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The Potential of Immigration for Developed Countries: What about Developing Economies?

Mass media has expressed the benefits of immigration for recipient countries.  However, are the gains for developed and developing countries equivalent? According to the UN Refugee Agency, UNHCR, around 85 per cent of international displaced people live in low or middle-income countries.

A receiving country experiences both advantages and disadvantages as a result of immigration. Certainly, large influxes of people exert pressure on the socioeconomic structure, infrastructure and services within the host country. It becomes a challenge for the economy to assimilate immigrants into society and to provide the necessary support. The benefits, many times, are remarkable only in the long term, while its costs are visible in the short term. In the future period, the entering population boosts a country’s economic growth, at the expense of wages reductions in the short-term, for example.

In economic terms, immigration increases the labour force of the receiving country. This rise has a great impact on an economy, depending on whether the incoming population has a similar or different level of skills relative to the local population. Then, immigrants can are substitutes or complement for the locals.

While there has been an extensive empirical research on the effects of immigration, this research has mainly focused on corollaries for developed countries. There are several features that show a possible situation in which the positive effects in advanced economies surpass those of less prosperous economies.

An advanced country is characterized by having a developed economy, an advanced technological infrastructure and a highly qualified human capital in relation to other less industrialized nations. These economies show a scarce active labour force in the primary sector of between 5% and 10%, most of it, dedicated to agriculture. On the other hand, the labour force is quite concentrated in the secondary and tertiary sectors. In general, these countries exhibit solid financial and public institutions. In other words, as a result of economic and educational advancements, developed economies struggle to fill-out low-skilled job vacancies. 

In high-income economies, immigration estimated effects on wages and unemployment tend to be relatively small on average. Immigrants typically act as complements in these countries because a large part of the incoming population have low levels of education. The sectoral allocation of this workforce is more likely to labour in occupations or sectors in which native workers are less likely to work. Immigrants are over represented in the agricultural sector, private domestic services, construction, hotel and restaurant sectors. Thus, in the labour market, this population tends to be located where there is a shortage of labour, filling the demand for these vacancies. 

In different circumstances, the economy of developing countries is in a state of transition. Some characteristics of these countries are: dependence on the primary sector, low per capita income, high population growth, low-skilled human capital, high unemployment rate, dependence on raw material, etc. Approximately 50% of the active labour force is located in the primary sector due to the scarcity of jobs in the remaining sectors, resulting in high unemployment. In Latin America for example, about half of the labour force works in a state of underemployment. Furthermore, these countries present weak institutions and high indexes of corruption perception.

Developing countries, as receipt countries, face limited capacity to fully benefit from immigration. The informal economy is very widespread and there is no access to markets or resources for the development of public goods. Everything becomes more complicated due to the lack of in-depth analysis and discussions of active policies on immigration. In developing countries, the scope of the positive impacts for development is high, but also the scope of negative ones are much more severe in the short-term.

One of the most discussed areas is the labour market due to the sectorisation of these economies. As mentioned above, in developed economies, the incoming workforce acts as a substitute for  the shortage of native workers. However, developing countries already face a saturated labour market which worsens with the arrival of a new labour force, and as a result, there is an imbalance against less qualified workers, increasing competitiveness.

Using a simple model of supply and demand, the influx of substitute workers constitute an increase in the supply of labour, which causes the wages of workers with similar skills to decrease. A possible explanation for this decrease is the fact that the incoming population is willing to work for a lower salary compared to the natives. Economic studies have found that an influx of low-skilled immigrants depresses the wages of low-skilled native workers in developing countries.

To provide an example, Venezuela currently suffers a migratory crisis, which arose due to political and socioeconomic issues that eventually yielded insecurity and violence.This crisis has affected several countries in Latin America, for instance Ecuador.

The country located at the equator apart from the migratory influx has led an adjusted economic situation due to its large fiscal deficit and external debt. The government is taking austere measures to recover from the deficit and be able to meet its debts obligations. This year Ecuador presents 32.50% of external debt relative to its GDP. A percentage that could continue increasing as a result of its large dependence on foreign financing. While uncertainty is present on a day to day basis, the Country Risk index is increasing considerably.

It is estimated that more than half a million Venezuelan immigrants have entered the country since the beginning of 2018. This number is almost 10 times more than the number of immigrants trying to enter Europe through the Mediterranean. Last August, the authorities declared the capital in a state of emergency after around 4000 immigrants began to enter each day to the country.

The Ecuadorian authorities expressed their concern about the country’s and immigrants’ panorama. They stated that in order to provide assistance to the arrived people (health, education, housing and employment) in the medium and long-term, an estimated $ 550 million USD would be necessary.

It is important to bear in mind that the situation is complex and cannot be solved in short, it takes time. In order to solve the status quo, the scenario requires correct economic policies. Moreover, there is great potential for economic growth with the arrival of immigrants. Yet, this can be achieved with proper management of public and economic policies. In the case of Ecuador, its status as a middle-income country may limit the possibility of exploiting the economic potential from arriving populations.


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