brain drain and development traps- a critique

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BRAIN DRAIN AND DEVELOPMENT TRAPS: A CRITIQUE

For

Term Paper

HUL 762

By

Siddharth Jain

2010PH10870

Sourav Sinha

2010ME10732

Harshul Kumar

2010TT10919


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INTRODUCTION

Migration is a hot topic, doing the rounds of international policy discussions. The issue of migration is

viewed not only from the perspective of immigration of valuable human capital into geographical

regions that can provide better opportunities and return, but also from the focus of immigration of

such human capital from territories that are unable to cater to the needs, aspirations and challenges of

such capital. It is the latter issue that has gained considerable momentum in developing economies,

considering the massive flight of human capital from such states in an increasingly globalised

economy, not to mention the concentration effects of such international mobility. This viewpoint

emphasizes that a significant cause of impoverishment of developing countries can be attributed to the

emigration of skilled labour, a phenomenon known in layman terms as brain drain.

Another topic that has been an important domain of development research is economic growth and

poverty traps, known in academic terms as development traps. Most mathematical models that focus

on traps can be characterised by multiple equilibria and the fate of the economy in absence of

intervention, is determined by the historical endowment of the country.

The paper, this report is based on; attempts to link these two topics through the integration of an

endogenous international migration model into a simple growth model to study regimes of

development determined by the interaction of technology and policy parameters. What is significant

about this model is how the variations in technological assumptions can affect the fate of the

economy. Simultaneously, this model draws attention to the importance of a policy parameter in

determining the countrys future.

FOCAL POINTS OF BENASSY- BREZIS MODEL

In this section, we will talk about some of the important assumptions and conclusions of this model.

We will attempt to explain these points through their link to previous literature.


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1. Though influenced by De la Croix and Docquier 2010 [1], which is an expectations driven

poverty trapmodel, this paper belongs to the alternate category of history driven poverty

traps, where the dynamics are completely deterministic.

2. The dynamics that this paper upholds are caused by the interplay of two main elements-

positive externalities a la Romer 1990 [2], and a migration mechanism that low real wages in

home country compared to real wages abroad will fuel migration of skilled population from

home country to abroad.

3. The potentially different dynamic regions can be attributed to two sets of parameters-

technology and policy.

4. Technology can be summed up in two parameters- the returns to scale a la Solow (1956) for

skilled labour and degree of productive externalities (1990) linked by a production function.

This paper shows that the development path of the economy will be determined by which of

these two effects dominate. If diminishing returns dominate, it results in Solowian effects.

The economy is more stable and converges to a single equilibrium point, irrespective of its

historical endowment. However, if production externalities dominate, then it can result in

several development regimes, multiple equilibria, poverty traps and high income equilibria.

Which of these conditions arise, as shown in this paper will depend on the single policy

parameter. This policy parameter is basically a heterogeneous factor combining all efforts by

public or private ventures in order to boost human capital growth. In more common terms,

this policy parameter can be considered as a proxy for the amount of investment in higher

education especially tertiary education, the quality and accessibility of such education, the

training provided to individuals to build specific capabilities. In another context, this could

also mean the level of immigration quota in order to attract human capital from abroad or the

return benefit to erstwhile emigrants. It has been shown that under the second condition of

dominating positive externalities in production, the policy parameter has two characteristic

values. For very low policy parameter values, the economy can fall in stable steady state low

income equilibrium, irrespective of its history. For median values the economy will exhibit a


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case of multiple equilibria characterised by a stable low equilibrium and unstable middle

equilibrium and a stable high equilibrium. Where the country converges to will depend on

where the country starts off. For high values of policy parameter, the economy will converge

to a single stable steady state high income equilibrium point.

5. A very significant result of this model under the conditions of dominating positive externality

is that a high stock of skilled labour will result in high real wages of skilled labour in the

home country.

However, this model and its conclusions should only be considered only in the light of the

assumptions and the concomitant complexities that it circumvents. In the next section, we will try

to analyse some of these issues through reference to literature and empirical studies.

SOME COMMENTS

In this section, we will try and exposit on some of the assumptions in this model and lend a

critical thought on their justification. We will take forward this analysis in the following lines.

1. BRAIN DRAIN VERSUS BRAIN GAIN

This paper like many of its precedents: Bhagwati and Hamada (1974), Groubel and Scott

(1966), is based within the confines of the context that migration of skilled labour from a

source country adversely affects its economy. However, there has been a slew of recent

research that has posited on the positive effects of brain drain. This line of research has been

studied by Beine et al (2001), Gibson and McKenzie (2012), Mountford (1997), Stark (2004)

and Easterly and Nyarko (2009). There are many different theories regarding the positive

impact of migrating skilled labour.

In Beine et al [3] it has been shown that under certain conditions of uncertainty regarding

opportunity of migration, there is a pre-migration brain gain effect and post migration brain

drain effect. If the source economy is initially poor in human capital and has low real wages,


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then incentives to acquire education and therefore accumulate human capital in the long run

does not exist if the source economy disallows emigration. However, when the source

country allows emigration, then people will have an incentive to invest in and acquire higher

education boosting human capital. Even though some might emigrate abroad, a fraction of

the skilled human capital will still stay back in the source country under reasonable

assumptions of barriers to migration, tangible as well as intangible. This has been called the

beneficial brain drain (BBD) effect.

In another paper [4], it has been shown that under three conditions of opportunity, incentive

and information brain drain can have a positive effect because of return immigrants. In this

particular model, the information available to employers of host countries is critical to the

dynamic evolution of migration of skilled as well as unskilled labour, discovery and

evaluation of skill levels and ultimately selection and rejection of high skilled versus low

skilled labour. However, the time period between migration and such discovery is likely to

boost the skill level even in low skilled labour, thus increasing the human capital level when

such relatively low skilled labour return to their home countries.

In another model [5] Brezis et al has studied student migration as distinct from worker

migration but have tried to correlate the two through the aspect of information. Student

migration is quite distinct from the international mobility in the labour market because of two

different reasons. The first reason is the lower restriction on migration of students to acquire

education in countries that are known to provide high quality of tertiary education, as against

restrictions on the number of immigrant workers seeking permanent residence in the host

country. The second reason as evidenced in this paper is the distinction between the quality

of education and real wages. It has been shown in this paper that countries with high wages

are not necessarily the ones with high quality of education and also that students tend to

migrate to countries that have high quality of education. Whether or not they stay back in

their host countries post education period is again a matter of information available to them


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regarding the value of their degree and acquired skill sets in the host country versus their

home country.

Therefore, literature suggests that migration of skilled labour if studied only from the aspect

of brain drain might give tangentially different results than if they are looked at through the

perspective of brain gain effects. The positive impact of brain drain is primarily through the

return of skilled migrants to their home country, knowledge spill-overs and important

network building efforts. This is extremely evident in the case of India, where the growth of

the IT sector can be primarily attributed to the network that migrant skilled labour in the

Silicon Valley had with their India counterparts. In a comment on Kochchar et al by Abhijeet

Banerjee (2006), he says that the IT sector grew out of individuals in India with contacts in

the US and who had low opportunity costs of getting outsourced work done in their spare

time. The effects of brain gain can also be accounted for by the remittances that individuals

tend to send back to their country to support their families or other ventures.

It is therefore important to incorporate the effects of brain gain in order to get a more realistic

result from this model.

2. INCENTIVES TO MIGRATION

This paper assumes that the only incentive to migration to the skilled labour within the home

country is the real wage rate of skilled labour. However, the authors of this report would like

to contend this assumption in the following lines:

A more practical assumption to the incentive to migration would be wage differential

between the two countries as used in De la Croix and Docquier. In fact, in a 1962 paper by

Sjastaad, it has been shown that the two most important incentives to migration are wage

differential and migration costs. It can also be shown that the rate of migration is not

monotonic with wage differential.

Empirical literature suggests that migration is highest for middle income countries, where

people have incentives to migrate as well as the ability to cover to migration costs. Migration


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costs could entail a host of factors including travel, visa applications, communication with

family at home, as well as more microeconomic factors like difficulties in acclimatization to

new environment, culture and physical distance between their host and home country.

Migrants from low income countries may be faced with liquidity issues, thus deterring

migration. However, high-income-country individuals maybe looking for an entirely

different set of incentives to consider migration to another country. These may be factors like

climate, lifestyle issues or something as economic as tax incentives (case of UAE). Again the

determinants of migration depend on the section of individuals who are migrating. If this is

workforce that is people looking for jobs then for them incentives may be wage rates and

migration costs. However as evidenced in the paper by Elise Brezis [5] if this section is

students then their incentives may be the quality of education and cost of education rather

than wage rates. Therefore, the determinants of migration are as diverse as the stock of

migrants themselves. Incorporating only real wages may not be exactly realistic.

3. ATTRITION FACTOR

In this paper, the focus has been on the policy parameter z. Under conditions of dominating

positive externalities, it has been shown that changes in the policy parameter will shift the

economy from one state to another. However, we would like to show that there are other

factors in the model, most importantly the attrition factor that can be varied in order to transit

between these three equilibria conditions.

The focus on attrition factor is primarily because this can be treated as a very important

policy parameter from the producer point of view. Better work environment, higher

incentives, other than monetary in the form of learning opportunities, exposure, challenges

and growth, will improve the attrition factor. The attrition factor can also be improved by

government policies, for example increasing the retirement ages, or increasing the limit on

age for entry into certain government sector services like the civil services. It can be shown

that if the policy parameter value is more than a lower limiting value, then the economy can


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move from one equilibrium to another, more specifically, it can escape from the poverty trap

to high income equilibrium only by increasing the attrition factor. However, this condition is

again valid under dominating positive externalities in production.

4. INTERMEDIATE FIRM SECTOR: ABSENCE OF CAPITAL

This model does not incorporate capital anywhere, neither in the intermediate sector nor in

the final output sector. However, it is a very realistic case that wherever high skilled

individuals are employed, the sector tends to be extremely capital intensive. This is because

high skilled labour will predominantly be involved in generation of new technology and this

requires a high investment of capital. In the Romer 1990 model, this has been incorporated

by including a third sector that generates technology for use in the intermediate sector. This

model however, does not leave room for any such incorporation.

5. FISCAL COSTS AND EXTERNALITIES

In this model the policy parameter z has been introduced with no further consideration on

cost-benefit effect of whosoever invests for a higher z. If the investment is on part of the

public sector then the fiscal cost of investment should be covered for by taxation and other

policies. If this investment is done in the private sector then their profits should account for

this investment.

CONCLUSION

The current model in the paper by Benassy and Brezis is groundwork in the context of involving

an exogenous policy parameter that under conditions of dominating positive externality can move

the economy out of a poverty trap into high income equilibrium. In this report we have tried to

critically analyze some of the assumptions in this model in the light of literature survey.


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REFERENCES

1] De la Croix, Docquier D., Do Brain Drain and Poverty Result from Coordination Failures?,

Working Paper, UC Louvain

[2] Romer P.M., Endogenous Technological Change, Journal of Political Economy, 98 (1990), 71-102

[3] Beine Michael, Docquier Frederic, Rapoport Hillel, Brain Drain and Economic Growth: Theory

and Evidence, Journal of Development Economics, Vol 64 (2001), 275-289

[4] Stark Oded, Helmenstein Christina, Prskawetz Alexia, A Brain Gain with a Brain Drain,

Economic Letters, 55 (1997), 227-234

[5] Brezis Elise S., Soueri Ariel, Why do studets migrate? Where do they migrate to? AlmaLaurea

Working Papers, ISSN 2239-9453

[6] Gibson John, McKenzie David, Eight questions about Brain Drain, Discussion Paper Series, IZA

DP No 5730, May 2011

[7] Mountford Andrew, Can a brain drain be good for growth in the source economy?, Journal of

Developmental Economics, 53 (1997), p 287-303

[8] Beine M., Docquier D., Rapoport H., Brain Drain and Human Capital Formation in Developing

Countries: Winners and Losers, Discussion Paper, May 2006

brain drain and development traps- a critique

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