regional bloc formation, its size and welfare impact, increases with international negotiation costs and the number of issues negotiated, and decreases with regional negotiation costs; ii) bloc size is optimal (below the optimum) if an accession fee is (is not) charged; iii) South-South migration raises bloc size and welfare; iv) South-South migration and trade are complements under market access negotiations and are substitutes under negotiations for unilateral transfers as well as under migrant remittances; and v) South-North migration and bloc formation, and South-North and South-South migration, are substitutes for the states that benefit from membership in the bloc.

This paper—a product of the Office of the Chief Economist, in the Latin America and Caribbean Region—is part of a larger effort in the department to understand regional cooperation among small states and their impact on members of the regional bloc and the region as a whole. Policy Research Working Papers are also posted on the Web at http://econ. worldbank.org. The author may be contacted at mschiff@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# **Small State Regional Cooperation, South-South and South-North Migration, and International Trade**<sup>*****</sup>

# **Maurice Schiff**<sup>**a**</sup>

*This paper represents the author’s views and not necessarily those of the World Bank, its Board of Executive Directors or the governments they represent.

- a: World Bank, University of Chile and IZA-Bonn
# **1. Introduction**

Developing small and micro states – defined by the UN as, respectively, countries with less than 1.5 and less than one million inhabitants – face severe disadvantages in dealing with the rest of the world because of low bargaining power and limited financial and human resources available for the various international negotiations they are engaged in. By forming a regional cooperation agreement and negotiating as a bloc, small and microstates would benefit from greater bargaining power and lower international negotiation costs. As the world has become more integrated, the number of issues to be dealt with in the international arena has grown and so has the importance of regional cooperation between these states.<sup>1</sup> Regional blocs often arise within a geographic region because member countries typically exhibit greater similarity of interests than more distant countries. The reason is that they tend to produce and export similar products, and negotiate about similar issues with the same regional and/or global powers and institutions. A number of regional blocs with small and micro member states located in relative proximity to each other have arisen over time. These include: i) the fifteen-member Caribbean Community or CARICOM (twelve microstates, one small state and two larger countries, Haiti and Jamaica); ii) the twelve-member Pacific Island Countries Trade Agreement or PICTA (eleven microstates and a larger country, Papua New Guinea); and iii) the six-member Gulf Cooperation Council or GCC (two microstates and four larger ones).

Though countries such as Jamaica and Haiti in CARICOM, and Papua New Guinea in PICTA, are not small in terms of the UN definition, they are small in comparison to developed countries and regions such as the US, EU and Japan in terms of population and, even more so, in terms of their GDP. Hence, the former’s influence in international negotiations with the latter is likely to be very limited.<sup>2</sup> Byron (1994) and IADB (1995) have argued that the fifteen Caribbean members of CARICOM pooled their negotiation resources and formulated common policy stances in negotiations with larger countries, trade blocs and international organizations.<sup>3</sup> Specifically,

> 1 Small states should also benefit from membership in a regional bloc because of enhanced visibility and more international agreements due to lower foreign entities’ costs of negotiating with a regional bloc than with each small member state separately. 2 This does not necessarily hold for the GCC whose share of the world oil market is large, though it has declined over time. 3 The members of CARICOM notified the GATT/WTO on formation of a regional trade agreement on goods in 1974 and on services in 2003.

2
CARICOM has been involved in the ACP-EU, WTO, the Commonwealth, UNCTAD and UNCLOS (UN Conference on the Laws of the Sea) negotiations and in negotiations with nonCARICOM Caribbean countries, including the Organization of Eastern Caribbean States (OECS), one of CARICOM’s five associated institutions. It has also participated in bilateral and regional (Western Hemisphere) commissions with Canada, Mexico, the US, the FTAA, the OAS, the G3 (Colombia, Mexico, Venezuela), SELA and Japan. It has negotiated preferential agreements with Colombia and Venezuela, the EPA with the EU and free trade agreements with Costa Rica, Cuba and the Dominican Republic, with other ones being considered. Moreover, by trading each other’s support, the CARICOM nations have succeeded in getting their nationals elected to key international positions such as Commonwealth Secretary-General and ACP Secretary-General.<sup>4</sup> This paper presents a model in which bloc formation by a region’s small and micro-states (henceforth referred to as “small states”) is based on negotiation costs and bargaining power rather than on the traditional trade-related arguments for regional integration. While the latter’s welfare impact is ambiguous,<sup>5</sup> the former’s impact is unambiguously positive. The questions examined are: i) what are the welfare gains small states can obtain from regional cooperation on international negotiations?, ii) how can South-South migration increase the welfare gains from regional bloc formation?, and iii) what does it imply for the relationship between South-South migration and trade, and between South-South and South-North migration?

Though members of a regional bloc may benefit from sharing international negotiation costs, reaching a common position on every issue to be negotiated with foreign entities results in additional costs. The process leading to a common position could be cumbersome and costly, especially if the group size is large and initial positions differ significantly. On the other hand, greater similarity among member states would reduce the cost of reaching a joint policy stance.

> 4 As in many regional agreements, accession to CARICOM was sequential. The original treaty was signed in 1973 by Barbados, Guyana, Jamaica, and Trinidad and Tobago. By mid-1974, seven more countries (Belize, Dominica, Grenada, St. Lucia, St. Vincent, the Grenadines, and Montserrat) had joined, followed by the Bahamas in 1983 and Suriname in 1995, and Antigua and Barbuda, Haiti, and St Kitts and Nevis later on. The British Virgin Island and the Turks and Caicos Island were granted Associate Membership in 1991.

> 5 For instance, a regional trade bloc among small trading partners is likely to result in a welfare loss (Panagaryia 1995, Schiff 1997).

3
International migration could make a significant contribution in this context by raising the likelihood that such regional cooperation bloc takes place and by raising the benefit obtained from it. This is likely to be particularly important – and the welfare impact particularly large – in cases where the heterogeneity in the endowments of the bloc’s member states is large.

Though an important international trade literature on South-North migration and on its impact in host and home countries exists, this is not the case for South-South migration. The classic trade and factor movement studies are Mundell (1957) and Markusen (1983). Mundell showed in a Heckscher-Ohlin model where wage differentials are caused by trade barriers that South-North migration and trade are substitutes. Markusen, on the other hand, showed in a model where wage differentials are caused by differences in technology that South-North migration and trade are complements.<sup>6</sup> A number of other studies have examined this relationship, including de Melo et al. (2001), de Melo (2007) and de Melo and Ivlevs (2008) who introduced political economy considerations in the analysis.

South-South migration may take place despite higher wages in the North because of constraints on financing South-North migration. As Ozden et al. (2009) have found, forty-seven percent of all migration from the South is to the South and over eighty percent of it is to a neighboring country. López and Schiff (1998) extended the Heckscher-Ohlin model by incorporating the migration cost and financing constraint features, and found that trade and migration are substitutes for skilled labor and complements for unskilled labor.

A number of studies have revealed other important determinants of international (and internal) migration, including migrant networks (e.g., Beine et al. 2009) and individual, household, and community characteristics (e.g., Mora and Taylor, 2006, whose analysis of Mexico’s internal, international and inter-sectoral migration also accounts for the impact of networks). Migrant networks are also important for the trade-migration relationship (e.g., Rauch 1991 and Rauch and Trinidade 1992, who find that they are complements) and for the FDI-trade relationship (Javorcik et al., forthcoming, and Kugler and Rapoport 2007, who find that migrant networks have a positive impact on FDI). This paper provides a different motive for migration,

> 6 He also examined this issue in the case of factor market distortions, departure from constant returns to scale and perfect competition, and obtained the same result. Schiff (2006) showed that substitution can also obtain in his models.

4
namely its impact on endowment differences between a region’s small states and on the benefits from regional bloc formation.

The remainder of the paper is organized as follows. Section 2 presents a general equilibrium model where the formation of a regional cooperation bloc among small states and its welfare implications re examined under various accession rules. Section 3 incorporates SouthSouth migration into the model and Section 4 examines the relationship between migration and trade and shows that it varies with the objective of the negotiations and the nature of the benefits. Section 5 incorporates South-North migration in the analysis and Section 6 concludes.

# **2. Model**

This section presents, in Subsection 2.1, a general equilibrium framework in order to examine the formation of a regional cooperative arrangement or regional bloc between some of the region’s small states. Subsections 2.2 and 2.3 examine the bloc’s equilibrium size and welfare impact under two different rules regarding small states’ accession to the regional bloc. This section abstracts from international migration, which is taken up in Section 3.

## 2.1. Bloc Formation in a General Equilibrium Framework

Assume a Heckscher-Ohlin model for a region with a uniform distribution of small laborabundant developing states<sup>_n_</sup> _i_  2,1[] using capital and labor to produce a labor-intensive exportable ( _X_ ) and a capital-intensive importable ( _Y_ ). Prices, which are normalized to one ( _PX_  _PY_  1 ), are given to each small state and to the region as a whole, and thus so are the normalized factor prices _w = r =_ 1.

The region’s small states form a regional bloc if cooperation between its members raises the benefits obtained from international negotiations. The number of foreign entities with which each state negotiates is denoted by _m_ . Internal solutions are assumed throughout unless stipulated otherwise. Each bloc member’s per-issue payoff or “revenue” _R_ from collective action is 2 2 _R_  _R_ ( _n_ ), _Rn_   _R_ /  _n_  ,0 _Rnn_   _R_ /  _n_  0 . (1) That _R_ ( _n_ ) is an increasing function of bloc size _n_ reflects the fact that a bloc’s bargaining power in international negotiations increases with its size. The latter is particularly important for small 5
states whose individual bargaining power is minimal. The concavity assumption is based on the conjecture that the increase in bargaining power associated with a given expansion in a regional bloc is more important when the group is small than when it is large, though _R_ could be convex as long as the net payoff or benefit _B_ is concave (see equation (5)).

Negotiation costs are of two types, international costs and regional costs. A small state negotiating individually incurs a per-issue international negotiation cost _x_ . The per-issue international negotiation cost incurred by each member of an _n_ -country regional bloc is _I I I I I I C_  _C_ ( _n_ , _x_ ), _Cn_  ,0 _Cnn_  ,0 _C x_  ,0 _Cnx_  0 .<sup>7</sup> (2) Bloc members also incur a per-issue regional cost _C_<sup>_R_</sup>  _n_ ,  , _m_  of reaching a common policy stance, where parameter  -- considered exogenous in this section and endogenous in Section 3 -- is a measure of the dissimilarity in member states’ endowments and hence in their positions on the _m_ issues. This cost is given by _R R R R R R R R R R R C_  _C_ ( _n_ ,  , _m_ ), _C_   ,0 _C_   ;0 _Cn_  ,0 _Cnn_  ;0 _Cm_  ,0 _Cmm_  ;0 _Cnm_  ,0 _Cn_   ,0 _C_  _m_  0<sup>(3)</sup> _R_ The regional cost _C_ increases with  at an increasing rate, implying that a degree of dissimilarity exists beyond which it is more beneficial to negotiate individually than as part of a regional bloc, in which case no such bloc is formed. The same result holds for bloc size _n_ , with _R R C_ increasing at an increasing rate with _n_ . On the other hand, _C_ decreases at a decreasing rate _R_ with the number of issues _m_ being negotiated, i.e., the negative impact of _m_ on _C_ due to scale and scope economies diminishes with _m_ .

The total per-issue negotiation cost is the sum of the international and regional costs, i.e.: _I R C_  _C_  _n_ , _x_  _C_ ( _n_ ,  , _m_ ) . (4) The average per-issue benefit _B_ is the difference between the bloc’s payoff _R_ and the sum of the international and regional negotiation costs, i.e.: _B_ ( _n_ ,  , _x_ , _m_ ) _= R_  _n_  _C I_  _n_ , _x_  _C R_  _n_ ,  , _m_  (5) Since _R_ ( _n_ ),  _C_<sup>_I_</sup>  _n_ , _x_  and  _C_<sup>_R_</sup> ( _n_ ,  , _m_ )<sup>are concave in</sup><sup>_n_, so is</sup> _B_ ( _n_ ,  , _x_ , _m_ ) , i.e., 2 2 _Bnn_   _B_ /  _n_  0 . This is shown in Figure 1 where _B_ is represented by curve AB. The benefit 7 An example is _C_<sup>_I_</sup>  _x_ / _n_ , with _CnI_   _x_ / _n_ 2  ,0 _CnnI_  2 _x_ / _n_ 3  ,0 _C xI_  1/ _n_  0 , and _Cnx_<sup>_I_</sup>   1/ _n_ 2  .0 6
of negotiating individually is _B_ 1  _R_ )1(  _x_ , which is assumed positive (see Figure 1). The likelihood that the maximum value of _B_ is greater than _B_ 1 , and thus that a regional bloc is formed, increases with bloc members’ similarity (i.e., with lower regional negotiation costs), with the level of international negotiation costs and with the number of issues being negotiated.

A bloc’s equilibrium size depends on the accession rule. Two such rules are examined. The first one, presented in Section 2.2, assumes member states do not charge an accession fee. The second one, presented in Section 2.3, assumes they charge an accession fee if it is optimal to do so. The first case serves in part as a benchmark against which the second case is compared.<sup>8</sup> Note that major elements of the general equilibrium model, namely the region’s production, consumption and trade of the two goods, cannot be determined at this stage. The object of the international negotiations must first be specified before these variables can be solved for and the model closed. This is done in Section 4.

# 2.2. No Accession Fee

Denote the maximum value of average benefit _B_ ( _n_ ,  , _x_ , _m_ )<sup>by</sup> _B E_ and the corresponding bloc size (that satisfies _Bn_  _Rn_  _Cn_  0 ) by _nE_ (a maximum since _Bnn_  0 ). The _nE_ members of the bloc are drawn randomly from the small states in the region, with a probability _nE_  1 of being selected. The solution is represented by point B in Figure 1. In the absence of accession fees, new member states obtain the same benefit _B_ as existing members and accession by an additional state generates a positive (negative) externality for _n_ < (>) _nE_ by raising (reducing) the value of _B_ . Thus, as long as _n_ < _nE_ , member states have an incentive to allow new states to join. However, they have no incentive to expand the bloc beyond size _nE_ since _B_ falls for _n_ > _nE_ . Thus, _nE_ is the equilibrium size under this accession rule.

The per-issue value of the regional bloc is _V E_  _nE_  _B E_  _B_ 1  and is represented by area EFLK in Figure 1. The impact of changes in  , _x_ and _m_ on _nE_ is obtained by differentiating the

> 8 Andriamananjara and Schiff (2001) examine bloc formation in a partial rather than general equilibrium framework and do not consider the issues of international migration or international trade.

7
first-order condition _Bn_  _Rn_  _Cn_  0 . Thus, we have: _Bnndn_  _CnxI dx_  _CnR_  _d_   _CnmR dm_  0 _R R_ which, with _Bnn_  ,0 _Cn_   ,0 _Cnm_  0<sup>(equations (1) to (3)), implies:</sup> _dnE_ / _d_   ,0 _dnE_ / _dx_  ,0 _dnE_ / _dm_  0 . (6) Thus, the bloc size _nE_ that maximizes the member states’ average benefit falls with the degree of dissimilarity between them (i.e., it falls with regional negotiation costs) and increases with international negotiation costs and with the number of issues being negotiated.

# 2.3. Accession Fee

Denote the equilibrium bloc size in this case by _n_ *  1, which is the bloc size where the value of * * the bloc for the _nE_ members reaches a maximum _V_ . The _nE_ members allow ( _n_  _nE_ ) * _E_ additional states to accede to the bloc (in exchange for a fee) if _V_  _V_ , i.e., if  _V_ *  _V_ *  _V E_  0 . Non-member small states agree to pay an accession fee if the benefit for them is at least equal to the benefit _B_ 1 of negotiating individually. Given the excess supply of * non-member states willing to join the regional bloc (1  _nE_  _n_  _nE_ ), the _nE_ bloc members provide the acceding states the non-member benefit _B_ 1 .

Consequently, _V_  _V E_   _V_  _V E_  ( _n_  _nE_ )( _B_  _B_ 1) , with _B_ denoting the average * * 1 benefit for a bloc of size _n_ . _V_ reaches a maximum _V_ at _n_  _n_<sup>where</sup>  _V_ /  _n_  _B_  _B_  ( _n_  _nE_ )<sup>_B_</sup> _n_  0<sup>or, defining gross benefit as</sup> _TB_  _nE B E_  ( _n_  _nE_ )( _B_  _B_ 1) , where the marginal gross benefit of accession _MB = B_ + ( _n_  _nE_ ) _Bn_  _B_ 1 . The solution is represented by point C in Figure 1, with _V_ *  _V E_   _V_ * , where  _V_ *  ( _n_ *  _nE_ )( _B_ *  _B_ 1) is represented by area FGJI = area FGL.

* The impact of  , _x_ and _m_ on _n_ can be obtained by differentiating the first-order condition _B_ ( _n_ ,  , _x_ , _m_ )  _B_ 1( _x_ )  ( _n_  _nE_ ) _Bn_ ( _n_ ,  , _x_ , _m_ )  0 . Thus,  2 _Bn_  ( _n_  _nE_ ) _Bnn_  _dn_   _B_   ( _n_  _nE_<sup>)</sup> _Bn_   _d_    _Bx_  ( _n_  _nE_ ) _Bnx_  _B_ 1 _x_  _dx_   _Bm_  ( _n_  _nE_ ) _Bnm_  _dm_  0 , which, together with equations (1) to (3), implies: * * * _dn_ / _d_   ,0 _dn_ / _dx_  ,0 _dn_ / _dm_  0 . (7)

8
* Thus, bloc size _n_ falls with member states’ dissimilarity (i.e., with regional negotiation costs) and increases with international negotiation costs and with the number of issues negotiated.

Note that _Bn_  0<sup>for</sup> _n_  _nE_ and ( _n_  _nE_ )<sup>_B_</sup> _n_ is the negative externality the ( _n_  _nE_ ) _th_ new member imposes on the _nE_ bloc members, _n E_  _n_  _n_ * , in the sense of reducing the average for the existing _n E_ members. Of course, the _n E_ members’ average benefit increases as new * members accede up to the point _n_  _n_ where their average benefit is maximized, i.e., where their marginal gross benefit _MB_ ( _n_ ,  , _x_ , _m_ ) is equal to the accession opportunity cost _B_ 1( _x_ , _m_ ) * for the ( _n_  _nE_ ) new members. Thus, the bloc size _n_<sup>_*_</sup> that maximizes the value of the regional bloc for the _nE_ members also maximizes welfare for the region as a whole since the _marginal_ * * benefit is the same for the _nE_ original members, the ( _n_  _nE_ )<sup>new members, and the</sup> 1(  _n_ ) non-members. The solution is represented by point C (Figure 1) where _MB_ = _B_ 1 .

In the case of a common property resource, a “tragedy of the commons” results when the _average_ rather than the marginal social value of the resource employed is equated in all its uses. This obtains under free entry into the regional bloc, i.e., under open access to the common 1 property resource, in which case the average benefit _B_ ( _n_ ,  , _x_ , _m_ )  _B_ ( _x_ , _m_ )<sup>is identical for all</sup> the region’s small states and the value of the regional bloc is entirely dissipated. This situation is represented by point D in Figure 1, with migration level equal to _nF_ .

The main results obtained in this section are collected in the following proposition.

_<u>Proposition 1: Assume a region’s small states negotiate with m non-regional entities on m</u> issues, with some states doing so as a bloc, and denote the per-issue benefit of negotiating_ 1 _N E_ * _individually by B and the average benefit of negotiating as a bloc by B_  _B_ , _B . Then: i) The likelihood that B N > B_ 1 _and a bloc is formed increases with international negotiation costs and with the number of issues negotiated, and decreases with bloc members’ dissimilarity_  _(and thus with regional negotiation costs);_ _ii) In the absence of an accession fee, equilibrium bloc size nE maximizes members’ average benefit B E but not regional welfare;_

* _iii) Under an accession fee, equilibrium bloc size n_  _nE maximizes both the average benefit of the nE members (at a level B_ * _> B E ) and regional welfare; and iv) dnd_  _<u>N</u>_  ,0 _dndxN_  ,0 _dndmN_  ;0 _nN_  _nE_ , _n_ * .

9
* The analysis so far has assumed that the (1  _n_ ) non-member states engage in international negotiations individually. The alternative assumption, that a new bloc is formed by non-members with the ( _n_ *  _nE_ ) bloc members whose benefit is also _B_ 1 , is examined in the Appendix.

# **3. South-South Migration**

Assume the dissimilarity in small states’ positions on the issues that are negotiated internationally is a function of the dissimilarity in their relative endowment of labor and capital _li_  _Li_ / _K i_ . The question examined here is whether migration between the region’s small states can reduce their regional negotiation cost and contribute to the benefit obtained from engaging in international negotiations as a bloc.<sup>9</sup> The heterogeneity in small states’ positions is represented by the parameter  in the _R R_ regional cost function _C_  _C_  _n_ ,  , _m_  in equation (3). A number of statistics of the distribution of<sup>_l_</sup> _i_<sup>can serve as a measure of its heterogeneity. For simplicity, the measure used here is the</sup> _range_ of _li_ values, _lMAX_  _lMIN_ , across the region’s small states.

Assume, without loss of generality, that _K_ is constant at level _K_ = 1. Then,<sup>_l_</sup> _i_<sup>simplifies</sup> to<sup>_L_</sup> _i_<sup>, with</sup>   _LMAX_  _LMIN_ , where<sup>_L_</sup> _i_  2,1[] is assumed to have a uniform distribution. The total amount of migration in the bloc is _M_ . For simplicity, it is assumed that _M_  1. The benefit from migration increases with the degree of dissimilarity  between the region’s small states, their geographic proximity (i.e., lower migration cost), number of issues _m_ being negotiated, and with a reduction in international migration costs _x_ .

Maximizing benefits with respect to  takes place in two steps. Before migration takes place, small states maximize their benefit from membership in the bloc by ensuring a compact * set of labor force values, e.g., _Li_  1,1[  _n_ ]; 0  _n_  _nE_ , _n_  1. Once migration takes place, the

> 9 This assumes intra-bloc migration holds among the region’s small states. Intra-GCC migration is 59.8% of total migration by GCC countries (and 82.9% without the largest country, Saudi Arabia). The figures are much lower for CARICOM, in part due to its closeness to the US market. CARICOM’s intra-bloc share in its total migration is around 4% (similar to the PICTA figure) and is 9% for the intra-bloc share between CARICOM’s 13 small and microstates or more than double the overall share.

10
optimum way to reduce  is to start with migration from the state with the largest labor force (the “top” state) to the state with the smallest one (the “bottom” state). Since migration reduce the labor force in the top state and raises it in the bottom one, the number of top and bottom states increases with _M_ . Thus, reducing the value of  requires emigration from, and immigration to, an increasing number of states as migration proceeds. Hence, the marginal impact of migration on  declines as migration increases.

Denote the largest (smallest) post-migration labor force in the regional bloc by _LMAX_ (<sup>_L_</sup> _MIN_ ) . Before migration,   _LMAX_  _LMIN_  1(  _n_ )  1  _n_ . Following migration, we have

> _M_ 1 _LMAX_  1  _n_  _dM i_  1  _n_  log _M_ , and _LMIN_  1  log _M_ . Thus:  _M_ 1 _i_

The next step is to determine the optimal value of _M_ . The total benefit member states obtain from bloc formation in this case is: where _C_<sup>_M_</sup>  _cM_ is the total migration cost and _c_ is the cost per individual migrant.

As mentioned above, the intra-regional South-South migration cost _c_ is likely to be relatively small while the increase in average benefit _B_ (associated with the migration-related decrease in  and thus in _C R_ ) is multiplied by _mnE_ ( _M_ ) (with _nE_ ( _M_ )  _nE_ (0) ) so that ~ ~ migration is likely to be beneficial. Denoting the maximum value of _G_ ( _M_ ) by _G_ ( _M_ ) , we have _G_ ~( _M_ ~ )  _mV_ ( _M_ ~ )  _cM_ ~  _G_ *(0)  _mV_ *(0)  _G E_ (0)  _mV E_ (0) , with _M_<sup>~</sup> determined by the equality  _G_  _m_  _V_  _c_  _m_   _V_     _c_   2 _mM_  1   _V_   _c_  0 . Denote the optimum  _M_  _M_     _M_    

> 10 The reason the marginal impact of migration _M_ on  is -2/ _M_ is illustrated with the following example. Assume ten small states _S_ = 1, 2, ..., 10, ordered by increasing size of their labor force _L_ = 1, 2, ..., 10. In the absence of migration ( _M_ = 0),  = 9. With one migrant ( _M1_ = 1) moving from the top to the bottom labor-endowed state, _L_ = 2 in states S = 1, 2, and _L_ = 9 in states S = 9, 10, with  = 7 and _d_  / _dM_ = -2/ _M1_ = -2. Then, for  to fall, the additional migration _M2_ must be equal to 2, in which case _L_ = 3 in states S = 1, 2 and 3, and _L_ = 8 in states S = 8, 9 and 10, with  = 5, i.e., _d_  / _dM_ = -2/ _M2_ = -1, etc.

11
The impact of migration on the value of the bloc and on the region’s welfare in the case of an accession fee is _R_ * Given that _C_   0 , a value of  exists for which _V_ (0)  0 (in the absence of ~* migration) and no regional bloc is formed. In that case, if _G_  0 , the impact of migration on the value of the bloc is  _G_ '  _G_ ~ * ( _M_ ~ * )  _G_ * (0)  _mV_ ~ * ( _M_ ~ * )  _cM_ ~ * . Not surprisingly,  _G_ '   _G_ , i.e., migration has a greater impact in the case where no bloc is formed in the absence of migration.

The findings in this section are summarized in Proposition 2.<sup>12</sup> _<u>Proposition 2: The impact of international migration on bloc and regional welfare is</u>_ ~~~ ~~~ * ~  _G_  _m_  _V_ ( _M_ )  _V_ (0)  _cM . The likelihood that_  _G_  0<sup>_increases with dissimilarity (_</sup><sup>_) of_</sup> _the small states, their proximity (i.e., with lower migration cost c), the number of issues being_

> 11 The derivation  ( _n_ ~*  _nE_ /)   0 is available upon request. This result also holds in the absence of an accession fee (in ~ * ~

> which case _n_  _nE_ ).

> 12 Note that individuals have no incentive to migrate since migration entails a private cost while its benefit accrues to the entire population of the bloc. Thus, bloc formation and migration are decisions that must be taken by member states’ authorities.

12
_negotiated, and a lower international migration cost x. The benefit from migration is greater in the case where a regional bloc is formed in the presence of migration but not in its absence._

# **4. South-South Migration and Trade**

Section 1 described a number of studies of the migration-trade relationship. This section considers two alternative objectives small states pursue in their various international negotiations and examines the implications of each for the relationship between migration and trade. Each objective makes it possible to determine production, consumption and trade for the two goods and close the model. The first of the bloc members’ objectives is to obtain a higher level of unilateral transfers from the _m_ entities with which they are negotiating. The second one is to obtain greater access to their trading partners’ market. The implications for the relationship between migration and trade are examined, respectively, in Sections 4.1 and 4.2 below.

## 4.1. Unilateral Transfers

Assume activities associated with regional and international negotiations, including migration, are “produced” with goods _X_ and _Y_ . Intra-bloc migration raises bloc size and unilateral transfers (equation (1)), and raises bloc members’ total benefit by  _G_ . Homothetic Heckscher-Ohlin preferences and constant prices for the region imply constant income shares _s X_ spent on _X_ and _sY_  1  _s X_ spent on _Y_ ( 0  _s X_ ,<sup>_s_</sup> _Y_  1 ). Moreover, the fact that factor prices are given implies that production of _X_ and _Y_ is given as well and is independent of the size of the transfers obtained.

Assume, plausibly, that transfers are made in units of good ( _Y_ ) exported by the donors. Then, migration and trade are substitutes, even if – as assumed here – _all_ negotiation-related expenditures are in units of good _Y_ . In that case, the (net) benefit  _G_ is in units of good _Y_ as well, and since a share _s X_ of  _G_ is spent on _X_ , exports of _X_ fall by _s X_  _G_ . Similarly, since a share<sup>_s_</sup> _Y_<sup>of</sup> <sup>_G_</sup> is spent on _Y_ , imports of _Y_ fall by 1(  _s y_ )  _G_  _s X_  _G_ . Thus, migration and trade are substitutes.<sup>13</sup>

> 13 The opposite holds for payment in _X-_ units. Partial equilibrium analysis typically assumes money transfers are made in some

> convertible currency. As benefit  _G_ is spent on both goods, imports rise and exports fall, i.e., migration and exports are substitutes (and migration and imports are complements. This differs from our result because money cannot be consumed). The Heckscher-Ohlin model is a _real_ general equilibrium model and does not include fiat money as no one would hold money in a 13
The same holds if migrants to the North (see Section 5) send remittances home. The assumption of remittances provided in donors’ exportable units _Y_ is not only plausible but can also be observed in the case of migrants who send, or take with them on their visits home, goods that are unavailable in their country of origin or only at much higher cost.

## 4.2. Market Access

In this case, the larger size of the regional bloc implies that its members obtain greater access for their exports. Thus, migration and trade are complements in this case.<sup>14</sup> The results obtained in this section are summarized in Proposition 3.

_<u>Proposition 3: The relationship between international migration and international trade depends</u> on the object of the negotiations. Under negotiations for increased unilateral transfers that are, as seems plausible, provided in units of the donor’s exportable good, migration and trade are substitutes. Under negotiations for increased market access, migration and trade are complements. Substitution also holds for remittances sent by migrants to the North._

# **5. South-South and South-North Migration**

Assume small member states first decide on bloc formation and South-South migration, after which individuals decide on South-North migration. Equilibrium South-North migration is given by equality between the heterogeneous migration cost and the North-South income gap. Under unilateral transfers, the income gap is equal to the difference between the wage rate in the North and the sum of the wage rate in the South and the per-capita benefit of bloc formation. Thus, South-North migration declines with the per-capita benefit from bloc formation.

The implications of these are provided below in Proposition 4.

_<u>Proposition 4: i.e., South-North migration and bloc formation are substitutes, i.e., South-North</u> migration is smaller for the nE bloc members than for the other small states (whether non-_ * _member states or, in the case of an accession fee, the additional ( n - nE ) member states); ii) South-North migration and South-South migration are substitutes; and iii) South-North_

> static (or finite-period) model because it would imply a loss of current (or final-period) consumption without any future period where the money could be used to buy consumer goods or to bequeath it.

> 14 If the benefit is infra-marginal, as with a small increase in a binding tariff quota, the marginal export price and output is unchanged. If the quota is not binding, increased preferences raise the marginal export price and output.

14
_migration and accession fees are substitutes, whether under South-South migration or in its absence._

# **6. Conclusion**

This paper examined, first, the issue of regional bloc formation among small states for the purpose of obtaining greater benefits from international negotiation, with bloc formation based on regional and international negotiation costs and bargaining power rather than on the traditional trade-related arguments for regional integration. The analysis was conducted within the framework of an augmented Heckscher-Ohlin model that includes international negotiations. Small states benefit from the creation of a regional bloc by saving on international negotiation costs and by obtaining a higher return from international negotiations, and they incur a regional negotiation cost of achieving a unified position. The findings were as follows.

First, bloc size and its welfare impact depend on the accession condition. A selective membership without accession fee leads to an inefficiently small bloc from the viewpoint of its members and of the region as a whole because the marginal accession benefit is greater than nonmember states’ benefit. In the case of an accession fee, bloc size is optimal for the original bloc members and for the region as a whole.

Second, the likelihood a regional bloc is formed and its size under both accession rules increases with the level of international negotiation costs, the number of issues being negotiated, and the degree of similarity between the members of the bloc (i.e., with a decrease in regional negotiation costs).

Third, with low migration costs within a region (e.g., CARICOM), South-South migration raises the average benefit obtained by members of the bloc and the region’s welfare. The likelihood this obtains increases with the degree of dissimilarity between the region’s small states, their geographic proximity, the number of issues being negotiated, and with a reduction in international migration costs.

Fourth, migration and trade are substitutes in the case when negotiations are for increased unilateral transfers and migrants to the North send remittances back home, under the plausible assumption that they are provided in units of the donors’ export good. They are complements under negotiations for increased market access.

Fifth, South-South and South-North migration are substitutes.

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