- Impacts on the Host Country
- Impacts on the Source Country
- Brain Drain as a Serious Issue for Developing Countries
- Policy Recommendations
- Exit Tax
- Host Countries to Collect Taxes for the Source Countries
- Other Policy Recommendations
Brain drain is the emigration of skilled and professional workers (such as engineers, scientists, doctors, nurses, and university professors) from a country. These people emigrate legally, become residents or even citizens of a new country (the host or destination country), and stay there with no intention of returning to the source (sending) country. There are two main legal ways for skilled workers to move to another country permanently: direct immigration through official channels, and indirect migration through overseas education. Direct migration refers to obtaining permanent residency directly because the worker possesses a particular skill or is reuniting with family. Indirect, educationmigration occurs when a university graduate (or graduate of higher education or a training programthat qualifies the worker as skilled) goes to another country to pursue further education, but later chooses to stay in the host country and apply for permanent residency after graduation.
One important feature of the current system of direct and indirect migration (except for family reunion) is that the governments of the host countries usually accept those workers with great skills and talent, because usually only those who are smart and perform well will be able to find new jobs in the host country to support their applications for permanent residency.
Brain drain is usually associated with developing countries, since most of the movement of skilled workers is from developing to developed countries. Many countries in Asia and Africa experience substantial outflow of skilled workers, both in absolute numbers and as a percentage of the initial stock of skilled workers, and this can have an adverse impact on the source countries. Furthermore, the big gaps between the wage rates of skilled workers in developed countries and those in developing countries make brain drain difficult to control.
It is not quite correct to regard brain drain as a problem only for developing countries. Many developed countries also experience outflow of some of their skilled workers. Canada, for example, has suffered a net loss of skilled workers and professionals to the United States, and some people have urged the Canadian government to do something to stem the loss. For developed countries such as Canada, however, while some local skilledworkers aremoving out, skilled workers fromother countries, especially from developing countries, are moving in.
Both government policymakers and economists are interested in the impacts of brain drain on the local economy. A simple analysis of these impacts involves three steps: (1) determining the benefits that brain drain may bring, (2) determining the costs that brain drain may cause, and (3) comparing the benefits and costs of brain drain. This approach applies to both the host country and the source country.
Impacts on the Host Country
Brain drain, as a form of permanent immigration, is usually not considered a problem by the host country, and in many cases it is regarded as a positive thing for the local economy. First, it gains workers, which contribute to the gross domestic product (GDP) and gross national product. Second,more skilledworkers coming in usually drive down the marginal product of these workers, a phenomenon called the Law of DiminishingReturns.This phenomenonwill lead to a drop in the market wage rates of these workers. At any point in time, each additional workermoving in will receive a wage rate equal to the value of his/her marginal product. However, the associated drop in the wage rate will mean that all the workers who moved in before will receive a new wage rate lower than their marginal products measured at the time theymoved in.Thismeans that the economy benefits from the gap between what these workers have contributed (their marginal products) and what they receive (the wage rate). Third, skilled workers could generate positive externalities for the society (such as increases in productivity and overall employment), and these immigrants can bring benefits to other parts of the economy notmeasured by the wage rates they earn.
Externalities (that is, the unintended effects of immigration of skilled workers) take two primary forms. By working with other skilled workers, new immigrants canraise theproductivityof localworkers through friendly competition and interactions. Also, there is usually some kind of complementarity between skilled workers and unskilled workers so that when a firm hires a skilledworker (such as a doctor or engineer) it also hires a certain number of less skilled workers (such as nurses or technicians) to work with the skilled worker. This means that the employment of skilled workers could generate demand for unskilled workers. This type of externality is especially helpful in solving the problem of unemployment of unskilled workers.
Brain drain, like other types of permanent migration, involves inflow of people, and thus it can have social and political effects. For example, the government may be concerned about any possible impacts of the inflow of foreign workers on crime, social order, and local education, or about cultural and language differences and conflicts between the new immigrants and local residents. Furthermore, the demographic distribution, the income levels, and the political views of the new immigrants may also have impacts on the local society.
Impacts on the Source Country
The impacts of brain drain on the source country could be very different from those on the host country. Consider first the special case in which only one skilled worker moves out so that the local wage rate is not much affected. If before themove theworker is paid his/her value of marginal product, then the impact on those left behind (TLB, or the rest of the local economy) will be negligibly small because while the economy loses the contribution of the worker, it saves the payment to the worker. The nonharmful effect of brain drain will no longer hold if (1) the outgoing worker received a wage rate less than what he/she has contributed, or (2) more similarworkersmove out so that the wage rate rises.
If the outgoing worker received a wage rate less than his/her contribution, the emigration is harmful to TLB because the worker takes with him/her his/ her previous contribution, which is bigger than what the rest of the economy is able to save. A worker receives less than his/her (value of)marginal product if there are distortions in the labor market. Two main types of distortion aremonopsony (in which a single buyer has disproportionate influence in a market) and externality. A monopsonistic firm will tend to underemploy workers and underpay each worker. The existence of (positive) externality can lead to a wage rate less than themarginal product of labor. As explained earlier, a skilled worker can generate two types of externality: positive impacts on his/her coworkers through friendly competition and interactions, and complementarity between skilled workers and unskilled workers.
Brain drain can hurt TLB even if there are no distortions (such asmonopsony or externality) in the economy. Suppose that a sufficient number of skilled workers move out so that the marginal product of labor increases, and thus the wage rate of the remaining workers increases. The gap between the new, higher marginal product and the original wage implies thatTLBhave experienced a net loss between the contribution of the emigrating workers and the wages saved by no longer paying them.
The impacts of brain drain on TLB in the source country are not all negative; some of them could be positive. Forexample, skilled workers working abroad may remit part of their income to their family, relatives, and friends back in the source country. They also serve as examples to younger generations of the benefits of acquiring high-level skills. Some of them may even bring back technologies and investment to the source country.
Brain drain can also have dynamic effects on the source country’s economy. First, brain drain means that the country is losing human capital. Since human capital is an important growth factor, brain drain can adversely affect economic growth. Moreover, because skilled workers tend to earn high wages before their departure, they usually have saving rates higher than the average rate in the economy. Thus the outflow of some of these high-income workers could pull down the average saving rate of the remaining population, and this means that the local investment rate and thus economic growth will be hurt.
Emigration of these workers could have other impacts on the rest of the economy. One very important impact is that on education, especially higher education. The prospect of moving to other countries where higher wage rates are offered will increase the incentive of local students to seek higher education and in-depth training. This will in general raise the skill level of workers in the economy, and they could help the economy grow. There are, however, some problems associatedwith this increase in the demand for higher education, sometimes referred to as a brain gain. First, the demand for higher education could be biased toward technical subjects such as engineering, medicine, science, and computer science, and away from other subjects such as the humanities. Second, there is always an excess demand for education, especially higher education. When there is an increase in the demand for higher education, it is not likely that the government will respond with an increase in the supply. As a result, brain drain may not imply an increase in higher education graduates although it may lead to an improvement in the quality of the graduates because talented children will have bigger incentives to get education.
Brain Drain as a Serious Issue for Developing Countries
There are several reasons that the governments of developing countries regard brain drain as a serious problem for their economies. First, the wage gaps between developing countries and developed countries are wide, implying big incentives for the skilled workers in the developing countries to emigrate. Second, the externality associated with skilled workers could be high in these developing countries,mainly because there is usuallywidespread unemployment of unskilled workers. The complementarity between skilled workers and unskilled workers means that the loss of a skilled worker to another country could lead to a drop in the economy’s demand for unskilled workers. Thus large outflow of skilled workers could substantially raise the unemployment rate of unskilled workers. Third, the outflow of different types of skilled workers may not be balanced, and the developing countries could very well be losing more of the types of skilled workers that they need the most for example, doctors, engineers, and nurses, who can easily apply for immigrant visas to developed countries but also are in very short supply in the source countries. Fourth, most developing countries are in an early stage of development, and skilled workers are needed for the economy to take off. Losing some of these workers could seriously hinder the growth of the economy.
In view of the impacts of brain drain on local economies, many economists have suggested policies to protect the welfare of TLB.
One suggestion is that thosewho want to emigrate would have to pay a tax before leaving the country, and that the tax revenue collected would be distributed to the remaining population in some way. The amount of the tax could be set at a level so that TLB would be adequately compensated, and might include an amount to cover the subsidy on education the government provided to these emigrants. It has been argued in economic theory that the increase in the income of the emigrants should be big enough to cover the compensatory tax. For the emigrants the tax payment could come from their own funds, or loans from relatives, friends, and banks. For example, the former Soviet Union imposed exit taxes on some Jews who immigrated to Israel (although in this case the main reason for the tax may have been political deterrence of emigration rather than economic recovery of investment in the emigrants). China had a policy closer in essence to the exit tax suggested here: it required people who went abroad for education to put down deposits before they were allowed to go, and the deposits would be forfeited if after graduation they did not return to China.
Exit taxation is not common in developing countries, partly because it is difficult to calculate the right tax rate. Another reason is that the amount required to adequately compensate TLB could be big, and people who want to move out may not be able to raise that sum of money. Even though it is argued that the future earnings of the emigrants are big enough to cover whatever is required to compensate TLB, banks will not accept these future earnings to guarantee loans. Thus exit taxes, when implemented fully, could turn out to be prohibitive.
Host Countries to Collect Taxes for the Source Countries
Since it is difficult to collect taxes before the emigrants actually earn the new wages, some economists have suggested that the host countries, notably the United States and other developed countries, could impose taxes on the new immigrants. The collected taxes would be returned to the source countries on a regular basis, with the purpose of compensating the remaining population. The merit of this argument is that taxes are collected only after the new immigrants have received income. However, it has a number of practical difficulties.
First, the administration of the tax scheme could be very costly, as a lot of information has to be collected in order to calculate the rates for immigrants from different countries. Second, strictly speaking, the tax scheme requires that people from different countries be subject to different rates. The problem of this requirement is that it could create a lot of administration problems, and it may generate feelings of unfairness among the immigrants. To respond to this point, it has been suggested that the source countries impose only one tax rate on the new immigrants, no matter where they came from. The required rate will be the one that is based on the average amount of compensation needed for all important source countries. The tax revenue collected will then be handed over to some international organization such as the United Nations to spend on programs that promote economic growth and development of developing countries.
Even if the high costs associated with administrating the scheme and the difficulty of implementing the scheme can be overcome, the tax scheme may be against the constitution of most developed countries: it requires that the initial residents in the host countries and new immigrants be subject to two different income tax rates, the higher being on the new immigrants. These developed countries are prohibited fromimposing such a two-tier tax system, based on whether people emigrated from another country recently.
Other Policy Recommendations
The fundamental way to solve the brain drain problem is to raise the local wage rates, so that skilled workers will have less incentive to emigrate.There are at least three possible ways to raise the local wage rates. First, the government can provide a general wage subsidy to all skilled workers to close the gap between what they may be able to get elsewhere and what they receive locally. This policy could be more effective in dampening brain drain, but it is costly because substantial subsidies will be needed. That could be beyond the budget capacity of the governments. Furthermore, themain reason why these skilled workers are able to earn higher wage rates is because they have higher marginal products in the host countries because of, for example, the availability of more and better capital and facilities. These can hardly be provided by the source country governments in the near future.
The second way is to substantially promote the growth of the economy so that the income levels of the population are raised. Economic growth of the country will boost not only the GDP and national income of the economy but also the wage rates of the skilled workers. The growth of the economy will substantially diminish the incentive of the skilled workers to move out.
This policy is only part of a long-term solution, as it takes a long time for the economy to have a substantial growth. Furthermore, brain drain has a negative impact on economic growth, as brain drain lowers the stock of human capital in the economy. To promote economic growth while skilled workers are moving out is not an easy task. To do that, the government can invest more in education and/or invest more in infrastructure. The first strategy seeks to slow the rate of depletion of the stock of human capital or even to increase the stock. The second one seeks to promote other growth factors, such as the infrastructure needed to attract foreign direct investment or support hightech development.
The third policy is to implement a two-tier wage system for skilled workers: one at the prevailing rate in the economy, and a second, higher one for those who choose to come back from abroad, usually after graduation from a training program or higher education. The higherwage scale for the returning skilled workers is to attract themto come back. To carry out this policy successfully, either there must be a substantially large public sector or the governmentmust be willing to use widespread subsidies on the employment of these returning graduates.Many countries such as China have been using this policy to lure students who went abroad for education to come back after graduation.
The use of a two-tierwage system, however, has its own costs. This systemrequires subsidy payments to these returningworkers, and the gap between the two wage scales could alienate those workers who were trained locally and are working with those returning skilled workers.
Another policy to slow the rate of brain drain and to encourage returning immigrants is to attract foreign direct investment. There are three channels through which the domestic demand for skilled workers can be raised. First, attract foreign firms to invest and produce locally. Because foreign firms usually have more advanced technologies than what local firms have, foreign direct investment could substantially raise the demand for skilled workers. Second, recent development of technologies allows local skilled workers (such as telephone operators, computer programmers, and accountants) to be employed by firms located in other countries, without having these workers moving out of the country a phenomenon called offshoring. Third, local production of products to be exported can increase through a process called fragmentation and outsourcing. As firms in developed countries are able to fragment their production processes, theymaymove the production of some of the components and intermediate inputs of the final products to developing countrieswhere labor costs aremuch lower. Thiswill raise the demand for skilled workers in the developing countries. See also brain gain; brain waste; migration governance; migration, international; remittances