BRUSSELS ECONOMIC REVIEW - CAHIERS ECONOMIQUES DE BRUXELLES VOL. 47 -N°I SPRING 2004 Who Is AFRAID OF THE BRAIN DRAIN? HUMAN CaPITAL FLIGHT AND GROWTH IN DEVELOPING COUNTRIES* HILLEL RAPororT (DEPARTMENT OF ECONOMICS, BAR-ILAN UNIVERSITY, CADRE, UNIVERSITY OF LILLE I, AND STANFORD CENTER FOR INTERNATIONAL DEVELOPMENT (SCID), STANFORD UNIVERSITY) ABSTRACT: This paper presents a non-technical review of the recent theoretical and empirical literature on the growth effects of the brain drain in developing countries. It focuses on the idea that migration prospects may foster human capital formation at home even after emigration is netted out. Channels through ‘which highly-skilled migrants continue to impact on their home country’s economy are also reviewed, remittances, return migration, and the role of migrants’ networks in promoting bilateral trade and knowledge diffusion Je. CLassirication: F22, 524, J68. Keyworps: skilled migration, immigration policy, human capital, growth. * This paper is the extended version of a policy brief written for SIEPR, the Stanford Institute for Economic Policy Research, in April 2002 (Rapoport, 2002). It draws on joint work with Michel Beine and Fredetic Docquiet (Beine et al., 2001 and 2003) and Ravi Kanbur (Kanbur and Rapoport, 2004). Correspondance: Hillel Rapoport, Department of Economics, Bar-Ilan University, 52900 Ramat Gan, Istael. Email: hillel@mail.biu.ac.il, 89WHO IS AFRAID OF THE BRAIN DRAIN? HUMAN CAPITAL FLIGHT AND GROWTH IN DEVELOPING COUNTRIES INTRODUCTION The term “brain drain” was first popularized in the 1950s with reference to the immi- gration to the US of first-rank scientists from countries such as the U.K., Canada, or the former Soviet Union; it is now used in a more general sense to designate the interna- tional transfer of human capital (people with tertiary education) from developing to developed countries. During the 1970s, it was taken for granted that the emigration of highly-skilled people was detrimental to the origin countries. Many prestigious aca- demic economists (notably Jagdish Bhagwati) were part of this consensus and delivered more or less the following message: i) the brain drain is basically a negative externali- ty imposed on those left behind in developing countries; it amounts to a zero-sum game, with the rich countries getting richer and the poor countries getting poorer; and, iii) at a policy level, the international community should implement a mechanism whereby international transfers could compensate the origin countries for the losses incurred as a result of the brain drain, for example in the form of an income "tax on brains" (later coined "Bhagwati Tax") to be redistributed internationally.' This view is perfectly illus- trated in the following citation: “In contrast to the case of foreign investment, where the gain fiom the international factor movement is divided by the two countries, the developed country gains now at the cost of those left behind in the less-developed country. The emigrants similarly are seen to gain at the sacrifice of those left behind" (Hamada, 1977, p. 20) During the last two decades, there has been a tremendous increase in the magnitude of the brain drain, However, as | explain below, it may well be that some developing countries, if not the majority of them, have experienced a social gain from this brain drain, The main reason for this is that migration prospects increase the expected return to education in poor countries and, hence, foster domestic enrollment in education. When this incentive (or "brain") effect dominates the observed emigration (or "drain") effect, the origin country may in fact end up with more human capital than its erstwhile no-migration human capi- tal stock, I first summarize in Section | the data on the magnitude of the brain drain, and then consider in Section 2 the possible positive feedbacks for the origin country, showing that these are unlikely to compensate for potential losses. The central idea of the new brain drain theoretical literature, namely, that migration prospects may foster human capital for- mation in developing countries even after actual emigration is netted out, is exposed in Section 3. Section 4 summarizes the results from recent empirical studies who found sup- portive evidence for the beneficial brain drain hypothesis. The last Section concludes. 1, How Bic Is THE BRAIN DRAIN ? Although the numbers may be disputable, it is clear that the brain drain has increased dramatically since the 1970s. Indeed, nearly thirty years ago, the United Nations estimated * See the special issue of the Journal of Public Economics edited by Bhagwati on “Income taxation in the ptes- ence of international personal mobility”, August 1982. 90HILLEL RAPOPORT the total number of highly-skilled South-North migrants for 1961-72 at only 300,000 (UNCTAD, 1975); less than a generation later, in 1990, the U.S. Census revealed that there were more than 2.5 million highly educated immigrants from developing countries residing in the U.S. alone, excluding people under the age of 25 (that is, without count- ing most foreign students). Country studies commissioned by the International Labor Organization also showed that nearly 40% of Philippines’ emigrants are college educat- ed, and, more surprisingly, that Mexico in 1990 was the world's third largest exporter of college-educated migrants (Lowell and Findlay, 2001). Until recently, there were no comparative data on the magnitude of the brain drain. Such data are now available thanks to William Carrington and Enrica Detragiache from the International Monetary Fund, who used US 1990 Census data and other OECD data to construct estimates of emigration rates at three educational levels (primary, secondary and tertiary) for about 50 developing countries (Carrington and Detragiache, 1998 — henceforth CD). The CD estimates, however, suffer from four main shortcomings. First, it is assumed for each country that the skill composition of its emigration to non-US OECD countries is identical to that of its emigration to the US; consequently, the CD estimates are reliable only for countries for which the US is the main migration desti- nation. Second, at the time Carrington and Detragiache conducted their study, the EU immigration data did not allow for a full decomposition of the immigrants’ origin-mix; more precisely, most EU countries used to publish statistics indicating the country of origin only for the top 5 or 10 sending countries. For small countries not captured in these statistics, the figures reported in the CD data set are therefore clearly biased: the total number of emigrants is under-estimated, and one is (mis)led to conclude that 100% of those who immigrated to countries belonging to the OECD immigrated to the US; as acknowledged by Carrington and Detragiache, this may approximate the reality for Latin America, but is clearly erroneous, for example, in the case of Africa. Third, the CD data set excludes South-South migration, which may be significant in some cases (e.g., migration to the Gulf States from Arab and Islamic countries). The CD data set is an important step towards building a fully-harmonized data set on migration rates by education levels. However, it must be used with caution because the reliability of the CD estimates for a given country depends on whether the US immi- gration data gives a good quantitative and qualitative approximation of overall migra- tion outflows from that country. In an effort to reflect the limitations of the CD data, Table | thus splits the Carrington and Detragiache estimates into three groups of coun- tries: it is only for group A, composed mainly of Latin American countries, that the CD estimates may be considered reliable. Finally, due to the definition of immigrants as foreign-born individuals, children arriv- ing with their parents and who acquired higher education in the host country later on are counted as highly-skilled immigrants; this is a source of over-estimation of the brain drain, which is potentially important for some counties. oOWHO IS AFRAID OF THE BRAIN DRAIN? HUMAN CAPITAL FLIGHT AND GROWTH IN DEVELOPING COUNTRIES ‘TABLE 1. MIGRATION RATE OF SKILLED WORKERS PER COUNTRY OF ORIGIN 92 lode county Brin dain Miration rote 4S Janrats {8 tumigots _ fins) (a) (involume) | fin sof 0860) ART A Limited spl with Nighy ell counties (30 counties) ~ (eay Yana 8 a Gian Tea Jim faamaica nA a3 159913 10 at [rinitad-tobago 58 95 ssa10 1000 ‘st fet satvador 2 na 253625 100.0 Ions |hona 2) 04 1244 33 an m0 6 67 68883 100 ic |Wicragua 18a a 61168 10900 Hon |Honduras 387 3 50306 1099 Kor [South Korea 149 42 sro 39 ‘tom | Dominican Rep. ur 6s wen 9,7 (cua | usterata Bs 36 aeTK6 190 ex 103 WT 2703638 100 i 4 aa 2854 ne ie ma 26 mas 1000 Irak er 03 son 32 ct 6 ta mesa 583 cat 58 tm 162739 969 lay 5 05 52261 508 Bot 2 07 wire 100.0 ecu 38 18 oe 1009 low 38 aa wnt 1000 Per 34 1 saz ana kc 1 on s79 ss lag a1 08 e000 Tea lind 28 02 30 co hen an 04 2636 mA Per 2 02 en 100 Indo a5 na wae sos ithe is 02 sue a6 ‘sa uu 02 53904 60 ‘Par; Small countries with ising non-US immigration data (21 countries) (Gan Yambia eis 02 7 1066 SL |Siera Leone a3 03 355 100.9 nc 23 36 1620 10909 lus 188 o1 60 1090 ken 10 02 are woo oe a6 ma 20 190 aw 2 02 00 ‘00 iam 5 01 163 eo in 4 an 361 1000 (om aR ma 1694 10.0 ye 3 a7 21806 1000 es 29 2 160 1000 Pog 22 ta 480 10900 va 22 ma 00 1000 bw 2 ta sat 10900 sud 18 ma 286 00 kan ur na 160 ee 03, 13 na “0 100 batt a9 ma 20 1060 (on os a 200 so fen _|penin 04 ma 10 000 art Countries with a hare of US earants lower than 30% (@ cunts) Tun ‘Tunisia 3 36 ‘aie ah lig Algeria 55 6a 3904 06 Sen | Senegat a 26 B70 20 Tur flukey 402 es 3605 is sit |srLana ae oa ams 1a IMat_—_[Malaysia 20 1 35261 182HILLEL RAPOPORT Table 1 reveals that the brain drain is a general phenomenon, at work for all types of developing countries (large and small), from all regions of the developing world: from the CD figures, it comes that the total cumulative loss of “brains” by region may be set at approximately 15% (of the remaining stock of people with tertiary education) for Central America, 6% for Africa, 3% for South America, and 5% for Asia. Since 1990, the chief causes of the brain drain have gained in strength and it is there- fore likely that the trends described above have been confirmed. Indeed, selective immigration policies first introduced in Australia and Canada in the 1980s have spread to other OECD countries: the Immigration Act of 1990 as well as the substan- tial relaxation of the quota for highly-skilled professionals (H1-B visas) in the US cer- tainly constitute the most influential change in immigration policy over the last decade; in addition, a growing number of EU countries (notably France, Germany and the UK) have recently introduced similar programs aiming at attracting a qualified workforce (OECD, 2002). In the current context of globalization, such selective immigration policies can only reinforce the natural tendency for human capital to agglomerate where it is already abundant. Whaat are the consequences for sending countries? To the same extent that immigration of a skilled labor force is seen as beneficial to receiving countries, it would seem that depriving developing countries from one of their most scarce resources can only affect their growth prospects negatively. In fact, such a pessimistic view may be mitigated in two ways: first, there could be positive feedbacks for the source country in terms of remittances or technology transfers; second, one has to correctly qualify the no-migra- tion scenario and wonder about the right counterfactual when it comes to evaluating the growth effects of the brain drain, 2, Wuat FEEDBACK EFFECTS ? Obviously, the brain drain may induce positive feedback effects as emigrants contin- ue to affect the economy of their origin countries. Such possible feedbacks include migrants’ remittances, return migration after additional skills have been acquired abroad, and the creation of networks that facilitate trade, capital flows and knowl- edge diffusion? In the case of migrants' transfers, we know from the remittances literature that the two main motivations to remit are altruism, on the one hand, and exchange, on the other hand. It is well-known that altruism is primarily directed towards one's immediate family, and then decreases in intensity with social distance. By contrast, in principle, no such proximity is required in the case of exchange; the exchange-based theory of remittances ‘See Rapoport and Docquier (2003) for a review of the remittances literature, and Domingues Dos Santos and Postel Vinay (2003) on return migration and knowledge diffusion, 93WHO IS AFRAID OF THE BRAIN DRAIN? HUMAN CAPITAL FLIGHT AND GROWTH IN DEVELOPING COUNTRIES, posits that remittances simply buy various types of services such as taking care of the migrant’s assets (¢.g., land, cattle) or relatives (children, elderly parents) at home. Such transfers are typically observed in case of a temporary migration and signal the migrants’ intention to return, Hence, someone moving with his or her immediate fami- ly on a permanent basis is less likely to remit (or is likely to remit less) than someone moving alone on a temporary basis. And indeed, we know from household surveys that despite their higher earnings potential, educated migrants tend to remit relatively less than their unskilled compatriots, precisely because they migrate on a more permanent basis (with family). This is confirmed at an aggregate level by Faini (2002), who shows that migrants’ remittances decrease with the proportion of skilled individuals among emigrants and concludes that “this result suggests that the negative impact of the brain drain cannot be counterbalanced by higher remittances”, As to return migration, we also know that in general, return migration is not signif- icant among the highly educated unless sustained growth preceded return, For example, less than a fifth of Taiwanese PhDs who graduated from US universities in the 1970s in the fields of Science and Engineering returned to Taiwan (Kwok and Leland, 1982) or Korea, a proportion that rose to about one half to two-thirds in the course of the 1990s, after two decades of impressive growth in these countries. Interestingly, the figures for Chinese and Indian PhDs graduating from US univer- sities in the same fields during the period 1990-99 are fairly identical to what they were for Taiwan or Korea 20 years ago (stay rates of 87% and 82%, respec- tively) (OECD, 2002). In the case of India, Saxeenian (2001) shows that despite the quick rise of the Indian software industry, only a fraction of Indian engineers in Bangalore are returnees. Hence, there seems to be no room for optimism on this front either, return skilled migration appearing more as a consequence than has a trigger of growth. Another channel whereby the brain drain may positively affect the source country is through the creation of business and trade networks; such a “Diaspora externality” has long been recognized in the sociological literature and, more recently, by economists in the field of international trade. In many instances indeed, and contrarily to what one would expect in a standard trade-theoretic framework, trade and migration appear to be complements rather than substitutes (e.g., Gould, 1994). Interestingly, such a comple- mentarity has been shown to prevail mostly for trade in heterogeneous goods, where eth- nic networks help overcoming information problems linked to the very nature of the goods exchanged (Rauch and Casella, 2002, Rauch and Trindade, 2003). How is the relationship of substitutability or complementary between trade and migration impact- ed by the skill composition of migration, however, remains unclear. In the same vein, whether FDI and migration are substitutes (as one would expect) or complements remains an unanswered question. On the whole, the evidence on the exact role played » Gaillard and Gaillard (1997), and Lowell and Findlay (2001), review this literature. 94HILLEL RAPOPORT by the highly educated in the creation of trade, business and scientific networks has so far been too anecdotal and limited to undermine the strongly negative view of the brain drain that has prevailed until recently. 3. AN OPTIMAL BRAIN DRAIN ? THEORY Modern theories of endogenous growth have considerably renewed the analysis of the relations between education, migration and growth. Unsurprisingly, the first models to address the issue of the brain drain in an endogenous growth framework all emphasized its negative effects (e.g., Miyagiwa, 1991, Haque and Kim, 1995). At the same time, however, a series of studies have tried to promote the simple idea that one should also look at Aow a given stock of human capital is built up. In particular, it is likely that in the presence of huge inter-country wage differentials, as is the case between developing and developed countries, the prospect for migration deeply modifies the incentive struc- ture faced by developing countries’ residents when making their education decisions. The idea that education investments are impacted by migration prospects is not new, however, and may be traced back in the brain drain literature at least to Bhagwati and Hamada (1974) and McCullock and Yellen (1977). The novelty in the more recent liter- ature lays primarily in the introduction of uncertainty into the migration process, creat- ing the possibility of a gain for the source country. The conditions required for this pos- sibility to materialize have been the subject of a number of theoretical contributions (Mountford, 1997, Stark et al., 1998, Vidal, 1998, Docquier and Rapoport, 1999, Beine et al., 2001). Using a slightly different perspective, Stark et al. (1997) elaborated on the possibility of a brain gain associated with a brain drain in a context of imperfect infor- mation with return migration. McCormick and Wahba (2000) also obtained the result that more highly-skilled migration may benefit to those left behind, but in a trade-theo- retic model where migration, remittances and domestic labor-market outcomes are jointly determined and multiple equilibria arise, with the high-migration equilibrium pareto-dominating the low-migration equilibrium. Finally, holding wage differentials constant but allowing for differences in the variability of the rate of return to human capital, Katz and Rapoport (2001, 2003) argued that migration imparts education with an option value and showed that increased variability may well increase the expected (post migration) stock of human capital at origin. The basic mechanisms at work in these models are best illustrated through a numerical example. Assume, for example, that the expected annual wage premium for someone with tertiary education is $5,000 in the home country and $30,000 in the U.S; then, even a relatively small probability of immigration to the US, of, say, 20%, has a huge effect on the expected return to human capital (in this numerical example, it is exactly doubled assuming a zero emigration probability for an unskilled individual) and, there- fore, is likely to foster domestic enrollment in education significantly even after emi- gration is netted out. 95WHO IS AFRAID OF THE BRAIN DRAIN? HUMAN CAPITAL FLIGHT AND GROWTH IN DEVELOPING COUNTRIES For this to occur it is essential to assume that education is a necessary but insufficient condition for migration. In other words, the education decision made during one's youth is made under uncertainty regarding future migration, with educated agents facing a probability p to be allowed to migrate and a probability (/-p) to stay home once adults. Such uncertainty may be due to personal or external factors, the most obvious justifi- cation for the context of uncertainty being that international mobility is restricted by immigration authorities at destination, and is so with some arbitrariness. To account for this, assume that the probability of migration depends solely on the achievement of a given educational requirement, which is observable, and not on individuals’ ability, which are not (i.¢., migrants are assumed to be randomly selected among those who sat- isfy some kind of prerequisite with informational content regarding their ability - in our case, education). This is clearly a simplification, however; in reality, immigration authorities may be combining education with other selection devices such as tests of IQ or host-country language fluency. Would 1Q be a perfect signal of ability and the only criterion retained, migration could only be detrimental to human capital formation at home (since the ability distribution is assumed to be given). Still, and to the extent that 1Q or other tests are imperfect signals of ability, introducing them into these models would not affect the quality of the results. Indeed, their main effect would be to intro- duce a probability, g(a), q’>0, that an educated applicant would receive an entry visa. In this setting, migration prospects still increase the expected return to education (even for individuals with relatively low success probability), with the expected impact on human capital formation at home depending on the steepness of the success profile at different ability levels. Figure | provides a simple diagrammatic interpretation of the essence of the results from these models. Assume that individual ability is uniformly distributed on the space {a, a] with people above a certain ability threshold choosing to invest in education and people below that threshold choosing not to invest in education. Assume also that human capital is the sole engine of growth, with the rate of growth depending on the proportion of educated in the country. In increasing the expected return to education, the effect of migration prospects is then to move the critical ability to the left. Figure 1 shows very clearly the two effects of migration on human capital formation (i.e., that skilled emigrants are drawn out of a larger pool of educated people when the economy is opened to migration). Denoting by a;-and ag the ability of the individual who is indif- ferent as to whether to invest in education in the closed and the open economy, Tespec- tively, one can see from Figure I that the proportion of educated among the remaining population (the proportion B/4+B) may well be higher in the latter case! ‘Note that for diagrammatic convenience, we represented the partition of the population between groups 4 (the uneducated), B (the remaining educated) and C (the educated emigrants) as if the migrants were self-selected instead of being randomly selected among the educated 96HILLEL RAPOPORT FIGURE 1. THE PARTITION OF THE POPULATION INTO DIFFERENT SUB-GROUPS qa af a l ~ T | < >< a A B q aé a ie t T 1 < >< ma > A B 4, Wuo Loses, WHo Wins, AND How Mucu ? EVIDENCE To the best of our knowledge, the first study to attempt at estimating the growth effects of the brain drain using cross-country comparisons is our joint work with Michel Beine and Frederic Docquier (Beine et al., 2001); in a cross-section of 37 developing coun- tries, we found that migration prospects have a positive and significant impact on human capital formation at origin, especially for countries with low initial GDP per capita levels. This was a first but imperfect try because, at the time the study was writ- ten (in 1998), we had no comparative data on international migration by education lev- els and therefore used gross migration rates as a proxy measure for the brain drain. Thanks to Carrington and Detragiache (1998), such comparative data became available later and in a subsequent study, we used the CD estimates on emigration rates for the highest (tertiary) education level as our brain drain measure; again, we found a positive and highly significant effect of migration prospects on human capital formation, this time in a cross-section of 50 developing countries (Beine et al., 2003), We also computed country specific effects, with the following results. First, countries that experienced a positive growth effect (the ‘winners’) generally combined low levels of human capital and low migration rates, whereas the ‘losers’ were typically charac- terized by high migration rates and/or high enrollment rates in higher education (this is quite intuitive, since in this case most migrants are picked up from a stock of people that would have engaged in education even without contemplating emigration). Second, we showed that except for extreme cases such as Guyana and Jamaica, the growth effects of the brain drain were relatively limited: around plus or minus a maximum of 0.20% in terms of annual GDP per capita growth; this is not negligible, however, in a dynamic perspective. Finally, it was also striking that while there were more losers than winners, the latter included the largest countries in terms of demographic size (China, India, Indonesia, Brazil) and represented more than 80% of the total population of the sample. Although it is a simplification, our results are suggestive of an inverse U-shaped rela- tionship between migration and growth: too much migration is detrimental, but too lit- tle is sub-optimal. Interestingly, the within-country result predicted by the theory out- lined above (i.e., that some migration should be good as long as it is not excessive) is 7WHO IS AFRAID OF THE BRAIN DRAIN? HUMAN CAPITAL FLIGHT AND GROWTH IN DEVELOPING COUNTRIES what comes out at the cross-country level apparent on Figure 2. The X-axis gives the Carrington-Detragiache migration rates for the highly educated and the Y-axis gives the net growth effect of the brain drain as computed by Beine et al. (2003). The variability across countries at given migration rates is due to the impact of other right hand side variables, and the curve itself is adjusted using a second-order polynomial. FIGURE 2. BRAIN DRAIN AND LDC's GROWTH 9.06 ‘ Pakietan + Indonesia ‘Guatemala 6 Honduras ‘china india om -— aT = ——— fant ayo tant vet ee * i \ ee) ont ia | cage | Ph Net effect on annual GDP growth rate (in %) + South Korea 0.0% Emigration rate of tertiary educated workers (in %) CONCLUSION The main conclusion to draw from the above analysis is that for any given developing country, the optimal migration rate of its highly educated population is likely to be pos- itive, Whether the current rate is greater or lower than this optimum is an empirical question that must be addressed country by country. This implies that countries that would impose restrictions on the international mobility of their educated residents, arguing for example that emigrants' human capital has been largely publicly financed, could in fact decrease the long-run level of their human capital stock. This also suggests that rich countries should not necessarily see themselves as free riding on poor coun- tries’ educational efforts. The difficulty is then to design quality-selective immigration policies that would address the differentiated effects of the brain drain across origin countries without distorting too much the whole immigration system; this could be achieved, at least partly, by designing specific incentives to return migration to those countries most negatively affected by the brain drain, and promote international coop- eration aiming at more brain circulation. 98HILLEL RAPOPORT On a final note, it may be appropriate to emphasize that we are well aware of the fact that our empirical findings need to be confirmed before we may seriously challenge the conventional view on the brain drain. As explained above, our results are based on cross-section regressions, meaning that we neglect the dynamics of migration rates as well as the dynamics of education levels and that, due to the absence of a time series dimension, it is impossible to control for individual-country effects in the regression estimates. Given the strong heterogeneity of the sample (in terms of countries' sizes, levels of development, etc.), such country-fixed effects are likely to play some role in the value of the estimates. The underlying drawbacks of the methodology used so far therefore call for the collection of additional data: improving the Carrington- Detragiache observations for the year 1990 and combining them with new data points for each country of the sample would make it possible not only to extend the time frame of our research but also to address some of its methodological limitations. 99WHO IS AFRAID OF THE BRAIN DRAIN? 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