Review of Global Evidence John Page and Sonia Plaza The World Bank

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Brain drain or brain gain? The migration of highly skilled labor.

Much of the literature on the development impact of migration focuses on the effect of emigration of skilled migrants on the composition of the labor force in the home country (see Box 1). Since the 1960s a major debate on the effect of migration on development has been focused on the “brain drain”, the emigration of qualified professionals from developing countries and the subsequent loss of skills faster than the replacement rate.

One implication of this literature is that investments in education in labor exporting countries may not lead to economic growth, if highly educated people leave. Lowell and Findlay (2001) find that migration of skilled labor from Eastern Europe during the 1990s slowed economic growth in some countries. In addition, there may be fiscal losses from three sources: i) lower returns on public investments in education when higher education is subsidized by the government; ii) the cost of training replacement workers; and iii) the loss in current and future income tax revenues. Desai, Kapur and McHale (2000) estimate a potential tax revenue loss of US$ 700 millions for India due to the migration of high skilled workers. Pang, Lansan and Haines (2002) find that “each migrant African professional represents a loss of US$ 184,000 to Africa”.
In Africa, the emigration of those with scarce professional skills such as doctors, nurses and engineers, the majority trained at public expense, is of particular concern. For example in Zimbabwe three- quarters of all doctors emigrate within a few years of completing medical school. Registered doctors in the UK trained in Ghana have more than doubled between 1999 and 2004.23. According to the International Organization for Migration (IOM), “the departure of health professionals has eroded the ability of medical and social services in several sub-Saharan countries to deliver even basic health and social needs. Thirty-eight of the 47 sub-Saharan African countries fall short of the minimum World Health Organization (WHO) standard of 20 physicians per 100,000 people”.24
In the late 1990’s, the literature shifted from brain drain to “brain gain” exploring the potential benefits of skilled migration arising from remittances, return migration, creation of trade and business networks, and the possible incentive effects of migration prospects on human capital formation at home. Stark and Prskawetz (1998), Vidal (1998), and Beine, Docquier and Rapporport (2001) argue that migrants invest in higher education when they see that their migration prospects increase with additional years of education. Stark and Wang (2002) show that migration to a richer country may serve as a substitute for subsidies for human capital formation. Domingues Dos Santos and Postel-Vinay (2003) and Stark, Helmenstied and Prskawetz (1997) argue that migrants promote brain circulation instead of brain drain, when returnees contribute to the diffusion of more advanced technology.
Using the diaspora: trade, investment and transfer of technology
Migrants maintain connections with their families and with other people in their home country. These groups form what is called a diaspora. Spurred by the highly publicized role of the Indian diaspora in India’s technology boom, recent attention has shifted from analyzing the impact of skilled migration on sending country labor markets to a broader agenda that also considers the possible channels by which migrants might promote trade, investment and technological acquisition. The recent socio-economic literature on the role of diasporas argues that trade, technology diffusion and capital formation are facilitated by migrants. The argument is that migrants facilitate host and source country bilateral trade and investment because they help to overcome information asymmetries and other market imperfections.

Migration and technology transfer

For a labor sending country, the diaspora can be an important source, and facilitator of research and innovation, technology transfer, and skills development. Japan, Korea, and Taiwan (China) are examples of economies that have tapped into their diaspora as a source of knowledge of international best practice. The governments in these economies promoted the return of foreign educated students or established networks of knowledge exchange with them.

Involvement of the diaspora in sending countries’ economies can take several forms:

  • licensing agreements to provide technology transfer and know-how between diaspora owned or managed firms in host countries and sending country firms;

  • direct investment in local firms, as a joint venture;

  • knowledge spillovers when diaspora members assume top managerial positions in foreign-owned firms within their country of origin;

  • networks of scientists or professionals to promote research in host countries directed toward the needs of sending countries;

  • virtual return, through extended visits or electronic communications in professional fields such as medicine and engineering;

  • return to permanent employment in the sending country after work experience in the host country.

Drawn partly by the high wages made possible by exports, many residents of Korea and Taiwan (China) who were trained abroad, particularly in new sectors such as electronics and computing, have returned home to work. (World Bank, 1993). Their return has provided a significant transfer of best practice methods. For example, foreign-educated nationals accounted for all the postgraduates employed in the electronics industry of Taiwan, (China) in the early 1990’s (Pack 1993). Several of theses foreign educated professionals became managers and played leading role in building Taiwan’s semiconductor industry.25 The transfer of technology via return migration in the semiconductor industry has continued during the 1990s first to Taiwan and then from Taiwan as well from the United States to China (Saxenian 2005).

More industrialized labor sending countries with large skilled migrant populations have also been able to tap their expatriates and develop some form of mentor-sponsor model in certain sectors or industries. How the knowledge is transferred varies according to the different types of diaspora networks: 1) networks of scientists and R&D personnel, 2) business networks of knowledge-intensive start ups and 3) networks of professionals working for multinationals.. Expatriates from India, China and Israel have played a critical role in accelerating technology exchange and foreign direct investment in the economies of their homelands by establishing official business links with their host countries.
Saxeenian (2001), Arora and Gambardella (2004) and Commander et al. (2004) have described the role of the diaspora in the case of the software industry. Table 4.4 summarizes various stages of growth in the IT industry in India, and the role the diaspora played in its evolution. A group as small as 200 professionals; can provide reliable business and technologies linkages with the rest of the world. Replication of successful experiences in smaller countries will be more difficult, however, because they may be unable to reach a critical mass of influential people in any given sector (e.g., medicine, engineering, large corporations, etc).

Trade and Foreign Direct Investment
A growing body of research suggests that diasporas and country networks abroad are an important reservoir of knowledge and information on trade and investment opportunities. (See for example, Rauch 2001). India is one example of a country that is using its diaspora to enhance host-home country bilateral trade and investment expansion.26 China also benefits from its diaspora. In 2000, 45% of its total US$41 billion in foreign direct investment came from the Chinese diaspora (Wei, 2004).
In the Hecksher-Ohlin model trade and migration are substitutes. This is the assumption that underlies NAFTA, ASEAN’S Free Trade Agreement (AFTA) and other FTA regimes. The NAFTA agreement was signed with the intention that Mexico would export goods and create jobs, instead of sending immigrants to the United States. Markusen (1983) and Wong (1986), however argue that if in addition factor endowments, trade is also based on technology, economies of scale or business networks, migration and trade can be complements. Trade in services is one example under which trade and migration are positively linked.
Several authors have tested the hypothesis that immigration increases bilateral trade flows. Gould (1990, 1994) uses a gravity model to estimate the effects of immigration on United States bilateral trade with 47 migrant-sending countries for the period 1970-1986. He finds a positive relationship between bilateral flows of exports and imports and the stock of immigrants. His findings suggest that “a 10 percent increase in immigrants to the United States is associated with a 4.7 percent increase in United States exports to immigrants’ countries of origin and an 8.3 percent increase in imports from immigrants’ countries of origin.” Similarly, in Canada, a 10 percent increase in the number of migrants has been associated with a 1 percent increase in exports to, and a 3 percent increase in imports from, their countries of origin (World Economic and Social Survey, 2004). Ligth, Zhou and Kim (2002) use panel data for emigration countries with which the US conducted bilateral trade during the period 1973-1980. They decompose exports and imports into finished and intermediate goods. Their results show that the immigration effect on source country exports (US imports) is positive for finished and intermediate goods. However the effect on source country imports (US exports) is positive only for finished goods.
Dunlevy (2003) uses a different specification of the gravity model to test the hypothesis that that stock of immigrants are more trade creating when the native population in the host country does not know the language of the partner country, arguing “The more distant their native language is from English, the greater will be the immigrants’ advantage in dealing with members of their origin countries.” He finds that the elasticity of exports with respect to the immigrant stock is significant at 0.29. Rauch (2003) and Rauch and Trindade (2002) also find trade and migration are complements and underscore the importance of ethnic networks in helping to overcome information problems linked to the nature of the goods exchanged. Head and Ries (1998) estimate a Tobit specification of the augmented gravity model using Canadian data for 136 countries. Their results suggest that “ a 10 per cent increase in the stock of immigrants increases exports by 1.0-1.3 per cent and imports by 3.1 – 3.9”. They also find that the trade creating effects of immigration vary across immigrant classes. Skilled migrants have the largest pro-trade effect on both exports and imports, following by family class immigrants. Refugees have the least impact.
Trade policy can also affect the mobility of workers and people. When a country applies restrictive measures to exports from other countries, these measures can accelerate the push factors of migration. Faini (2004) for example argues that the Common Agricultural Policy of the EU that bans the expansion of agricultural exports from Northern African countries fosters out-migration from these countries.

5. An Emerging Policy Agenda

Given current global trends, the world will be a very different place in 20 to 30 years. It is projected that by 2050 Africa will have 20 percent of global residents and Europe 7 percent, a reversal of each region's global demographic weight. Migration pressures are expected to rise with growing demographic and economic differences. Both sending and receiving countries are beginning to realize that the volume of resources currently being channeled through immigrant communities will continue to grow, and that public policies must be jointly developed to increase the development impact of both migratory movements and the remittances they generate.

Policies to increase the development impact of remittances
The remittance market is a new and expanding financial link between developed and developing countries. Annual remittances to developing countries already have more than doubled over the last decade and account for larger international transfers than official development assistance. On current trends they will soon equal more than half of FDI flows.
Our survey of the current literature indicates that these flows are complementary to the poverty reduction, conflict prevention and post-conflict reconstruction objectives of development assistance in developing countries. It is therefore unsurprising that both developed and developing countries are beginning to search for ways to increase the development impact of financial transfers between host and origin countries. As one development minister has noted: “We want to make remittances contribute more effectively to international development, and making it easier and cheaper for people to send money home to families and communities abroad is an important way to do this.”27

Improving market structure and reducing costs in sending countries

Much of what we know about the internal workings of remittance markets comes from the numerous studies on the United States-Latin American market, and lately from Japanese-Latin American markets. These studies underscore problems such as information asymmetries, non-competitive behavior, lack of transparency, predatory pricing and the lack of service diversity at the sending end of the market. They also highlight the costs of weak financial markets in developing countries. As new studies and surveys are being conducted, the same findings are emerging in different countries. For example, DFID has just announced the results of the first UK survey of money transfer products to developing countries.28

All of the studies have recommended:

  • promoting competition at the sending end of the market;

  • strengthening the financial environment in remittance-receiving countries; and

  • enhancing the linkages between developed countries’ financial systems and financial systems in developing countries.

In addition the surveys have indicated that some of the measures proposed to regulate the transfer of money through informal channels after September 11 could be costly for developing countries. As Ratha and Riedberg (2004) state: “there is a need to strike a balance that minimizes money laundering, terrorist financing, and general financial abuse, and one that enhances and facilitates the flow of funds between migrants and their families back home”.

Recommendations for tackling the problems mentioned above include: measures to improve the competitive structure of the marketplace; transparency in the pricing and services delivery system; and the reduction of information asymmetries. A number of concrete measures to accomplish these objectives are outlined in Table 5.1 which summarizes the findings of the recently completed UK study.
The majority of sending countries permit migrants with legal status to operate bank accounts, and do not regulate remittances through those accounts. Thus, one policy initiative to increase competition would be for sending and receiving countries to work together within framed agreements to increase migrants’ access to financial institutions. The US-Mexican “Partnership for Prosperity” program of 2001 (involving a device to grant legal identity, the “matricula consular”, and low cost electronic transfers through the Federal Reserve Bank’s Automated Clearing House system for Mexico) has helped reduce the cost of Mexican remittance transfers by 60% (ECOSOC, 2005). Germany has worked closely with Turkey to reduce and control remittance transfers, successfully channeling much of it into formal channels (ECOSOC. 2005). Such initiatives can significantly reduce transfer fees and foster the entry of new agents into the financial market, thereby expanding competition. Surveys and publicity campaigns such as the recent UK initiative can reduce the extent of information asymmetries.
Policy initiatives in remittance receiving countries
An overview of measures currently being used or proposed in developing countries to facilitate and promote the transfer of remittances can be found in Table 5.1. Among the policies listed are providing special tax regimes for remittances, increasing access to banking services by recipients; promoting financial literacy for receiving households, removing regulatory restrictions on money transfers; creating incentives to set up a business; supporting for migrant association projects and matched funding arrangements. In general these policy actions address one of two objectives, either improving the attractiveness of the home country to senders or influencing how remittances are used by receiving households.

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