Does Brain Drain Lead to Institutional Gain?

• Date: 01 July 2017
• Published date: 01 July 2017
• Author: John McHale,Xiaoyang Li,Xuan Zhou
• DOI: http://doi.org/10.1111/twec.12407

Does Brain Drain Lead to Institutional

Gain?

Xiaoyang Li

1

, John McHale

2

and Xuan Zhou

3

1

Cheung Kong Graduate School of Business, Beijing, China,

2

National University of Ireland, Galway

City, Ireland and

3

Renmin University of China, Beijing, China

1. INTRODUCTION

THE role of institutions as a fundamental driver of economic growth has raised the ques-

tion of how institutions, especially in the less-developed countries, can be improved. In

2010, over 5 million people migrated to OECD countries and this number has increased by

40 per cent since 2000. Moreover, international migration to these countries is dominated by

skilled adults as they are more likely to migrate than those with lower skills (Grogger and

Hanson, 2011). How does skilled labour emigration affect home country’s institutional devel-

opment? The answer to this question is complicated by a long list of plausible channels of

influence that could be at work, ranging from the role of emigration as a safety valve for con-

flict to the loss of scarce institution-building skills. The question is further complicated by the

possibility of quite different impacts on political and economic institutions. In this paper, we

investigate the question by examining the associations between emigrant stocks and quality of

political and economic institutions and by exploring whether the observed correlations reflect

a causal role for emigration.

The broader question of the role of human capital in institutional development has received

considerable attention in recent theoretical and empirical research. Barro (1999) and Glaeser

et al. (2007) find that institutional outcomes depend critically on domestic human capital

endowments. Gennaioli et al. (2013) show that variations in human capital account for the

majority of variations in regional development in the world.

1

Murtin and Wacziarg (2014)

find that primary schooling are strong determinants of the quality of political institutions but

find little evidence of causality running the other way over the period 1870–2000. At a more

microlevel, Fukuyama (2004) focuses on the importance of human and social capital in meet-

ing the challenge of providing public services that are both transaction intensive and require

discretion by providers (e.g. judges and doctors) to respond to specific circumstances.

We distinguish throughout the paper between political institutions and economic institu-

tions. The motivation is the hierarchy of institutions hypothesis proposed by Acemoglu and

Johnson (2005) and Acemoglu et al. (2005a, 2005b), who argue that political institutions ‘set

the stage’ in which economic institutions can be devised and economic policies implemented.

Different types of institutions act at different levels, with political institutions being part of

This paper was previously circulated under the title ‘Emigrants and Institutions’. We would like to thank

seminar participants at Queen’s University, the University of British Columbia, the University of Michi-

gan, the Midwest Economic Association Meetings, 2009 World Bank Conference on Migration and

Development, and the United Nations International Symposium on International Migration and Develop-

ment in Turin for their helpful comments and suggestions. All errors are our own. Please direct all corre-

spondence to the corresponding author, Xuan Zhou.

1

These views are not without their criticisms (see e.g. Acemoglu et al., 2005a, 2005b).

©2016 John Wiley & Sons Ltd

1454

The World Economy (2017)

doi: 10.1111/twec.12407

The World Economy

the deep causes of development, while economic institutions belong to the set of proximate

causes.

Political institutions –the ‘checks and balances’ on those in power, have to be such that

they constrain the ruler’s power in order to avoid despotism and political instability (see e.g.

McGuire and Olson, 1996; Acemoglu et al., 2005a, 2005b). The functioning of political insti-

tutions depends on how good citizens are at making politicians accountable for their actions.

One vital cog in shaping political institutions is the information disclosure to electorate.

Often, the valuable information flows from migrants abroad. The extent of information citi-

zens have, either through news media, personal networks, or their own direct experiences,

curbs the opportunities politicians may have to engage in political corruption and mismanage-

ment. Therefore, a well-informed and politically mobilised electorate matters greatly to ensure

good government (Adser

a et al., 2003).

Economic institutions –the ‘rules of the game’ in a society, such as contract enforcement,

control of corruption, property rights, refer to the way in which public goods and services are

delivered. Well-performing economic institutions are the result of having enough physical and

human capital to enable politicians to fund and manage public policies and administrative

agencies in an effective manner. Relative to political institutions, economic institutions are

more transaction intensive and demand more human capital.

We rely on Albert Hirschman’s comparison of ‘exit’ and ‘voice’ as mechanisms to influ-

ence organisation (including state) performance (Hirschman, 1970). We draw on Hirschman’s

insights on how exit and voice can be both substitutes and complements in bringing about

institutional change, and in particular Hirschman’s own application of the framework to the

links between emigration and state reform. We also use a framework in Kapur and McHale

(2005) to understand how emigration can affect institutions.

Emigration could affect home country’s institutional development through various chan-

nels. Most obviously, the absence of talented individuals could alter both the demand for pro-

ductivity-supporting institutions and the supply of institution builders. Due to different

requirements of human capital involvement, the absence of skilled labour could do more dam-

age to economic institutions than to political institutions. But there are other mechanisms at

work as well. The simple prospect of emigration could affect the extent and nature of invest-

ments in human capital, or put pressure on governments to deliver the institutions and associ-

ated performance valued by potentially mobile individuals. Emigrant diasporas could be both

a resource to help with building modern institutions, or a source of angry exiles intent on

overturning the existing political structures. Since information flow plays a more important

role in fostering political institutions than economic institutions, we argue that the diasporas

are in a better position to help political institutions, especially by providing valuable informa-

tion from abroad. A diaspora with enduring connections can be a source of ideas and

resources and have more far-reaching effects for political institutions than for economic insti-

tutions. And finally returnees could come back with valuable skills, savings and soci al con-

nections, or disgruntled and disruptive challengers to the status quo. Returned skilled

emigrants (especially from more advanced countries) can spread attitudes, behaviours, norms,

ideas and even institutional arrangements absorbed in democratic host countries to their home

countries. The returnees can further raise the supply and demand for both economic and

political institutions, especially for political institutions.

The overall impact of skilled emigration on any given measure of institutional quality is

clearly an empirical question given these many channels of influence at work. Our appro ach

in this paper is to combine the recent IAB data on emigrant stocks (Brucker et al., 2013), the

©2016 John Wiley & Sons Ltd

DOES BRAIN DRAIN LEAD TO INSTITUTIONAL GAIN? 1455