Nov 22, 2011

The magic of diasporas

This week's Economist has a special report on migration in business which includes a delicious cover as well as a bunch of fascinating stories. The report focuses mostly on how Chinese and Indian diasporas create trade and new business ideas by facilitating the flow of information across countries and by fostering mutual trust.

The report is based on a wide body of theoretical and empirical work, mostly initiated by James Rauch, though it doesn't cite much of it. In a series of papers he argued that international trade was hampered by search costs as well as contract-enforcement costs. This is why migrant networks, and especially ethnic-Chinese ones, play such an important role in building trade relationships. To show that networks foster mutual trust, Dunlevy showed that immigrants in the US were most useful to promote exports to corrupt countries. I showed this was also the case for Swiss exports. This is also true when using international data from the World Bank. The two graphs here show that the bilateral stock of migrants between two countries increases their trade the higher the corruption whether it's in the importer or exporter country.

Their role as information providers, though quite straightforward, has been harder to identify. Rauch had argued that since networks facilitate trade more in differentiated products, such as cameras, than for products sold on organised markets, such as coffee, they provide market information. The problem with this strategy is that differentiated products are not only information-intensive but also trust-intensive, so we cannot be sure the information channel is at play, as I argue in my paper. A promising avenue is to try to estimate information frictions between countries, and show that networks are most useful when these are high. Information frictions can be captured by a lack of news coverage, a lack of internet connectivity, or a lack of phone traffic (see this new paper by Treb Allen) etc...

Last but not least, The Economist also point out that "the ability to use informal networks built on trust and a sense of belonging is not restricted to honest businesses such as soap making. Those with dirty hands can build criminal networks on a very similar basis." This is exactly what we tried to show empirically in a paper with Lorenzo Rotunno. We showed that import-tariff evasion, a form of illegal trade, was made easier by Chinese networks who know which border official is corrupt and know how to disguise products. The Economist also has put together some new data on Chinese communities abroad, maybe a better estimate than the stock of ethnic-Chinese migrants we use in our paper.

The report also cites Borderless Economics, a new book by Robert Guest, The Economist's business editor, on which this report seems to be based. I'll add that to my Amazon wishlist. But I need to get a kindle before buying it. Too many trade frictions otherwise.

No comments: