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Monetary Integration and Dollarization

Monetary Integration and Dollarization

No Panacea

Edited by Matías Vernengo

This book deals with the economic consequences of monetary integration, which has long been dominated by the Optimal Currency Area (OCA) paradigm. In this model, money is perceived as having developed from a private sector cost minimization process to facilitate transactions. Not surprisingly, the book argues, the main advantage of monetary integration in the OCA context is the reduction of transaction costs, yet the validity of OCA to analyze processes of monetary integration seems to be limited at best.

Chapter 5: Dollarization and Illegal Immigration: Implications for NAFTA

Susan Pozo

Subjects: economics and finance, financial economics and regulation, international economics


Susan Pozo INTRODUCTION When economists were asked to predict the impact of NAFTA on illegal immigration from Mexico to the USA, there were two opposing responses. Some argued that illegal immigration would increase, while others argued instead that illegal immigration would decrease.1 The former argued that restructuring the Mexican economy in response to trade liberalization would raise the Mexican unemployment rate and increase US/Mexican wage differentials. The incentive to migrate would thereby increase. In addition closer economic ties forged by the treaty would increase trade between Mexico and the USA. The increased flow of goods across the border would make for more camouflage opportunities for undocumented immigrants. The probability of detection would be lowered increasing the success of illegal border crossings and hence raising the total level of illegal immigration. Others argued, to the contrary, that illegal immigration would be decreased. A standard trade model (say the Heckscher–Ohlin model) would argue that given the relative abundance of capital in the USA and the relative abundance of labor in Mexico, specialization along the lines of comparative advantage would cause Mexican wages to rise, while US wages would fall. The incentive for Mexican workers to migrate to the USA would thereby fall, reducing the level of illegal immigration. In effect, trade would substitute for migration. Still others argued that NAFTA was unlikely to have any effect on illegal immigration. Markusen and Zahniser (1997), for example, present several trade models that suggest that NAFTA does not effect the relative wages of US...

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