Will transition countries benefit or lose from the brain drain?

• Author: Lundborg, Per
• Position: Report

Abstract

We analyze the theoretical effects on growth and welfare in transition economies of emigration of educated and uneducated labor, of higher emigration probability, etc. Using a Grossman-Helpman growth model, we show that the prospects of labor market integration with the EU raises the expected returns to education, stimulate human capital formation and thus raise the growth rate in the candidate countries. However, given these expected returns, emigration of educated workers tends to lower growth and welfare of those remaining. Thus, while the brain drain reduces welfare, effects of labor market integration could nevertheless be positive. Emigration of low skilled workers also reduces growth via adverse effects on education. Higher tuition fees, common in transition countries, counteract positive growth effects of market determined wages.

INTRODUCTION

Emigration of skilled workers like scientists and engineers has increased over time (1). The main increases in these flows have been from Asia and Central and Eastern Europe into North America, Australia and Western Europe. Flows of well-educated workers are also likely to increase in the near future as the European Union is enlarged to include a number of candidate countries (CCs) in Eastern Europe. Most EU countries will then open up their labor markets to the new member countries' workers. In this connection, discussion has focused a great deal on the level of education of the workforce in the CCs and consequences of emigration of the best educated. Many citizens in the CCs fear that brain drain will reduce growth and welfare in their home countries.

Emigration from the CCs and other transition countries before 1989 had a strong political component as the lack of political freedom, besides prospects of higher incomes, was a principal factor behind emigration. The social and economic openness after the fall of communism and the freedom of movement changed the balance in favor of economic migration (2). Empirical studies conducted after 1990, show that for some CEECs, the propensity to work abroad has not changed dramatically after the fall of communism. Chompalov (2000) finds that the brain drain from Bulgaria increased after 1989, but, to the best of our knowledge, other empirical analyses of brain drain from candidate countries are not available. The Central and Eastern European countries (CEECs) remain a major potential source of skilled labor for the Western countries. The modest flows of skilled workers after the transition to market economies started can be explained by regulations and poor labor market performance in the EU countries. However, the approaching EU enlargement, in which, labor market integration is a major issue, makes the welfare effects of a brain drain a highly topical issue on the agenda.

The discussion of the brain drain has also been stimulated by studies, notably Barro (1991), showing that level of schooling across countries is a significant variable for explaining growth rates. Hall and Jones (1999) extend the studies by including differences in social infrastructure across countries. Bils and Klenow (2000) elaborate further on Barro (1991) by studying the dual relationship between schooling and growth. In their model, expected growth rate reduces the effective discount rate that leads to an increase in demand for schooling. Their overall conclusion contradicts that of Barro by showing a very weak direct relationship between schooling and growth but a strong effect of growth on schooling.

In light of these results and the potential for East-West migration after the accession of the CCs to the EU, we shall expand on the issue of the brain drain and growth. A particular feature to be analyzed is the fact that the CCs during the 1990s introduced tuition fees in higher education while education before 1990 was financed by taxes. New private universities emerged at impressive rates. In Poland, for instance, 63% of academic institutions are now privately owned, in Romania 60% and in Slovenia 82%. Moreover, budget deficits and the increased competition from private universities force state institutions to find new ways to maintain infrastructure in human capital formation.

Significant changes in education policy of the CCs affect not only the balance between skilled and unskilled workers but also the propensity to emigrate to the West. Besides changes in different types of labor, the tuition fee plays an important role in our model, since it allows for an analysis of education policy in face of a brain drain problem.

In the centralized system, rewards to flexibility and mobility of labor were almost non-existent. One of the first signals of change in the education policies of transition countries is the increasing inequality of earnings between skilled and unskilled. Clark (2000) investigated the returns and implications of human capital investments for Russia during the second half of the 1990s, concluding that the university premium is increasing in the private sector. While the issue of wage differentials between skilled and unskilled workers, to the best of our knowledge, has not been studied extensively in the transition countries, it is very likely that most transition countries have experienced increased wage differentials. As shown in Ivaschenko (2000), distribution of income became increasingly unequal in 25 transition countries during 1989-98, suggesting that wage differences increased (3).

The brain drain is a research issue of a long-standing interest. Recently, Mountford (1997) studied the conditions for the brain drain to have positive growth effects in the source economy. His paper shows that when educational decisions are endogenous and if successful migration is not a certainty, a brain drain may increase productivity. Migration to a high wage country raises the return to education, which favors human capital formation and can outweigh the negative effects of the brain drain. Beine, Docquier and Rapoport (2001) specify an OLG model with the same counteracting forces and find that the brain drain may favor the sending country if the domestic human capital is stimulated enough (4). Using a cross-section of 37 developing countries, they also find that the possibility of such a positive effect of the outflow of skilled labor cannot be rejected.

Our approach is inspired by the growth model in Grossman and Helpman (1991a,b), which is extended to analyze effects of migration of workers of different skill levels. Like Mountford and Beine et al, we allow for the effect that emigration of skilled workers stimulates education, but this positive growth effect cannot fully counteract the negative growth effect as skilled workers leave the country. However, this does not mean that labor market integration necessarily lowers economic growth and welfare in the new member countries. We need also to consider that opening up the labor markets raises the probability of emigration to high wage countries in Western Europe, which in turn raises the returns to higher education and thus stimulates more education and raises the growth rate. Only if a large enough number of skilled workers emigrate, will welfare fall.

We find that emigration also of unskilled workers lowers growth and welfare. While these workers do not enter the growth generating R&D departments, an outflow lowers the relative wage of R&D workers who react by cutting down on education. This reduces human capital formation and growth.

THE MODEL

Consumer Behavior

Consumers share a common inter-temporal utility function that is maximized:

U [equivalent to] [[integral].sup.[infinity].sub.0] [e.sup.-[rho]t] log u(t)dt (1)

where r is the subjective discount rate and log u(t) is each consumer's static utility at time t. The instantaneous utility is given by:

log u (t) [equivalent to] [[integral].sup.1.sub.0] log [[summation over j] [([lambda]).sup.j]d(j,t,[omega])d [omega] (2)

where d(j,t,[omega]) denotes the quantity consumed of a product of quality j produced in industry w at time t. [lambda] > 1 represents the extent to which innovations...