REGIONAL COOPERATION AND ECONOMIC INTEGRATION

PART III:
and migration flows between two countries. If the level of development of the sending
and host countries is measured by GDP per capita, then the relationship between GDP
per capita differentials and the share of migration is not collinear. Accordingly, when a
given level of development of the sending country is achieved, the migration flows into the
host country are reduced. Similarly, re-migration back to the sending country begins when
income differentials between the sending and the host counties reach a maximum.
The present analysis is based on the migration theory presented by Ortega and Peri
(2009), which is fully consistent with the generalized gravity model. In this model the
log of bilateral migrations (either stocks or flows) is a function of sending and receiving
country effects, that is, expected income differentials and migration costs. Ortega and
Peri tested the prediction of the model with aggregate panel data on stock and flows of
migrants. It is important to note that their empirical specification allowed focusing on the
factors that determine immigration into the destination countries. They also showed that
mis-measurement can be a problem due to classification. Namely, some countries define
immigrants on the basis of place of birth, while others define an immigrant population on
the basis of nationality. In this way they suggested the measure of so-called net instead of
gross immigration for each of the destination countries.
The basic empirical specification estimated by Ortega and Peri is as follows:
(2)
where Migration represents either inflows or stock of the immigrants in the host country,
the term D ot
is the set of country-of-origin by time dummies, D d
are destination country
dummies, W dt-1
is the difference in GDP per capita between sending and destination
countries, Y odt-1
are time-varying variables for the destination country (such as population,
Gini coefficient, share of young workers), X od
are time invariant proxy variables (as for
instance distance, common language, contiguity), and ε
odt
is the zero-mean measurement
error.
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1.3. The model and methodology
While Cheng and Wall (2005) showed that the country pair fixed effects model is preferred
to all other specifications that estimate the gravity model, this paper tested a similar
specification of the gravity model as presented in equation (2) by using a fixed effects
estimator. We also weight the stock of immigrants as a dependent variable by the population
of the destination country to correct for heteroskedasticity of measurement errors. Since
the decision to migrate is probably based on historical experience, we lag the explanatory
variables for one period, allowing them to affect the stock of immigrants in the following
year. When immigrants are coming from countries characterized by very different levels
of socio-economic development, the model is firstly estimated using the entire sample of
countries and then estimated on sub-samples based on country of origin.
In this way we analyse the stock of immigrants originating in the EU-15 countries,
Central and Eastern European countries and the developing world. Following Ortega and