Migration and Economic Policy:

A Comparison of Two South Indian States

Aniruddha (Rudy) Gopalakrishnan1

Duke UniversityDurham North Carolina

April 2002

1 Anirudh Gopalakrishnan graduated with distinction from Duke University in May 2002 with a B.A. in Economics,a B.A. in Comparative Area Studies, and a certificate in Markets and Management. He resides in Bombay, India,where he will return to work as a Business Analyst at McKinsey & Company.

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Acknowledgment

Completing a comprehensive project like a thesis is an exercise that I could not have

done without the assistance of others. I am deeply grateful to Dr. Lori Leachman, who served as

my thesis advisor. Her considerate instruction, stimulating insights, and thoughtful suggestions,

undoubtedly, have made this paper significantly better. Dr. Leachman lavished much more

attention on my successive drafts than they perhaps deserved, and any wisdom this essay might

contain is certainly due to her ministration as a teacher and scholar.

Next, I would like to thank Dr. Craufurd D. Goodwin, my academic advisor, Paul

Dudenhefer, managing editor of the History of Political Economy, and Professor Connell

Fullenkamp for their invaluable suggestions on how to improve the paper.

I am grateful to the Ford Foundation and to the Comparative Area Studies Department for

funding this project.

I would also like to thank Mr. George Mathew, Managing Editor at Malayalam

Manorama, Mr. Jiban Mukhopadhyay, Ms. Shobha Ramesh and Mr. Sudeepta Chaudhury at the Tata

Department of Economics and Statistics for allowing me access to their research libraries.

I would also like to extend my gratitude to my economics teacher in high school, Mr.

M.J. Subban, who encouraged me to study economics. This work has definitely been inspired by

his patience for teaching me the subject.

In my first economics class at Duke, my macroeconomics professor, Dr. Craufurd

Goodwin, pointed out that “if you want someone to say only good things about your paper, show

it to your mother!” Without a doubt, my mother remains the biggest fan of this work. For this, I

am eternally grateful. I would also like to thank my more critical referee, my father, for his

inputs. Any mistakes that may appear in this paper are mine alone.

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People have always felt somewhat ambivalent about ambition. We see it as dangerous yet

essential. We disapprove of those who abuse it, but we dismiss those who lack it. We see too

little of it as a failing, too much of it as a sin. We sense that ambition is combustible, a form of

energy that can bring us immortal glory but also destroy us forever, depending on how we use it.

Simply put, ambition is what makes us go. Ambition is the spirit of success, of striving for

something worth achieving.

—James Champy and Nitin Nohria, The Arc of Ambition

For Those Who Leave the Territorial Frontiers of India to Fulfill Their Dreams, Aspirations andAmbitions . . .

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Introduction

The recorded flow of Indians across their national boundaries began in 1790 when the

first immigrant was taken by a naval captain from Madras to Massachusetts. Since then, the

Indian diaspora has expanded significantly to various parts of the world. Researchers and policy

makers in India have dedicated much thought to issues pertaining to migration. Their work

strengthens our understanding of the issues and challenges that arise as a result of these flows of

people across borders. However, to date, the focus of these studies has been mainly on

quantifying the flow of labor to different parts of the world, and estimating migrants’

contributions to the Indian economy. Looking at migration through such a narrow lens has led

the Indian government to lose sight of other important issues. One such issue has been the

evolving relationships between migration, trade policies, and economic development policies.

This paper will explore these relationships by studying two different kinds of migration

with reference to the Indian experience. The first part of the paper focuses on the migration of

low-skilled workers from the south Indian state of Kerala to the Middle East. This migration

began in the 1970s. The second part discusses the socio-economic impact of the migration of

high-skilled workers from Karnataka, another south Indian state, to the Silicon Valley.

Coincidentally, these flows also began around the 1970s. In undertaking such a comparative

analysis, this study seeks to highlight the similarities and differences associated with these two

forms of migration and with the policies and environments of the states from which they

originate.

In order to gain a better understanding of the implications of migration and the role that

economic policy plays in shaping migratory patterns, we begin with a literature review of

migration studies in Section 2. In Section 3 the similarities and differences between Kerala and

Karnataka are outlined and discussed. This overview is followed by individual case studies of

Kerala and Karnataka, which appear in Section 4. We introduce the policy measures

implemented by each government and draw inferences concerning the impact that these

measures have had on the migration patterns we see today. We also discuss the pull factors

(prompting workers to migrate to their host country) and the push factors (prompting workers to

migrate from their country of origin) in each state as well as in the destination country, and

provide a brief commentary on the evolving nature of these factors. In addition, the stock and

flow of migrants between 1975 and 1990 are quantified. The impact of these labor outflows on

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output and employment of the home state economy is assessed. Section 5 focuses on “return

migration.” Studying the effects of return migration is necessary to gain a complete

understanding of the outflows and inflows of labor across international boundaries. The

penultimate section discusses the financial flows associated with migration. The seventh section

concludes with policy recommendations. It also addresses the core challenges that may impede

their implementation.

Literature Review

“Which is the most effective use of existing labor, to employ it abroad or to leave it unemployed at home?”

—Charles Kindleberger

Historically, migration began as a result of differences in the distribution of labor in

various parts of the world. The steady demand for labor in some parts of the world, for example,

has grown steadily since the Second World War to a point where “international labor migration

has become one of the most unsettled sociopolitical issues of our time” [Papademetriou and

Martin, (1991), p. ix]. Technological change, reduced transportation costs, and the integration of

global economies have all contributed to an increase in migration. Today, “about one hundred

and forty million persons – or roughly two percent of the world’s population – reside in a

country they were not born in” [Borjas, (1998), p.1].

At a very simplistic level, three factors affect the migration decision. The first two factors

have to do with the mindset of the individual migrant. Specifically, what motivates a worker to

migrate, and what influences his decision to return, if he does? The third and equally important

factor is the immigration policy and the socio-economic conditions in the home and host state.

The decision to migrate is affected by many factors. Oded Stark, director of the Migration

and Development Program at Harvard University, points out that “attitudes toward risk, relative

deprivation and intra-household interactions” are just a few of the influences that prompt

workers to migrate [Stark, (1991), p.33]. A worker’s attitude towards risk is central to the

migration process. More than just a transfer of residence, migration entails acclimating to a

completely different culture and generally involves a prolonged stay away from home. The

pecuniary costs of migration are significant too. A migration study undertaken by the Center for

Development Studies (CDS) in India noted that “each worker had to spend, Rupees 44,000 to

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migrate to the Middle East . . . they raised this money from family savings, borrowed from

relatives, took institutional loans, and even sold ornaments and jewelry” [Business Line,

September 23, 1999].

Migration is also motivated by relative deprivation, an assessment of which occurs when

“people engage in interpersonal income comparisons within their reference group” [Stark,

(1991), p.24]. The greater the relative deprivation (dissatisfaction), the higher the probability that

the worker will migrate. Grubel and Scott (1977), for example, argue that “a man making a real

income of two hundred and fifty dollars per year as a tribal chief in Africa may not be willing to

move to the United States for ten times this income, because he would be considered a pauper

with an income of only two thousand five hundred a year” [Grubel and Scott, (1977), p.15].

A third impetus for migration is intra-household interactions. Stark reports on the

importance of “network and kinship capital” in the migratory process [Stark, (1991), p.26]. He

believes that potential migrants and current migrants are involved in a prisoner’s dilemma super-

game. Potential migrants, for example, cooperate in the first game. Once they migrate, they

reciprocate by assisting future workers to do the same. The underlying assumption used in this

model is that “the arrival of new migrants confers benefits upon the earlier migrants” (ibid).

Two of the most frequently employed economic models used to explain migrations are

the classical economic model and the historical-structural model. “The classical view focuses on

equilibrium models that treat migration as a voluntary and rational decision made by individuals

who seek to enhance their economic position by responding to the higher wages offered away

from home” [Papademetriou and Martin, (1991), p. 8]. Proponents of this theory argue that

migrants arrive at a rational decision by taking the individual costs and benefits of migration into

consideration. A migrant’s attitude towards risk, their relative deprivation, and intra-household

interactions are but a few factors considered by this theory. Critics, however, argue that these

models “ignore the international distribution of production factors and natural resources, and the

state-level economic and political decisions that directly affect individual decisions to migrate”

[Papademetriou and Martin, (1991), p. 8) (also see e.g. Sjasstad, (1962) and Todaro, (1976)].

In contrast, the “historical-structural model of migration shifts focus from individual

actions to national and international political and economic forces” [Papademetriou and Martin,

(1991), p. 9]. Conditions in the host country are an example of determinants, according to this

theory. However, critics point out that the historical-structural model has obvious limitations

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[Cardoso and Faleto, (1979), Portes and Walton, (1981)]. Coastal states, for example, have

significantly more outflows of migrants than do landlocked states. “With their unitary view of

the global system, historical- structuralists often underestimate the economic dynamism of some

peripheral states, for example, the fact that migration brings peasant communities and

households into direct contact with international capital”, which may provide an impetus for

future immigration [Papademetriou and Martin, (1991), p. 11]. Additionally, Sassen (1988) has

extensively analyzed the relationships between migration and overpopulation, poverty and

economic development. Her work reveals that lesser developed countries (LDCs) with high

population-growth rates, high levels of poverty and stagnating economic growth have higher

migration rates [Sassen, (1988), p.2].

Both theories noted above have merit. They contribute to our understanding by primarily

increasing the “awareness of the interdependence between the international politico-economic

system and migration, and of the economics and sociopolitical implications of such

interdependence” [Papademetriou and Martin, (1991), p.12]. This has stimulated much debate

concerning how governments must view the migration process.

Immigration laws are often driven by the impact that immigrants can have on the local

economy. Immigrants influence the labor market, wage rates, standard of living, educational

standards, and the welfare systems of the host nation. Given the scope of the influence of

immigrants, policy makers need to “resolve two distinct issues: how many immigrants the

country should admit, and what kinds of people they should be” [Borjas, (1995), p.3].

The role that immigrants play in the economy of a host country hinges heavily upon the

number of immigrants in the state as well as their occupational status. Today, the Indian

immigrant population in the United States, for example, is over one million people. Based on

their “median income, they comprise one of the highest paid groups in the country” [Panagariya,

23 May, 2001]. Their standing in society has enabled them to influence policy decisions in

Washington, an indication of the political power they command in their host country2.

Still, not all immigrant groups can exert as much influence relative to their numbers as

Indian immigrants in the United States. In the United Arab Emirates (UAE), for example, the

proportion of expatriates to the local population is 4:1. This makes the local population a

2 Several Indian-Americans have held the position of mayor: Bala Srinivas (Hollywood Park, TX), John Abraham(Teaneck, NJ), and Arun Jhaveri (Burien, WA).

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minority in their own land. Yet, despite their disproportionately high numbers, immigrants in the

UAE wield almost no political power. Hence, gathering insights into the socio-economic

dynamics of migrants is essential to gain a richer understanding of the migratory process.

Kerala and Karnataka: Similarities and Differences

As noted earlier, this study explores migration from two South Indian states, Kerala and

Karnataka. These two states share many similarities. First, the net domestic product per capita in

each state is about the same. At approximately five hundred dollars a year, it is slightly below

India’s average of six hundred dollars annually. This would lead one to believe that both states

have approximately the same productivity levels. This, however, is not the case, for reasons that

will become evident later. Second, both states have similar economic structures. In both states

approximately 34-37% of their domestic product is generated from agricultural activities, 23-

25% from industry and the remaining 40-42% from service activities [Center for Monitoring

Indian Economy, (1997)]. However, “services” in Karnataka is composed mostly of software and

financial services, while “services” in Kerala consists primarily of government services.

A third common feature of Kerala and Karnataka is that both states have been relatively

free from communal and religious strife. Kerala is one of the few states in the country where

Hindus, Christians and Muslims peacefully co-exist. Karnataka, on the other hand, is

predominantly a Hindu state. The relative harmony in both states implies they both have

stability, which contributes to quality of life and thereby encourages local investment.

With respect to the differences between the two states, the first set has to do with their

geographic features. Karnataka is a much larger state (192,000 km^2) than Kerala (39,000

km^2), and has a longer coastline. Yet, although Kerala’s coastline is shorter than Karnataka’s,

Kerala has five ports – Cranganore, Quilon, Alleppey, Cannanore, and Cochin -- whereas

Karnataka has only one, Mangalore. Historians point out that “Kerala’s narrow channel to the

Arabian Sea has served as a gateway to trade with lands as varied as China, Egypt, Greece,

Portugal, and Holland” [Kapur, (1998), p.4]. As a result, Kerala has been more exposed to

different cultures through trade than have most other states in India, and this, to a large degree,

has strengthened Kerala’s contacts with the Persian Gulf and beyond.

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A second critical difference between the two states is that they have different styles of

governments. While Karnataka is primarily a market-oriented capitalist economy, Kerala is a

socialist state. As one author put it,

“at a time when India is refashioning itself in the image of American-style capitalism,Kerala remains unabashedly communist, a bastion of militant trade unions and five-year economic plans . . . everywhere in Kerala are signs of its anachronistic ideology:roads are littered with small paper flags bearing the hammer and sickle; walls areplastered with portraits of Marx, Lenin, and Che Guevara” [Kapur, (1998)].

The differing governmental structures in both states have contributed to contrasting

experiences with respect to investment. Table 1 illustrates the amount of investment in both

states. As is evident from the table, investments in Karnataka have been far greater than those in

Kerala. Hence, Karnataka has managed to foster a much healthier entrepreneurial climate than its

neighboring state of Kerala. Karnataka has also attracted significantly more foreign direct

investment (FDI) than Kerala. Between August 1991 and January 1997, Karnataka received

Rupees 54,954 million; in contrast, Kerala received a paltry Rupees 5,209 million (Source:

Department of Economics and Statistics, Tata Services).

Table 1: Trends in State Investments (Rupees Crores) (1997-2000)

State Oct 00 Apr 00 Apr 99 Apr 98 Apr 97

Karnataka 116,746 94,649 100,918 115,029 128,041

Kerala 42,796 42,946 48,959 50,787 45,324

Another indication of the effects of different styles of governance is reflected in the labor

laws in the two states. It is not surprising that the socialist state of Kerala has high levels of

unionization. This has put upward pressure on wages. Kerala’s minimum wage, for example,

ranges from Rupees (Rs.) 30 to Rs. 150 per day. Karnataka’s minimum wage, however, ranges

only between Rs. 26 to Rs. 46 a day [GoI Handbook, 2001]. This is yet another reason why many

industries have opted to stay out of Kerala and instead have focused on hiring cheaper labor from

the neighboring states of Karnataka and Tamil Nadu.

Finally, demographic patterns vary in the two states. Kerala has a much higher literacy

rate (90%) than does Karnataka (56%). This has serious implications for policy, since it has been

conclusively proven that higher literacy rates help reduce population growth, reduce infant

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mortality rates, and to some extent improve the overall quality of life in a state [Sen, (1999)]. It

is not surprising, therefore, that Kerala has a much healthier demographic profile than Karnataka.

Decennial population growth, between 1981 and 1991, for example, in Kerala (14.3%) was much

lower than in Karnataka (21.1%). Life expectancy is much higher in Kerala (72 years) than in

Karnataka (63.7 years), and the infant mortality rate is only 16 per 1000 in Kerala, as compared

to 58 per 1000 in Karnataka.

These profiles indicate that the two states have met with fairly different socio-economic

outcomes under varied governance structures. Specifically, Karnataka has managed to foster a

better business and investment climate than Kerala. Despite this, however, Kerala continues to

enjoy a better quality of life than Karnataka.

In order to assess whether quality of life and economic factors significantly influence

migration outflows between 1970 and 1993 we estimate a series of simple regression equations.

If quality of life measures are significant factors affecting migration, they should certainly affect

Kerala’s outflow since Kerala’s performance on a variety of these dimensions is far superior to

Karnataka’s. Hence, the dependent variable is migrant outflow from Kerala to the Middle East.

The equations are specified below.

P1 = ?0 + ?1L + e1 (1)

P2 = ß0+ ß1I + e2 (2)

P3 = ?0 + ?1U +e3 (3)

P4 = d0 + d1L + d2I +d3U + e4 (4)

Where:

P = Percentage Change in Keralite Population in the Middle East

L = Percentage Change in Literacy Rates in Kerala

U = Percentage Change in Unemployment Rates in Kerala

I = Percentage Change in Infant Mortality Rates in Kerala

Equations (1), (2), and (3) are simple bivariate linear regressions. These regressions have

been estimated to assess the importance of each of the independent variables on migration.

Literacy rates are used as a proxy for educational levels and social capital in Kerala. Infant

mortality rates proxy for the quality of healthcare. Unemployment rates, on the other hand,

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reflect economic conditions rather than the quality of life. Equation (4) then combines all three

factors in a multi-variable regression.

Table 2 below presents the OLS estimates for the four regressions. As the results

demonstrate, literacy has virtually no significance. Similarly there appears to be no significant

relationship between infant mortality and migration outflow. These findings run contrary to our

initial hypothesis that better performance on quality of life factors would reduce migration

outflow.

However, estimates of Equation (3) suggests that there is a positive relationship between

unemployment rates and migration. Specifically, the equation demonstrates that a one unit

(percent) increase in the unemployment rate of Kerala brings about a 0.21 percent increase in the

outflow of workers from Kerala to the Middle East. This relationship is significant at the one

percent level.

The full system of variables is estimated by equation (4) and results are reported in

column five of Table 2. Here again the results indicate that quality of life measures are not

significant determinants of Kerala’s migrant outflow to the Middle East.

Table 2: OLS Estimates for Migration of Keralite Workers to the Middle East

Dependent Variable: Percentage Change in Keralite Workers in the Gulf (P)

Variable (1) (2) (3) (4)Intercept 13.1756

(1.63412)

12.773

(1.1083)

10.9116

(1.044)

11.5316

(1.59743)

F -0.20625

(0.9420)

-0.98633

(0.830)

U 0.212078 **

(0.0716)

0.250367 **

(0.0763)

I -0.015109

(0.10559)

-0.079146

(0.09291)

Adjusted R^2 0.001988 0.000 0.23004 0.2316

Durban-Watson

Statistic

0.359 0.3348 0.92454 1.1461

T-Statistic -0.223 -0.1430880 2.96114

P-Value 0.8252 0.8874 0.0066 0.0284

The figures in parentheses are the standard errors of estimated coefficients* denotes significance at 5% level** denotes significance at 1% level

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The results do support the notion that unemployment rates, which are a measure of

economic performance, have a significant relationship with the dependent variable. This finding

suggests that it is economic factors, rather than quality of life indicators, that drive migratory

patterns. As Table 2 suggests, almost 23% of the increase in the outflow of workers from Kerala

to the Middle East can be explained by unemployment.

Policy Initiatives in Kerala

In 1957 Kerala was the first state in India to elect a communist government to the state

legislature. Reportedly, it was “the first time a Marxist government was brought to power

democratically anywhere in the world” [Kapur, (1998), p.1]. Thus, the state’s policy since the

1960’s has been to promote high minimum wages and redistribute wealth. As a result, a large

number of industries have stayed away from Kerala for fear of its large trade unions and

abnormally high minimum wage rates. The powerful trade unions in the state, coupled with the

government’s insistence on promoting a primarily agricultural economy, means that a large

amount of unskilled and semi-skilled labor has been under-utilized.

In 1989-90, for example, there were eighty government-owned enterprises in the state,

which accounted for 9.7% of total enterprises in Kerala (823 enterprises) and 6.7% of total

investments. Reportedly, “out of these eighty enterprises, only thirty two enterprises made a

profit, totaling Rs. 370 million. The losses of the other forty eight units amounted to Rs. 990

million, resulting in a net loss of Rs. 620 million to the state” [Tharamangalam, (1995), p.13].

This led observers to believe that growth in Kerala would be unsustainable in the long run due to

the drag that the fiscal situation placed on the economy.

On the positive side, however, the government promoted three policies to further

development. First, the government launched a program called the “New Democratic Initiatives”

between 1987 and 1991, which sought to “establish 100% literacy throughout Kerala” [Franke

and Chasin, (1995), p.1]. Second, they built one of the best distribution networks in the country

where “shops sold everything from rice to batteries at subsidized prices” [Kapur, (1998)]. Last,

the government initiated land reform programs that “allowed farmers to grow crops and earn an

income that kept them away from destitution” (ibid). This means that although Kerala remains

under- industrialized, its quality of life is higher than that in most other Indian states.

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Kerala has received significant attention for its superior quality of life indicators.

Amartya Sen notes that “the success and failure of development initiatives cannot be judged

merely in terms of income and output . . . what ultimately matters, is the nature of the lives

people can or cannot lead” [Sen, Development as Freedom]3. C.P. Narayan, leader of the ruling

communist party in Kerala, is proud of this fact. In a recent interview with a journalist, he

supposedly began to wave a copy of the Economist that contained a story on the Asian economic

crisis, which he saw as a free-market debacle. The journalist “expressed surprise that he should

be reading the staunchly free-market British publication, to which Narayan responded with a

comment straight from the trenches of the Cold War…. ‘Of course I read it….we should know

what our enemy really thinks and is really planning’ ” [Kapur, (1998), p.3].

Such anecdotes reveal the complexities of government in the state of Kerala. Although a

sizeable part of the population benefits from the government’s support for agriculture and their

generous subsidies, there are those who have been left unemployed due to under-investment in

industry. This fact, at least in part, has motivated unskilled and semi-skilled workers to migrate

temporarily to other parts of India as well as to the Middle East.

Migration between Kerala and the Middle East

Historians point to the oil price increase of 1973 as the start of the first emigration flows

from Kerala to the Middle East. With their incomes soaring, Middle Eastern states embarked on

an ambitious investment program that increased the demand for labor in sector-specific

industries. Two interrelated “pull” factors influenced the demand for imported labor: the inability

of Middle Eastern states to supply their own labor, and the higher paying jobs in Middle Eastern

countries [Amjad, (1989), p.3]. With respect to the Keralite experience, its geographical

proximity coupled with its low level of industrialization also played a critical role in determining

the migration of workers to the Middle East.

To assess the impact of labor outflows on output and employment, one needs to look at

“the magnitude of the flow of workers, their employment status before migration and the skill

composition of the migrants” [Nayyar, (1994), p.4]. A study of wages is also informative. Table

3 indicates the outflow of workers from Kerala to the Middle East between 1976 and 1990.

3 Later in the paper it will be shown how Kerala’s economy is highly dependent on remittances from workers in theMiddle East, and how without those financial inflows, their economic outlook would be bleaker.

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Table 3: Labor Outflows4 from Kerala to the Middle East, 1976-1990

Source: Nayyar (1994). [Note: Keralite workers comprise half of all Indian workers in the Gulf.]

Year Number of persons1976-1980 251,6501981-1985 446,9491986-1990 239,122TOTAL 937,721

As is evident in Table 3, migration was greatest between 1981 and 1985. The flow of

migrants became so significant, in fact, that policy makers in Kerala set up welfare programs to

assist a migrant’s family during the worker’s stay abroad. In October 1983, the government

announced programs to “educate the migrants’ children, settle their income tax disputes, reduce

their air and train fares and allot them residential sites for the construction of houses” [Nair,

(1989), p.359]. Additionally, in November 1984, the Kerala State Industrial Development

Corporation (KSIDC) sent a two-person delegation to the Middle East to “outline the assistance

which KSIDC could provide to migrants in setting up industrial units in the home state” [Nair,

(1989), p.362].

The KSIDC subsequently formed an investment company in November 1986 that

allowed workers to invest in industrial ventures in Kerala. In particular, the purpose of this

company is to “promote small and medium sized industries to provide employment to Keralites

returning from the Middle East” [Nair, (1989), p.359]. Table 4 below outlines the nature of

projects that KSIDC invests in.

Table 4: KSIDC Investments (1990-1999)

Name of Project Location Cost (in Millions US Dollars)Petrochemical Complex Kasargod $1489.36Special Economic Zone Ernakulum $1276.59LNG Gas Terminal Project Ernakulum $340.25Internet High Bandwidth Project Ernakulum $191.48Development of VizhinjamDistrict

Trivandrum $170.21

Radial Tires Project Kottayam $130.21

In the peak years of migration, as Table 5 indicates, almost 85% of all migrants from

Kerala to the Middle East were either unskilled or semi-skilled. A large number of these

laborers, however, were either underemployed or unemployed prior to migration. In fact,

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personal interviews found that 40% of those interviewed were either underemployed or

unemployed prior to migrating.

Table 5: Skill Composition of Labor Outflows from Kerala to the Middle East, 1984-1986

(1984) (1985) (1986)Skill Category Number % Number % Number %Unskilled1

workers44,288 43.0 27,855 34.2 22,789 40.1

Semi-skilled2

workers43,007 41.8 43,018 52.8 26,716 47.0

White-collarworkers

3,738 3.6 2,877 3.5 3,676 6.5

High-skilledworkers

3,248 3.2 3,689 4.5 2,979 5.2

Others 8,680 8.4 4,078 5.0 666 1.2

TOTAL 102,961 100.0 81,517 100.0 56,826 100.0

Source: Nayyar (1994)[Note: 1Unskilled workers are construction workers/farm laborers/household workers.2Semi-skilled workers are carpenters, masons, steel fixers or fabricators, welders, painters, blacksmiths, drivers,cleaners, electricians and plumbers].

Although large in numbers, the migration of unskilled and semi-skilled labor had almost

no effect on output since these workers were underemployed and readily replaceable by the

surplus labor. The only sector-specific shortage arose in the construction industry. In addition,

construction work in Kerala increased with migration, since a substantial part of worker

remittances were invested in new housing construction [Prakash, (1998), p.3211]. This increase

in demand and tightening of supply for construction workers in Kerala was satisfied by

employing labor from the surrounding states of Tamil Nadu and Andhra Pradesh.

The effect on unemployment, however, was more pronounced. Since most of the

unskilled and semi-skilled workers were either underemployed or unemployed prior to

migration, the unemployment rate fell once migrants left the state. In a sense, Kerala’s

government began to recognize the importance of encouraging workers to migrate to the Middle

East for both demand and supply reasons.

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Policy Initiatives in Karnataka

The first national policy implemented to promote the Indian software industry was

initiated in November 1984 under the leadership of Prime Minister Rajiv Gandhi. Referred to as

the Computer Policy, the reform “sought to lower import duties on software and personal

computers, and aimed to permit the import of computers in exchange for software exports at a

special low duty” [Saxenian, (2000), p.4]. This policy, however, was not implemented in

isolation. The government simultaneously promoted policies for related industries such as

electronics and telecommunications, which needed to be upgraded to facilitate the smooth

functioning of the IT industry.

The second major policy reform was implemented two years later, when the Computer

Software Export, Development and Training Policy was introduced in 1986. This policy sought

to continue the initiatives undertaken by the previous plan, but also promised to increase foreign

investment for software products in the domestic economy as well as to promote the export of

labor to foreign countries. Anna Lee Saxenian, professor of economics at the University of

California at Berkeley, points out that “this policy explicitly recognized body shopping, or the

provision of labor intensive, low value added programming services, such as coding and testing,

at client sites overseas, as valid exports” [Saxenian, (2000), p.5]. Observers such as D.N.

Seshagiri, who is reported to have been the chief architect behind these two plans, agreed that

“for India to become a major software exporter, it would need to begin with high volume, low-

valued added exports and move up the value chain” (ibid).5

The third, and by far most distinctive policy measure was implemented in 1990 with the

establishment of Software Technology Parks (STP) around India. These parks were envisioned

as “export processing zones for software . . . that gave software firms designated tax exemptions

for five years and guaranteed access to high-speed satellite links along with communication

facilities that would include 64 Kbps data lines and internet access” [Saxenian, (2000), p.6]. The

first of these three STP’s was established in Bangalore, the capital of Karnataka, through

partnerships with the Karnataka government, Tata Industries and a consortium of Singaporean

firms. Key tax incentives included exemption from corporate income tax until 2010 and duty-

free imports of hardware and software.

5 Seshagiri was the Additional Secretary, Department of Electronics, New Delhi.

17

The thrust of Karnataka’s IT policies, among other forward-looking initiatives, signaled

the liberalization of the Indian economy in 1991. The Karnataka government, in particular, took

an active role in promoting foreign direct investment through subsidies and other tax incentives

and managed to lure many established companies in the United States to set up offshore

development centers (ODCs) in Bangalore.6 Hewlett Packard (HP), IBM, and Texas Instruments

were among the first companies to set up software development centers in Karnataka.

The I.T. initiatives in Karnataka heavily influenced the nature of the state’s migrant flow.

Specifically, three key factors contributed to employment and output shifts from Silicon Valley

to Karnataka. First, the time difference between Pacific Standard Time and India is twelve and a

half hours. This proved to be an exciting opportunity for companies in the Silicon Valley, giving

them the flexibility of having a twenty four hour work schedule, along with sizeable cost

reductions and competitive advantages.

Second, Karnataka has more than seventy-seven engineering colleges which are

estimated to produce 15% of India’s engineering graduates, of which 80% enter the IT industry

[International Technology Park Statistics (2001), Bangalore]. Using linear interpolation,

estimates indicate that this puts the number of engineering graduates who enter the I.T. sector in

Bangalore each year at eight thousand and forty workers.7 Furthermore, Karnataka has had a

long tradition of having the best institutes in the country. The Indian Institute of Science (IISc),

the Indian Institute of Management (IIM), and the Indian Institute of Information Technology are

notable examples.

Third, quality-of-life issues have made Karnataka the obvious choice for investments.

Known for its moderate climate and rich social fabric, Bangalore has managed to outclass

centers like Bombay which have been riddled with communal and religious strife. Karnataka’s

economic and social stability has attracted foreign investments and, along with it, an entire IT

industry.

The next major policy initiative, dubbed the IT Action Plan, was begun in 1998. It set out

to address and solve some of the biggest impediments facing Karnataka’s as well as India’s

position in the global IT market. The first of these, which we noted earlier, was the lack of

suitable infrastructure. According to the International Telecommunications Union, “India has a

6 Customs duties on the following items were reduced: computers, from 20 percent to 15 percent; mother boards,from 20 percent to 15 percent; floppy diskettes, from 20 percent to 15 percent; CD ROMs, from 5 percent to nil.7 Sixty-seven thousand students graduate from engineering colleges throughout India each year.

18

teledensity of only seven telephones per 1000 people compared to 490 per 1000 in the United

States” [Saxenian, 2000]. Upgrading these facilities is an essential requirement for growth, a

factor that has been recognized and addressed by the IT Action Policy of 1998.

The second impediment, which is closely related to the first, is the presence of

bureaucratic governments, both at the national as well as at the state level. Rather than acting as

a facilitator and providing a hands-off approach, the government often finds itself playing the

role of a regulator. This has made it tremendously difficult for entrepreneurs to establish new

companies, since the cumbersome process involved in doing so offsets the benefits.

Third, the lack of a vibrant venture capital (VC) industry8 hampers Karnataka’s software

industry. In 1998, “twenty one companies were registered with the Indian Venture Capital

Industry Association with approximately $700 million available for investment . . . Taiwan, on

the other hand, which started at a similar level of economic development as Karnataka, had one

hundred and ten funds with $1.32 billion available for investments” [Saxenian, (2000), p. 18].

Hence, entrepreneurs have only limited opportunities to raise money in the Indian market.

However, NASDAQ has recently taken the lead and is expected to open an office in Bangalore

in 2002, in an attempt to get more companies to list on their index. Pending the Reserve Bank of

India’s approval, this move is expected to give software companies in Karnataka much needed

access to funds.

All of these initiatives have focused on developing and expanding investment and

employment in the I.T. industry. They served as the foundation for Karnataka’s development

policy and contributed to the migration patterns that we see today between Karnataka and the

Silicon Valley. The first of the pull factors was the high-skilled and low-wage profile of the

Indian software engineer, which proved to be an attractive combination for most large multi-

national corporations (MNC’s). Silicon Valley’s demand for high-skilled labor gave the Indian

workers significant increases in compensation and other financial benefits that they found

difficult to forgo. In a recent study on comparative wages for the software industry published by

a leading Indian newspaper, differences in compensation were reported to be significant. In

Table 6 below, we show the differences in annual wage rates of countries possessing a sizeable

software industry in 1994.

8 A venture capital industry cannot be a player unless Karnataka develops its secondary market.

19

Table 6: International Annual Wage Rates, Software Industry, 1994 (Source: Business India)

Country ProgrammerU.S. $

Systems AnalystU.S. $

India 4,002 5,444U.S. 46,600 61,200Japan 51,731 64,519Germany 54,075 65,107France 45,431 71,163Britain 31,247 51,488Hong Kong 34,615 63,462Mexico 26,078 35,851

The second most important pull factor was that Indian programmers had a fortuitous

advantage over their counterparts. IBM, who set up an Indian Offshore Development Center

(ODC) to advance their UNIX operating systems, left India in 1978. As a result, a large number

of programmers in India who had developed knowledge of the UNIX operating system found

their skills temporarily displaced. By 1990, however, the UNIX system had become “the system

of choice for PCs and workstations . . . and as a result India’s UNIX programmers had a skill that

was extremely scarce elsewhere in the world” [Saxenian, (2000), p.9].

The final pull factor that influenced workers from Karnataka to migrate to the Silicon

Valley can be attributed to the dynamics of the California economy. “In the 1940s, the author

Carey McWilliams coined a phrase to characterize California’s penchant for innovation and

experimentation. He called it the ‘edge of novelty’ “[Lyon, in Saxenian, (1999), p. iii]. In

essence, he was suggesting that the entrepreneurial spirit fostered in the Silicon Valley, as well

as in other parts of California, had drawn the attention of workers all over the world, and, not

surprisingly, California has more immigrants than any other state in the United States [Camarota,

(2000)].9

In addition, a variety of push factors have also been at work. The first is the lack of

economic opportunity in Karnataka. The inhospitable entrepreneurial climate in the state, despite

its initiatives, has made it very difficult for companies to move into higher value added services.

Saxenian (2000) reports, for example, that the five largest software companies in India (Tata

Consultancy Services, Infosys, Pentafour, Tata Infotech and Wipro) account for close to 50% of

software industry exports. Smaller companies have simply not been able to challenge the bigger,

9 According to the 1999 Census, California had 6,459,999 immigrants, and in the 2000 Census, they had 8,781,000immigrants.

20

better-established software firms. Such issues as the lengthy process involved in starting a

business has meant that companies in Karnataka have not been able to become first movers, a

huge disadvantage in the competitive and rapidly changing software industry.

Second, Karnataka’s firms have been unable to move up the value chain quickly enough,

due to the lack of a venture capital industry. Hence, high-skilled workers working in low value

added services find migration to be a tempting option. In new and developed markets, in

contrast, they can provide higher value added services and earn higher wages. These greater

professional opportunities account for a large proportion of the outflow of workers from

Karnataka to the Silicon Valley.

Migration from Karnataka to the Silicon Valley

Table 7 details the flow of high-technology workers from India to the Silicon Valley. As

the table illustrates, only 2% of the Silicon Valley’s high-technology workforce were Indian

migrants before the 1960’s. A revision to the immigration policies of the United States occurred

in 1965 with the passing of the Hart Celler Act. This reform sought to abolish the quota system

that previously restricted labor inflows from certain South Asian countries. As a result, the

number of migrants to Silicon Valley more than quintupled between 1960-1970, doubled

between 1970-79 and then doubled once again between 1980-1989. Notice that the largest

outflow of workers coincided with the years following the easing of immigration policies in the

United States, which took place in 1965.

Table 7: Immigration of Indians, Chinese, and Whites into Silicon Valley High-TechnologyIndustries, by year

Before 1960s Before 1970 1970-79 1980-89

No %ge ofmigrants

No %ge ofmigrants

No %ge ofmigrants

No %ge ofmigrants

Indian 162 2 803 11 1,963 27 4,367 60Chinese 3,109 16 2,491 13 5,697 30 7,921 41White 167,385 88 10,143 5 6,136 3 7,553 4

Source: Saxenian, (1999).

21

An analysis of the number of H-1B visas10 issued to workers from Karnataka can be used

to approximate the number of software engineers who migrate to the United States. As the

figures presented in Table 8 demonstrate, there was a substantial increase in the flow of software

workers to the Silicon Valley after 1990. The increase in demand for software workers can be

attributed to the expansion of the U.S. software industry, which experienced high growth rates

between 1990-2000.

Table 8: Number of visas granted to hi-tech workers for the four south Indian states11, between1994 and 2000.

Year US H-1B Visas Annual Percentage (%ge)Increase

1994 2313 45.20%1995 3455 49.37%1996 4520 30.82%1997 10758 46.80%1998 15799 46.80%1999 21377 35.30%2000 21800 1.97%Source: US Embassy, Chennai

As Table 9 illustrates, Indians were well represented in managerial as well as technical

positions in the Silicon Valley’s high-technology industry. An indication of the dominant role

played by software workers, both from Karnataka as well as other parts of India, is reflected in

the estimated contribution they make to the U.S. economy. Fortune Magazine, for example,

estimated the wealth generated by them at two hundred and fifty billion dollars, more than half

of India’s current GDP [Fortune Magazine (2000)].12

Table 9: Occupations of Indian Workers in Silicon Valley High-Technology Industries, 1990Source: Saxenian, (1999).

Occupation Number of Workers Percentage of Total (%)Managerial 1,122 15Professional 3,249 45Technical 818 11Semi-Skilled 1,418 19Administrative 688 9Total 7,295 100

10 H-1B Visas are granted to high-technology workers who seek employment in the United States.11 Kerala, Karnataka, Tamil Nadu and Andhra Pradesh12 For example, Kanwal Rekhi sold the networking firm Excelan to Novell for $250 million in 1989; Sabeer Bhatia,co-founder of Hotmail, sold his company to Microsoft for $250 million; Vinod Khosla founded Sun Microsystems.

22

In the Silicon Valley today, there are seven hundred and seventy four high-technology

firms led by an Indian CEO. These companies combine to produce goods and services worth

$3,558 million and employ more than sixteen thousand five hundred and ninety eight people

(Source: Saxenian, 1999). The significance of these figures is noteworthy given that all these

companies deal with high value-added work such as strategic consulting, brand management,

R&D and product development. In contrast, the work done in India is mostly low value-added

work, such as manufacturing and back-end data entry. Notice that the software workers that

migrated to the Silicon Valley were highly skilled (the majority of them were involved in

professional, managerial and technical positions) and have managed to move up the value chain

and leverage their skills in an economy that is more entrepreneurial.

Another indication that Karnataka bore the costs of training workers, while Silicon

Valley reaped the benefits of the migrants’ skill sets, is apparent in Table 10. Between the period

1980-84, there were only forty-seven companies established by an Indian in Silicon Valley. The

next period, this figure almost doubled, and continued its exponential increase over the 1990-94

and 1995-98 time periods. These figures add credence to the notion that developing an

entrepreneurial climate in Karnataka is an important prerequisite for retaining highly skilled

workers and progressing into producing higher value added goods and services.

Table 10: Indian/Chinese/White-Run Companies As a Share of Total Silicon Valley High-Technology Start-Ups, 1980-1998

(1980-1984) (1985-1989) (1990-1994) (1995-1998)

No. %ge No. %ge No. %ge No. %geIndian 47 3 90 4 252 7 385 9Chinese 121 9 347 15 724 19 809 20White 1181 88 1827 81 2787 74 2869 71Total 1349 100 2264 100 3763 100 4063 100Source: Saxenian (1999)

The impact of the outflow of these workers on Karnataka’s output and unemployment

would depend upon the occupational status of workers prior to migration. In order to generate a

rough estimate we assume that most workers who came to the Silicon Valley worked in well-

established software companies, either in Karnataka or in other parts of India. When these

outflows are taken as a percentage of the total incremental I.T. workforce in Karnataka, the

figure is very low. This in essence suggests that the outflow of these workers had very little

23

impact on the unemployment rate since they were readily replaceable from the surplus of skilled

labor available at the time. The effect on output, however, would be more pronounced, due to

training costs that software companies incur when recruiting new employees. Further, if the

better performing employees of a software company in Karnataka decide to leave, they can be

replaced, but only from a lower quality group of workers. This would have a qualitative impact

on output, which would hurt companies’ prospects of increasing their growth rates in the long

term.

Return Migration to Kerala

Return migrants are workers who migrate but eventually return to their country of origin.

Analyzing the impact of return migration is informative, given that the Kerala-Middle East

migration is generally temporary. This contrasts with the Karnataka-Silicon Valley migration,

which tends to be permanent. Return migration has implications for policy, since reabsorbing

these workers into the workforce affects the economic outlook of the state. As Table 11

illustrates, the average migrants’ stay in the Middle East was between two and six years.

In part, the length of stay has been motivated by government policy with respect to

customs duties. Any person who returns to India after having lived abroad for more than two

years can avail themselves of the transfer of residence concession under customs regulations.

This concession allows the import of personal and household items that have been in use for at

least a year without payment of customs duties. Any person who returns to India after having

lived abroad between one and two years can also receive import concessions on durable goods,

subject to a limit of five hundred dollars without payment of customs duties [Nayyar, (1994)].

Table 11: Average Duration of stay for Migrant Workers from Kerala to the Middle East

Length of Stay in Years Percentage of MigrantsLess than 1 5.71-2 9.62-3 11.93-4 12.24-5 12.35-6 10.46-8 14.58 or more 23.4Total 100Source: Government of Kerala Survey, 1988, p. 20-21. See Nayyar (1994)

24

To assess the impact of return migration on the Keralite economy, return migrants need

to be viewed as a percentage of the surplus labor in the home state. Such an approach provides

an indication of the impact of their return on state output and employment. If this figure were

relatively large, unemployment would increase either because the migrants who return to Kerala

cannot find jobs or because their newly acquired skills displace current workers. The magnitude

of the number of return migrants has been large relative to the surplus labor in the state, which

suggests that it has had a considerable impact on the labor market.

Table 12: Return Migrants from the Middle East to Kerala, 1984 to 1990

Year 1984 1985 1986 1987 1988 1989 1990

Number of personswho availedthemselves of transferof residenceconcessions

17,653 22,672 24,649 20,216 16,001 14,718 19,065

Number of personswho availedthemselves of mini-transfer of residencefacilities

7,292 9,093 10,978 1,516 2,468 3,595 3,462

Estimated number ofTotal ReturnMigrants based ontransfer of residencedata

24,945 31,765 35,627 21,732 18,469 18,313 22,527

Source: p. 35, Nayyar (1994).

As Table 12 illustrates, return migration has not been consistent since 1984. This trend is

due to four factors. First, a fall in oil prices in several of the Middle Eastern states sparked off

recessionary fears in the region. Second, the market for exporting low-skilled labor became

highly competitive with countries like Thailand and Indonesia competing to supply the Middle

Eastern states with low-skilled workers. Thailand and Indonesia, in particular, started offering

their workers vocational training to better prepare them for employment opportunities abroad.

Most Keralite workers failed to make the transition from providing low-skilled labor to semi-

skilled labor; they have been displaced by Thais and Indonesians, thereby forcing their return to

Kerala.

A third reason for the increase in return migration is the fact that Middle Eastern natives

have been encouraged to accept job placements in low-wage sectors that they previously were

25

not willing to accept. This move was seen as an effort to reduce the dependence on foreign labor

and promote employment among the unemployed in the Middle Eastern states.

Finally, migrants have had to return to Kerala due to the stringent immigration policies

adopted by Middle Eastern states. Starting in 1997, for example, Saudi Arabia stopped issuing

visas to unskilled workers from Kerala. Further, employers in the Middle East reportedly

reduced salaries by as much as 50% of the original promised pay, prompting workers to return to

their home country.

Although research in this area is quite sparse, it is possible to provide a rough estimate of

the socio-economic status of return migrants. Looking at Table 13, we see that a little more than

half of all workers are unemployed upon their return. “A general tendency noticed among the

returnees was that only those who were very poor were prepared to work as partially-employed

laborers . . . on the other hand, those with higher savings preferred to be self-employed”

[Prakash, (1998), p. 4538]. Personal interviews buttress this observation. Return migrants display

a general unwillingness to accept low-paying jobs in the domestic industry.

Table 13 : Present Economic Status of Return Migrants from the Middle East to Kerala, 1990-

1999

Year of Return Self Employed PartiallyEmployed

Unemployed Total

Up to 1990 7.7 15.4 76.9 100.01991-95 3.3 37.9 51.7 100.01996-99 15.8 42.1 42.1 100.0

Source: Prakash (1998)

As the table demonstrates, the percentage of self-employed and partially employed

workers has increased since 1990. “Starting an industrial unit depends on the return migrant’s

experience, their enterprise in running the unit, and the amount of savings they can mobilize”

[Prakash, (1989), p. 3211].

Return Migration to Karnataka

Return migrants from the Silicon Valley to Karnataka make up a very small proportion of

the overall workforce. As a consequence, their impact on output and employment is marginal.

Return migration from the United States to Karnataka is motivated by a variety of factors. With

the liberalization of the Indian economy in 1991, significant growth opportunities emerged in

26

different parts of the country. Additionally, MNC’s began to outsource functions to their

subsidiaries in India, providing an impetus for workers to return to Karnataka. General Electric

(GE), for example, announced that they would expand their digitization initiatives to Bangalore

by establishing a GE Global Technology Solutions Group. It will provide software services to

GE aircraft engines and GE appliance businesses globally [indiainfo.com]. This is just one of

several exciting opportunities that have started to flourish in Karnataka.

Another enticing factor is the higher incomes offered by MNC firms located in

Karnataka. MNC’s usually transfer software engineers from the United States to their

subsidiaries in India to establish best practices. Software engineers are encouraged to accept

these positions since they are paid in U.S. dollars, even though they are working outside the

United States. Since the cost of living in Karnataka is considerably lower than that in the United

States, earning a dollar-denominated salary significantly increases the engineer’s purchasing

power and real income.

On the other hand, there was one push factor that significantly impacted return migration.

With the economic slowdown in the United States beginning in 2000, a large number of workers

had their contracts terminated. The visa granted to high-technology workers, also known as the

H-1 visa, demands that a worker leave the country twenty days after the sponsorship of the visa

is terminated. Those software engineers who were not able to find a new job during this time

period were forced to return to Karnataka or to other parts of India.

Financial Flows: Kerala-Middle East Migration

A study of migration would not be complete without a mention of the direction, volume,

and magnitude of financial flows. Remittances and repatriable deposits (deposits brought back

by migrants upon their return to their country of origin) can be specifically linked to migration.

“Remittances are unrequited transfers which affect the current income and expenditure of the

economy, while repatriable deposits (capital flows) affect the net wealth or debt position of the

economy” [Nayyar, (1994), p.10].13

Between 1975 and 1977, the Keralite government began to implement policies to

increase the flow of remittances from workers abroad. They did this by “simplifying the banking

13 We will not focus on repatriable deposits given the scant amount of data available in this area. Instead, we willfocus on remittances.

27

procedures for remittances, offering increased banking services overseas, and most importantly,

through a liberalization of foreign exchange regulations for non-resident Indians” [Nayyar,

(1994), p.49].

To assess the impact that these remittances have had on Kerala’s economy, we use

national income accounting identities. Nominal GDP (Y) is equal to consumption (C),

Government Expenditure (G), Investment (I), Exports (XX) which includes remittances, and

Imports (MM).

Y= C + I + G + (XX – MM) (5)

Since Y - (C + G) = S (6)

Combining equations (5) and (6) produces I - S= MM – XX (7)

I – S = KA (surplus of investment over savings = (I-S), (KA)= Capital Account (8)

Rewriting (8) produces,

(M - X ) + rm = KA, where rm= net remittances (9)

Equation 9 derives the relationship between imports, exports and net remittances with

respect to the capital account [Leachman and Francis, (2000)]. This equation posits that the

"remittance flows arising from international labor migration can alleviate either the savings

constraint [(I-S) = KA] or the foreign exchange constraint (X - M) thus enabling the economy to

attain a higher rate of growth" [Nayyar, (1994), p.8; see Mckinnon, (1964) and Strout, (1966)].

Table 14 details the flow of remittances sent by Keralite workers in the Middle East to

their home state. As can be inferred from these figures, remittances account for an annual

average of 20-25% of Kerala’s Net Domestic Product (NDP).

28

Table 14: Remittances transferred by Keralite workers to Kerala, 1980-1998

Year Remittances by Gulf Workers- USDMillion

Remittances as a %ge ofNDP

Remittances Per Capita

1980-81 925.2 21.5 3,1761981-82 734.4 19.2 2,1681982-83 850.8 19.3 2,1601983-84 870.6 17.9 1,9011984-85 865.2 18.2 1,8061985-86 681 15.6 1,3591986-87 721.8 15.2 1,3781987-88 835.8 16.0 1,5251988-89 640.8 13.1 1,0531989-90 639.6 12.8 9471990-91 484.8 10.7 6441991-92 769.05 20.7 9321992-93 563.85 16.7 6161993-94 693 15.4 6821994-95 1119.6 20.4 9921995-96 1440.9 22.9 1,1511996-97 2098.35 30.4 1,4991997-98 2003.85 25.9 1,289Source: Nayyar (1994)

To examine the impact of migrant flow on the flow of remittances between the Middle East and

Kerala, between 1970 and 1993, a simple bivariate regression is estimated. It is specified below

by equation (10).

R1 = ?0 + ?P + e1 (10)

Where:

R = Percentage Change in Remittances from the Middle East to Kerala

P = Percentage Change in Keralite Population in the Middle East

Clearly, one can hypothesize that there will be a positive relationship between the

dependent and independent variable. In Table 15, the empirical results confirm this hypothesis.

However, this study is more interested in analyzing the quantitative impact of the outflow of

Keralite workers to the Middle East on remittances repatriated to the home state. The regression

demonstrates that a one unit (percent) increase in the outflow of Keralite workers to the Middle

29

East will increase remittances by 7.6%. The results of our regression have been detailed in the

table below.

Table 15: OLS Estimates for Remittances Sent from the Middle East to Kerala

Dependent Variable: Percentage Change in Remittances (from the Middle East to Kerala) (R)

Variable (10)

Intercept -54.9147

(48.4236)

P 7.5875 **

(3.56103)

Adjusted R^2 0.119385

Durban-Watson Statistic 1.16837

T-Statistic 2.130

P-Value 0.0431

The figures in parentheses are the standard errors of estimated coefficients* denotes significance at 5% level** denotes significance at 1% level

The Indian Department of Economics and Statistics (DES) undertook a survey to estimate

how these remittances were invested in Kerala. “It was found that of the total utilization, 21%

was spent on purchasing or improving land, 36% was used for constructing or purchasing

buildings and 21% was spent on jewelry/gold ornaments14, education and repayment of loans”

[Prakash, (1998), p.3212]. Only a very small portion of remittances was invested in the financial

market and small businesses.

As noted earlier, the impact of these remittances on income distribution was most notably

seen through an increase in land prices. Land prices increased “in those districts where the

intensity of migration was the highest” [Prakash, (1998), p.3212]. This resulted in a subsequent

increase in the prices “of construction materials, consumer goods and food products” (ibid).

Since not all families had a member who had migrated to the Middle East, the poorer families in

the state were adversely affected.

30

Furthermore, savings in Kerala increased as a result of migration. The surplus remittances

augmented savings in Kerala, since "the difference between the increase in income and the

increase in consumption attributable to remittances was saved" [Nayyar, (1994), p. 7]. Table 16

outlines the growth of bank deposits in Kerala. As seen in the table, the migrants’ share of

deposits has increased continually over time to a point where almost 40% of all deposits were

held by a Non-Residential Emigrant (NRE).

Table 16: Growth of Bank Deposits in Kerala (1988-1997)

Ending March Total Deposit( Rs. Crores)

Of whichMigrants’ deposit(Rs. Crores)

Growth of NREdeposit

Share of NREDeposit to Total(%)

1988 4811 1369 - 28.41989 5667 1584 15.7 27.91990 6620 2012 27.0 30.31991 7858 2304 14.5 29.31992 9671 3039 31.9 31.41993 12112 4499 48.0 37.11994 14941 6015 33.6 40.21995 17458 6886 14.4 39.41996 20171 8103 17.6 40.21997 23029 9956 22.8 43.2

Source: Economic Review, 1997

The impact of financial outflows can also be assessed by looking at Kerala’s external

trade balance. As Table 17 demonstrates, Kerala’s interstate trading suffered a deficit between

1974-1975 and 1980-1981. International trade, however, increased considerably between this

time period. Given that the bulk of Kerala’s exports to foreign countries consisted of food

products such as tea, coffee and cardamom, it is possible to hypothesize that these exports

increased due to greater demand by the Keralite migrants abroad. Dunlevy and Hutchinson point

out that “immigrants may have a taste for the goods of their homeland, and the presence of an

immigrant community beyond some minimum critical mass can create a market for imports

(exports for the home country) of these goods” [Dunlevy & Hutchinson, (2001), p.4]. Imports,

also, registered a significant increase. The majority of these imports consisted of consumer

durable goods, which were imported from the Middle Eastern states.15

14 This is a common form of savings in Kerala.15 Precise figures on the quantification of these imports are not available at the state level.

31

Table 17: External Trade of Kerala, 1974-75 and 1980-81

(1974-75) (1980-81)

Exports Imports Balance Exports Imports BalanceForeignCountries

3012 2718 +384 5169 2670 +2499

OtherStates inIndia

9816 11303 -1487 22824 26373 -3549

Source: B. Krishnambal (1987), p. 125-126

Goods Flows: Karnataka – Silicon Valley

The monetary receipts received by Keralites from the Middle East consisted mostly of

financial inflows. In contrast, the flows between Karnataka and the Silicon Valley consisted

mostly of goods outflows. The structural composition of these outflows is comprised mostly of

software exports. This is visible from Table 18, which outlines the growth of software exports

from Karnataka to the United States between 1991 and 2001. “More than one hundred and eighty

five of the Fortune 500 companies – almost two out of every five giants – outsource their

software requirements to India” [Asia Times, (Dec 7, 2000)].

Table 18: Software Exports from Karnataka to the United States (1991-2001)

Year No. of Companies Exports (Rs. Crores) % Growth1991-92 13 5.6 --1992-93 29 20.6 267.85%1993-94 53 90 336.89%1994-95 79 200 122.22%1995-96 125 480 140%1996-97 163 980 51%1997-98 207 1700 73.4%1998-99 267 3200 88.2%1999-00 782 4321 35.0%2000-01 928 7475 73%

Source: Government of Karnataka/bangaloreit.com

The United States has the largest software market in the world, which has enabled them

to “take advantage of Karnataka’s services.” This, of course, produces a positive impact on

exports. Probably the most critical factor, however, is tied to the migration process. In particular,

“businesses in Karnataka have forged links through family members or friends who reside in the

United States” that have helped spur demand for software services [Asia Times, (Dec 7, 2000)].

32

Hence, the patterns of trade we see today are, at least in part, shaped by the migratory patterns of

Karnataka’s software engineers to the United States.

Dunlevy and Hutchinson, for example, report that migrants can strengthen the trade link

of their home country and their host country in two ways. They show that “immigrants

recognize opportunities because they are aware of cost differentials and product differentiation

that would promote trade links between the two countries“ [Dunlevy and Hutchinson, (2001), p.

4]. Their study also illustrates that “the information bridge that will result is a direct application

of ethnic network theory to international trade in goods” (ibid).

Policies to support Bangalore’s Software Technology Park (STP) led to an increase in

software exports, which is evident in Figure 1. “The growth of Bangalore’s STP was the highest

among all STP units in the country” (Times of India, 23 April, 2001).16

Figure 1: Exports from each of the STP’s in India (2000-2001).

Of the total software exports, “62% flowed to the United States and Canada, 23.5% to

Europe, 3.5% to Southeast Asia, 3.5% to Japan, 1.5% to West Asia, 1.5% to Australia and New

Zealand, and the rest of the 4.5% to the rest of the world”. [Asia Times, December 7, 2000].

Policy Recommendations : Kerala-Middle East Migration

Western economists have been justifiably impressed with Kerala’s rich social fabric and

its quality of life, one that rivals those of most developed nations. The truth of the matter is,

however, that the Keralite model for growth will not be sustainable in the long run because

Kerala is approaching an impending crisis, However, in this crisis lies the perfect opportunity for

16 Other STP’s in Karnataka are located in Mysore (1999), Manipal (1999) and Hubli (2000).

33

change. Kerala will need to focus on the fundamentals – for example, what are the key drivers of

economic growth and how can migratory patterns help explain some of these drivers? – to

successfully navigate the crisis ahead.

This study has shown that the flow of Keralite migrants to the Middle East has had a

positive impact on the state economy, due, in large part to the remittances sent home by migrants

to their families. An underlying worry about the future of Keralite workers migrating to the

Middle East has been that the unskilled workers don’t have the requisite training to compete for

the semi-skilled jobs demanded by the Middle Eastern labor markets. Thailand and Indonesia,

for example, have given their workers vocational training, which has reportedly been very

successful. We recommend, however, that the Kerala government not focus too heavily on

encouraging migration to the Middle East. While in the past, this may have been a convenient

ploy to improve the fiscal situation in the state, it is quite clear now that the demand for migrant

labor from the Middle East has changed. This, however, poses an excellent opportunity for

Kerala's government to reform its economy by employing workers who would have otherwise

migrated to the Middle East to work in various service industries. The underlying hypothesis of

this paper is that Kerala has not been able to develop a thriving industry in the state. The

government needs to liberalize the economy to provide an impetus for growth in the long run. In

principle, we argue that Kerala can sustain its growth in the future by opening up its market and

focusing its efforts more on the services sector than on manufacturing and industry. Through

such a mechanism, the invisible hand could, in effect, lead these migrants to utilize their skills

optimally in their home state.

Our prognosis evolves from the understanding that Kerala cannot remain insulated for

much longer. They have witnessed how their neighboring state of Karnataka has been able to

develop a vibrant software industry in the presence of obstacles. Hence, Kerala, although a

latecomer in the I.T. arena, could learn from the lessons offered by Karnataka as they venture

into developing a software services sector in the state. The most obvious advantage Kerala

possess is that they will not have to reinvent the wheel. They would only need to modify it.

We believe that with workers returning from the Middle East can be effectively utilized

in the services sector. For example, a fact that is often overlooked is that Kerala has “the best

communication infrastructure amongst all Indian states” [Times of India, December 19, 2001].

Patrick Hellar in his study of Kerala notes that “the high levels of basic and technical education

34

and a well-developed public infrastructure represent critical assets for future growth” [Heller,

(2000), p.514)]. In addition, Kerala has a rich tradition of being an educational powerhouse.

Kerala could leverage this advantage by developing knowledge and skilled-based services such

as software services and tourism, for example, to increase economic growth in the state.

Additionally, Kerala set up a Technology Park in 1994, which today houses more than

fifty companies and over five thousand employees. Companies are beginning to view Kerala’s

software industry as a key area for investment, since the estimated cost savings for I.T.

companies is reported to be significant [Times of India, December 19, 2001]. Rajiv Vasudevan,

CEO of Technopark, argues that additional savings could be generated since Kerala has one of

the lowest employee attrition rates (three to five percent) in India. He argues that this statistic

could have “an enormous impact on costs, with direct savings on recruitment, training and

retention of staff” [Times of India, December 19, 2001].

The biggest problem arising from Kerala’s migration, undoubtedly, has been the large

influx of return migrants and their subsequent unemployment status upon return. As noted

earlier, detailed studies undertaken on the profiles of return migrants indicate that they prefer to

be self-employed. Also, personal interviews indicate that semi-skilled workers often work with

more advanced machinery in the Middle East, which is not available in Kerala. Clearly, workers

returning from Kerala are very entrepreneurial – by lowering import duties on machinery from

the Middle East, the government could better utilize its human resources in the future. Such a

move would help promote employment in Kerala, which would subsequently reduce their

unemployment rate.

It must be stressed that governmental reform is necessary, at least initially, to accelerate

development reforms in Kerala. The markets have been inefficient in allocating resources

optimally, which is evident in Kerala’s poor performance on most economic dimensions. Our

recommendations propose that the government liberalize the economy and then let market forces

determine how resources should be allocated.

Third, policy makers need to take steps to simplify banking procedures and be more

proactive in studying the flow of remittances to Kerala. More detailed studies on the profile of

migrants and their spending dynamics would greatly contribute to the implementation of

effective policies and encourage investments in productive activities. This recommendation is

premised on the belief that policy action will accelerate economic development in the state.

35

Fourth, closer interaction between KSIDC and the Keralite migrants would be beneficial.

By promoting employment opportunities in the state, and subsequently encouraging workers to

invest in industrial ventures, Kerala can maintain its rich tradition of being a welfare state, while

simultaneously developing a strong industrial base.

A fifth recommendation is the establishment of a housing development agency by

migrant families. Given that a large amount of a worker’s savings goes into funding construction

activities, an efficient private agency in the state could help lower the costs of building a house,

for example.

These recommendations propose activities that entail costs. We are confident, however,

that these costs will be borne by the migrants (through higher service fees) but will be offset by

the benefits conferred on the migrants. Personal interviews confirm this standpoint. While the

government need not take any interventionist measures, they would need to take steps to

facilitate growth in the state.

Policy Recommendations: Karnataka-Silicon Valley

In a recent report published by McKinsey & Company, it is estimated that “India needs at

least eight thousand new businesses to achieve its target of building an eighty-seven billion

dollar I.T. sector by 2008 . . . and in the next ten years, 110-130 million Indian citizens will be

searching for jobs, including 80-100 million looking for their first jobs” (McKinsey-NASSCOM

report). If these statistics tell a story, it is plain and simple: while nothing much can be done

about the “brain drain” phenomenon directly, an indirect approach may be required to attract and

retain high-technology workers in Karnataka and in other Indian states. This indirect approach

calls for upgrading infrastructure in the country, promoting an entrepreneurial climate by

promoting venture capital (VC), and encouraging foreign MNC’s to invest more in R&D. 17

Regarding policy prescriptions for Karnataka, it is important to observe that the I.T.

industry is not going to solve all its quality of life problems, however impressive the industry

growth may be. Karnataka must understand that having a diverse economic base is critical for

long-term economic growth. The government of Karnataka needs to take a bottom-up approach

rather than a top-down approach in improving the quality of life of its people. An important lesson from

the study done on Kerala , for example, is that it is far easier for a state with good quality of life indicators

17 On August 3, 2001, Intel opened their first R&D center in Bangalore in partnership with Infosys Technologies.

36

and a literate population to develop a service industry, than for a state with only one vibrant industry (I.T.

in the case of Karnataka) to develop strong quality of life indicators. Understanding this fundamental

result is key to Karnataka’s future growth prospects.

As for the micro-level recommendations, the Karnataka government must look at two

issues: the migration of workers from Karnataka to the Silicon Valley, and its competitive

position in the I.T. sector in the global marketplace, which is illustrated in Figure 2.

Figure 2: India’s Position in the global I.T. marketplace

Source: McKinsey-NASSCOM Study (1998)

This paper has stressed that high-quality software workers leave the state to work in the

Silicon Valley, resulting in tremendous opportunity cost. The government could look to curb this

trend by encouraging workers to stay in Karnataka by reforming its regulatory environment in

such a way that would encourage companies to engage in the production of high-value added

goods and services.

It must be stressed that the government need not take an interventionist role in the I.T.

industry. Rather the government must liberate the I.T sector and foster a climate more conducive

to I.T. growth by providing the industry with basic public goods. Specifically, there are six key

areas that the government needs to address. They include, cyber laws, telecom regulations,

investment policies, capital market regulations, labor laws, and taxation (Source: McKinsey-

NASSCOM Study). By developing superior policies in these areas, Karnataka’s government can

take a significant step towards “enabling” the I.T. sector to move into producing high-value

added goods and services. TCS and Infosys Technologies, for example, are examples of

37

companies that have been able to make the transition into producing high-value added goods.

Figure 3 demonstrates how a company could make the transition from producing low-value

added services to high-value added services.

Figure 3: Moving Up the Value Chain – Speeding up the Process

Source: Tata Consultancy Services

Figure 4 demonstrates the competencies that companies would need to acquire to make

the transition from producing low-value added services to high-value added services. The

government of India, which accounts for 34% of domestic I.T. demand, is looking to partner

with companies that produce high-value added services. For example, TCS is helping “the

Reserve Bank of India build a world-class messaging infrastructure to secure banking

transactions across the country and is helping the Andhra Pradesh government automate several

aspects of its governance framework” (Source: Ramadorai). By adopting such strategies the

government could seek to create a win-win situation, both for itself and for the I.T. industry.

38

Figure 4: Competencies required to make the transition from producing low-value added

services to high-value added services

Source: Tata Consultancy Services

In Singapore, the I.T. industry prospered with active governmental support, and moved

into producing higher value added goods and services quickly. First they undertook ambitious

R&D efforts, something that Karnataka has not been able to do. As Lester Thurow points out,

“no one has ever started substantial investments in R&D at an earlier state of economic

development than Singapore” [Schein, (1997), p. vii]. Hence, a stronger R&D effort is one way

to shift industry focus to higher value goods and services.

Intel, for example, has established an R&D center in India. Further, the large software

houses in India, such as Infosys and Tata Consultancy Services will play a key role in making the

transition into higher valued-added goods and services. Software companies in Karnataka need

to find “incentives for collaboration with local universities” to help develop the I.T. industry

further [Saxenian, (2000), p.27]. Sharing of knowledge is crucial in developing and building

competencies in the I.T. market.

Our principal recommendation deals with creating a regulatory environment such that

I.T. companies can develop and prosper in the state. A comparison of Hewlett Packard’s

initiatives in India and Singapore illustrates that the absence of complementary government

39

initiatives can prove to be a detriment to growth and investment. Hewlett Packard (HP) set up a

development center in Singapore in 1970, and in India in 1989. In the first two decades of

operations in Singapore, HP “expanded its various manufacturing facilities, set up design

centers, R&D facilities, and multiple software development centers…. HP Singapore started with

62 employees in the mid 1960s….these operations have grown to a fixed investment of over

$300 million and a staff of more than 6,000 today” [Schein, (1997), p. 21]. Following this

success, HP Singapore was awarded Operational Headquarters Certification to support a range of

high value-added regional activities from procurement to corporate finance, marketing, IT and

general management.

In contrast, HP’s operations in India began modestly in 1989, although negotiations to

establish an offshore development center (ODC) began as early as 1980. It took over nine years

to finalize an agreement to set up an ODC in Karnataka, whereas in Singapore, it took barely two

months. Further, after eleven years of operations, HP India has only 316 employees, with only

one manufacturing and development lab in Karnataka. The bureaucracy and inadequate

development of infrastructure in the state contributed, in part, to the slow rate of development of

HP’s ODC.

It should be noted, however, that there are considerable investment expenditures involved

in R&D, with no guaranteed payoffs. In the case of Singapore, this risk paid off but at the

expense of an increase in the overall cost of doing business in the country. What is important,

however, is that this has not deterred companies from doing business in Singapore. As one

executive of an MNC company noted, “Singapore is the most expensive place in the world to do

business, ten times more than Malaysia and twenty times more than China, but the infrastructure

is so good that we will still be happy to stay in Singapore” [Schein, (1997), p. 206].

R&D spending by Indian software companies was only 3.4% of total revenue in 1999-

2000. (Source: NASSCOM). In the same year, R&D spending for most software companies in

the Silicon Valley ranged from 16-25% of revenues. There is plenty of scope for policy in

Karnataka since the government can play an important role in spurring R&D expenditures given

that they are the biggest drivers of the domestic I.T. demand.18

Second, more companies in Karnataka need to build and bring to market products that

would serve domestic needs. The Simputer, for example, was a product developed by a group of

18 The government of India accounts for 34% of domestic IT demand.

40

Bangalore-based engineers that introduced to the market, “a low-cost mobile personal computer, priced

at $200” [Saxenian (2000), p. 24]. Such innovative products catering to domestic needs could strengthen

Karnataka’s position in the global I.T. marketplace.

A third policy recommendation is to establish a mechanism to facilitate contacts19 with

successful migrant software engineers from Karnataka, as well as from other parts of India, and

to gather their inputs on how to develop growth industries in Karnataka. Given their wealth of

experience, the government of Karnataka must look into ways to use them as consultants, just

like the Taiwanese government consulted their emigrants when they built their highly successful

semi-conductor industry in the 1980s. By encouraging communication through a website, for

example, the government can foster relationships with Indian entrepreneurs from all over the

world.

Further, the Karnataka government could ease investment restrictions placed on software

engineers working overseas to invest in businesses in Karnataka. Another way to raise capital

from migrants would be to encourage them to donate generously to their alma mater. Kanwal

Rekhi, reportedly the first Indian to become a millionaire in Silicon Valley, recently donated five

million dollars to his alma mater (Indian Institute of Technology). Similar initiatives can go a

long way in improving the quality of education in the academic institutes in the country.

Conclusion

While migration at the micro-level has been studied, the macro-foundations of migration

have largely been ignored. This is especially true for the governments of lesser-developed

countries. The Indian government, in particular, has traditionally accepted the importance of

migration but has been so deeply preoccupied with solving other problems such as illiteracy and

poverty (to name a few), that migration has not been given the attention it deserves.

This study has shown the impact of migration patterns of workers from two South Indian

states, Kerala and Karnataka, to the Middle East and to the Silicon Valley respectively. This

comparison is informative, given that Karnataka is a capitalist state, while Kerala is a socialist

state. Despite historical data that suggests that socialist states fare worse than capitalist states on

quality of life metrics, Kerala has fared better than most Indian states on these metrics. However,

41

this study has shown that quality of life indicators do not have a very big impact on migratory

patterns. Rather, the study suggests that it is economic factors in the home state that drive

migratory patterns. This conclusion prompted us to study the relationships between migration,

trade policies and economic development policies in more detail.

This study has also shown the importance of studying the financial and goods flow

between the host country and the home state. By investing these flows into more productive

assets, the governments of the two states could maximize the benefits that migrants indirectly

confer on each state’s economy. After all, what migrants possess most of all is ambition –

channeling this ambition effectively could unleash significant gains to the individual, to the state

and to the nation. Just how long this realization will take, remains to be seen.

19 One means of strengthening contacts with software engineers in Silicon Valley, as well as in other parts of theworld, would be to offer citizens the right to have “dual citizenship”, that is, for Indians holding American passportsto be allowed to maintain their Indian citizenship too

42

Appendix A: Methodology for Research

There are two types of research that have been employed in this study. The first is

primary research, which was undertaken in India, the United Arab Emirates, and the United

States. A set of interviews was conducted with consuls in the Indian embassy, officers at the

Reserve Bank of India, and workers who had recently migrated. The information generated from

these interviews has been documented and used to make some assumptions on the quantification

of the financial flows.

Appendix B: Migration of unskilled workers to the Middle East

Labor flows from Kerala to the Gulf are undertaken on a contractual basis whereby

workers are matched to a corresponding job based on the demand for their services as well as on

their skill level. Primary research indicates that there are a large number of companies that run a

“contractual labor” business. This typically means that companies in the Gulf notify them of

their demand for labor, for which they pay a pre-determined cost. The contractual companies

then find workers with similar skill sets and transport them to their respective destinations. Once

they arrive, they are given quarters to stay in (6 people per room), a common restroom, and a

meal plan, which are all included in the worker’s agreement with the contractual companies. In

addition, each worker is paid by the hour (ranges from U.A.E. Dhirams 6 to 8 depending on the

worker’s skill set). The migration to the Gulf states from Kerala signifies “temporary migration”

rather than “permanent migration.” After a stint of between five and ten years (which is

determined by the worker’s contract), migrants return to Kerala.

43

References

Part A: Books/Journals

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Birks, J.S. & Sinclair, C.A.International Migration and Development in the Arab Region, International Labor Office,Geneva, 1980

Borjas, George J.The New Economics of Immigration, p. 1-19The Economic Benefits of Immigration, The Journal of Economic Perspectives, Vol. 9, Issue 2,Spring 1995, p. 3-22

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Franke, Richard & Chasin, BarbaraKerala State: A Social Justice Model, Multinational Monitor, July/August 1995, Vol. 16, No.7&8

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Saxenian, AnnaLeeSilicon Valley’s New Immigrant Entrepreneurs, Public Policy Institute of California, 1999Bangalore: The Silicon Valley of Asia? Center for Research on Economic Development andPolicy Reform, Stanford, May 2000

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Part B: Newspaper Articles/Websites

Software – The Arrowhead of India’s IT WeaponryAsia Times, December 7, 2000

In India, A Bit of CaliforniaFar Eastern Economic Review, November 2, 2000

Return Passage to India: Émigrés Pay BackThe New York Times, February 29. 2000

Trolling for Brains in International WatersThe New York Times, April 1, 2001

Chalo Dubai, Chalo Silicon ValleyThe Times of India, 14 January 2001Karnataka Tops in Software ExportsThe Times of India, 23 April 2001

46

Emigration from Kerala Set To Taper OffBusiness Line, The Hindu, 23 September 1999

Expatriates Population – Striking a Balance in the UAE’s populationGulf News, 17 February 2001

The Indian Diaspora in the United StatesReturn2india.com

McKinsey-NASSCOM Study (1999)Indian American Community - A Story of AchievementsEmbassy of India (www.indianembassy.org/indusrel/comm.htm)

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Part C: Statistical Bibliography

Handbook of Statistics on Indian Economy, Reserve Bank of India, 2000

Statistical Outline of India, 2000-2001Tata Services Limited, Department of Economics and Statistics, Mumbai, India

Profiles of States, Center for Monitoring Indian Economy (1997)

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