Brain Drain in Globalization: A General Equilibrium Analysis from the Sending Countries' Perspective

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Is brain drain a curse or a boon for the sending countries? The economic literature has put forward several positive and negative effects of high-skilled emigration, but little is known on the relative magnitudes of these different forces at work. (1) In order to study the global impact of brain drain on developing economies and to identify the dominant channels among the various static and dynamic effects, a generic framework is certainly required, which is capable of incorporating the main mechanisms identified in the existing literature. With this aim, we develop a 10-region general-equilibrium model characterized by overlapping-generations (OLG) dynamics and calibrated to real data. The implications of skill outflow are assessed on the basis of gross domestic product (GDP) per capita. (2) In such a framework, not only can we juxtapose the direct impacts of brain drain, but their interactions and other indirect effects are also endogenously and dynamically generated. This is a very important step forward, as high-skilled emigration is not an isolated incident, but it ripples through the entire global economic system.

In the process of economic globalization, the international movement of production factors is an essential component that stimulates further integration of the world economy. On the one hand, financial liberalization and the practice of international arbitrage contribute to large cross-border flows of capital. While the amount of foreign direct investment (FDI) at the world level has increased from 13 billion U.S. dollars in 1970 to nearly 2 trillion in 2007 (measured at current prices), the rise in FDI per capita is far more remarkable in the developed economies alias "North," than in the developing economies alias "South." This North-South disparity reflects largely the wide gaps in total factor productivity (TFP), and not insignificantly, the higher risks involved in investing in many developing countries. (3)

On the other hand, international wage gaps are the most important pull factor luring economic migrants from the developing to the developed economies (Clemens and Pritchett 2008; Grogger and Hanson 2008). The immigration rate in high-income countries has tripled since 1960 and doubled since 1985. In addition, Docquier, Lowell, and Marfouk (2009) document that, in OECD countries, two-thirds of the increase in immigration stocks during the 1990s are accounted for by the South-to-North movement. Moreover, when skill heterogeneity is taken into account, they find that the number of highly educated immigrants has increased by 70%, whereas the corresponding figure for immigrants with lower educational attainments is a dwarfed 30%. Although this difference does not necessarily imply an increasing trend of brain drain, (4) the same authors show that there exists a strong positive selection of emigrants, especially in the least developed countries. In many developing countries, high-skilled emigration rates are well above 40%, particularly for sub-Saharan African countries, Central American countries, and small states.

Furthermore, international flows of production factors are not independent of one another, but the direction of their interdependencies is ambiguous. For example, static trade models predict that an exogenous reallocation of labor to the North from the South must raise returns to capital at the destination and induce capital outflow from the origin. In the meantime, however, the empirical evidence on network externalities indicate that emigration and FDI inflows may well act as complements, especially from a dynamic perspective. (5) Moreover, technology diffusion through skilled diaspora can also augment the marginal productivity of capital in the South and attract more capital investments (e.g., Agrawal, Kapur, and McHale 2008; Kerr 2008; Lodigiani 2008). Last but not the least, the officially recorded amount of remittances has been increasing at a fast rate, (6) suggesting yet another complementary and important link between labor emigration and capital inflows (Walmsley and Winters 2005). …