Trade, Migration and Welfare: The Impact of Social Capital

Despite the predictions of standard trade theory, countries in the North are not indifferent between free migration and free trade. Explanations include the redistributive policies of the welfare state (Wellisch and Walz, 1998, this Review). This paper offers an explanation using the concept of social capital and extends the analysis to the South. The movement of people differs from the movement of goods and services because people create attachments with those with whom they share social capital, including norms, language, customs, values and culture. South-North migration affects social capital in both places. Four types of externalities associated with migration are identified. The paper examines the impact of trade and migration policies under alternative assumptions about internalization of these externalities, and concludes that the South always gains by freeing trade and the North by controlling immigration. JEL classification numbers: F11, F13, F22, J61.