Introduction The eect of Brain Drain on educational incentives The eect of Brain Drain on income distribution dynamics Conclusion

Can a brain drain be good for growth in the source economy ?

Andrew Mountford Journal of Development Economics

1997

Andrew Mountford

Can a brain drain be good for growth in the source econom

Introduction The eect of Brain Drain on educational incentives The eect of Brain Drain on income distribution dynamics Conclusion

Motivation

What is the economic justification for a limited emigration policy ? Will the emigration of some of an economy’s most educated people always be bad for the level of output per capita ? Is it certain that "Brain Drain" will leave developing economies in a poverty trap ?

Andrew Mountford

Can a brain drain be good for growth in the source econom

Introduction The eect of Brain Drain on educational incentives The eect of Brain Drain on income distribution dynamics Conclusion

Literature review

This article is chiefly related to two literatures : Growth and human capital accumulation literature Lucas (1988), Barro (1991), Mankiw and al. (1992) Galor and Zeira (1993), Galor and Tsiddon (1994)

Brain Drain and migration literature Bhagwati and Hamada Miyagiwa (1991) Galor and Stark (1990,1991)

Andrew Mountford

Can a brain drain be good for growth in the source econom

Introduction The eect of Brain Drain on educational incentives The eect of Brain Drain on income distribution dynamics Conclusion

Contribution and approach

Contribution Two possible beneficial effects of Brain Drain on growth : Migration to a higher wage country rises the return to education The development of an "under-educated" class can be limited

A theoretical reason for the use of emigration quota policies

Approach The use of probabilistic migration to the obtaining of emigration visa Two cases : a fixed number of educational classes an endogenous number of educational classes Andrew Mountford

Can a brain drain be good for growth in the source econom

Introduction The eect of Brain Drain on educational incentives The eect of Brain Drain on income distribution dynamics Conclusion

Results Preview

When emigration is not a certainty in the source economy : Brain Drain can increase average productivity Brain Drain can increase income equality The possibility of emigration can permanently increase the average level of productivity in an economy as well as permanently reduce income distribution inequalities

Andrew Mountford

Can a brain drain be good for growth in the source econom

Introduction The eect of Brain Drain on educational incentives The eect of Brain Drain on income distribution dynamics Conclusion

Table of Contents

1

The effect of Brain Drain on educational incentive 1 2 3 4

2

The effect of Brain Drain on income distribution dynamics 1 2 3 4

3

The theoretical model The effect of general migration on educational incentives The effect of Brain Drain on educational incentives Which is better ?

The theoretical model The effect of general migration on income distribution dynamics The effect of Brain Drain on income distribution dynamics Which is better ?

Conclusion Andrew Mountford

Can a brain drain be good for growth in the source econom

Introduction The eect of Brain Drain on educational incentives The eect of Brain Drain on income distribution dynamics Conclusion

The theorical model (1) The eect of general migration on educational incentives The eect of Brain Drain on educational incentives Which is better ?

The eect of Brain Drain on educational incentives

I - The effect of Brain Drain on educational incentives How can brain drain improve the producitvity level of the source economy ? Is there an optimal level of emigration or exit visas ?

Andrew Mountford

Can a brain drain be good for growth in the source econom

Introduction The eect of Brain Drain on educational incentives The eect of Brain Drain on income distribution dynamics Conclusion

The theorical model (1) The eect of general migration on educational incentives The eect of Brain Drain on educational incentives Which is better ?

Hypotheses (1)

Small open and overlapping generations economy One good produced with two factors : capital and efficiency units of labor CRS technology Perfect capital mobility A continuum of agents Measure of agents in each generation = 1 No population growth Two classes of agents : the educated and the uneducated

Andrew Mountford

Can a brain drain be good for growth in the source econom

Introduction The eect of Brain Drain on educational incentives The eect of Brain Drain on income distribution dynamics Conclusion

The theorical model (1) The eect of general migration on educational incentives The eect of Brain Drain on educational incentives Which is better ?

Production function

Production function :

Yt = F (Kt , λt Lt ) = f (kt )λt Lt with kt = λKL t

t

t

Kt and Lt : total amount of capital and efficiency units of labor respectively λt : productivity of labor or state of the technology

f (k ) > 0 ; f ’(k ) > 0 ; f ”(k )< 0 ; Inada conditions : lim f (k ) = 0 ; lim f ’(k ) = ∞ ; lim f ’(k ) = 0 k →0

Andrew Mountford

k →0

k →∞

Can a brain drain be good for growth in the source econom

Introduction The eect of Brain Drain on educational incentives The eect of Brain Drain on income distribution dynamics Conclusion

The theorical model (1) The eect of general migration on educational incentives The eect of Brain Drain on educational incentives Which is better ?

Factor prices

Firm’s maximization program gives : rt = f ’ (Kt ) + (1 − δ ) and rt = r ∗ Agent’s maximization program gives : wt = λt [f (k )- kf ’(k )] = λt w (k )

rt is the capital’s marginal product or the net return to capital δ is the rate of depreciation of the capital stock

wt is the wage rate per efficiency unit of labor

Andrew Mountford

Can a brain drain be good for growth in the source econom

Introduction The eect of Brain Drain on educational incentives The eect of Brain Drain on income distribution dynamics Conclusion

The theorical model (1) The eect of general migration on educational incentives The eect of Brain Drain on educational incentives Which is better ?

Distribution of ability and Educational decision

Three period Overlapping Generations model Agents possess different levels of latent ability e i distributed as follows : RE i i i 0 g (e )de = 1; with g (e ) > 0 the density function Agent i invests in education if : λt w (k )e i − c (1 + r ∗)> λt w (k ) c (1+r ∗) ⇒ e ∗ = λ w (kλ)+ = e ∗NM w (k ) t

t

with c=cost of education, r*=world’s interest rate

Andrew Mountford

Can a brain drain be good for growth in the source econom

Introduction The eect of Brain Drain on educational incentives The eect of Brain Drain on income distribution dynamics Conclusion

The theorical model (1) The eect of general migration on educational incentives The eect of Brain Drain on educational incentives Which is better ?

Growth dynamics (1)

Assumption of Buiter and Kletzer 1993, Galor and Tsiddon 1994 about growth externality : λt , positive function of educated workers in the previous period λt = λ (st −1 )where st −1 = eE∗ −1 g (e i )de i (1) and λ 0 (st −1 ) > 0 ; λ (0) = 1; λ (1) = innite R

t

Andrew Mountford

Can a brain drain be good for growth in the source econom

Introduction The eect of Brain Drain on educational incentives The eect of Brain Drain on income distribution dynamics Conclusion

The theorical model (1) The eect of general migration on educational incentives The eect of Brain Drain on educational incentives Which is better ?

Dynamics and steady state productivity

The Proportion of educated workers at t is an increasing function of the one at t-1 : st = ψ(st −1 )

de ∗ < 0⇒ ds >0 Since : ds ds −1 −1 t

t

t

t

Andrew Mountford

Can a brain drain be good for growth in the source econom

Introduction The eect of Brain Drain on educational incentives The eect of Brain Drain on income distribution dynamics Conclusion

The theorical model (1) The eect of general migration on educational incentives The eect of Brain Drain on educational incentives Which is better ?

Hypotheses (2)

We will examine the effects of emigration : when there is no educational requirement for emigration = General emigration When only educated agents can emigrate = brain drain

Hypotheses π is the probability of successful emigration π is independent of the number of workers who are eligible to emigrate Emigration policy is fully anticipated w F >λt w H Agents are risk neutral Andrew Mountford

Can a brain drain be good for growth in the source econom

Introduction The eect of Brain Drain on educational incentives The eect of Brain Drain on income distribution dynamics Conclusion

The theorical model (1) The eect of general migration on educational incentives The eect of Brain Drain on educational incentives Which is better ?

Individual's educational decisions (general emigration)

An agent i will choose to be educated so long as : (πw F +(1−π)λt w H )ei >π w F +(1−π)λt w H + c (1 + r ∗)

⇒ e∗ = de ∗ dp

pw F + (1−p ) lt w H +c (1+r ∗) pw F +(1−p)lt w H

< 0 ⇒Average productivity of the source economy will rise in

the next period ⇒the government should make p as large as possible General emigration will always increase productivity in the next period in the source economy

Andrew Mountford

Can a brain drain be good for growth in the source econom

Introduction The eect of Brain Drain on educational incentives The eect of Brain Drain on income distribution dynamics Conclusion

The theorical model (1) The eect of general migration on educational incentives The eect of Brain Drain on educational incentives Which is better ?

Individual's educational decisions (brain drain)

There is only a chance of emigration p if the agent is educated

e∗ =

dst = dp

lt w H +c (1-r*) p wF + (1 − p) lt w H dst dst de* dp + de* dp ds

with dpt

<0,

dst de*

e* < 0 , ddp <0

Brain drain has a negative and a positive effect on the source economy

Andrew Mountford

Can a brain drain be good for growth in the source econom

Introduction The eect of Brain Drain on educational incentives The eect of Brain Drain on income distribution dynamics Conclusion

The theorical model (1) The eect of general migration on educational incentives The eect of Brain Drain on educational incentives Which is better ?

Proposition

Proposition : There will exist a positive optimal level of ’Brain g (e ∗NM )(lt w H + c (1 + r ∗))(w F − lt w H ) 1 drain’ emigration if >4 (l t w H ) where e ∗NM is the lowest level of ability of an agent choosing to be educated when there is no possibility of emigrating =⇒The source economy can benefit from a brain drain so long as there are a sufficient number of poeple who would be enticed to invest in education, by a small prospect of emigration

Andrew Mountford

Can a brain drain be good for growth in the source econom

Introduction The eect of Brain Drain on educational incentives The eect of Brain Drain on income distribution dynamics Conclusion

The theorical model (1) The eect of general migration on educational incentives The eect of Brain Drain on educational incentives Which is better ?

Conditions

Case of uniformly distributed abilities : w F −lt w H e∗ t ⇒ ds d p >0 iff 1 − E <(1 − p) pwF + (1 − p)lt w H A brain drain will increase the proportion of educated people if π is low w F is very high relative to λt w H The proportion of educated people in the economy was previously low

Andrew Mountford

Can a brain drain be good for growth in the source econom

Introduction The eect of Brain Drain on educational incentives The eect of Brain Drain on income distribution dynamics Conclusion

The theorical model (1) The eect of general migration on educational incentives The eect of Brain Drain on educational incentives Which is better ?

The eect of Brain

Andrew Mountford

Can a brain drain be good for growth in the source econom

Introduction The eect of Brain Drain on educational incentives The eect of Brain Drain on income distribution dynamics Conclusion

The theorical model (1) The eect of general migration on educational incentives The eect of Brain Drain on educational incentives Which is better ?

Main results

Under certain conditions : Brain Drain can increase next period's productivity An optimal level of p exists Home country government can inuence p through agreement with other governments or via lax border controls

Andrew Mountford

Can a brain drain be good for growth in the source econom

Introduction The eect of Brain Drain on educational incentives The eect of Brain Drain on income distribution dynamics Conclusion

The Theoretical model (2) The eect of general migration on income distribution dynam The eect of Brain Drain on income distribution dynamics Which is better ?

The eect of Brain Drain on income distribution dynamics

II - The effect of Brain Drain on income distribution dynamics How can brain drain improve income equality ? Can brain drain be better than general migration ?

Andrew Mountford

Can a brain drain be good for growth in the source econom

Introduction The eect of Brain Drain on educational incentives The eect of Brain Drain on income distribution dynamics Conclusion

The Theoretical model (2) The eect of general migration on income distribution dynam The eect of Brain Drain on income distribution dynamics Which is better ?

Hypotheses (3)

Small open and overlapping generations economy One good produced with two factors : capital and efficiency units of labor CRS technology Perfect capital mobility A continuum of agents Measure of agents in each generation = 1 No population growth The education decision is a continuous choice variable The number of educational classes is endogenous - migration can influence the formation of educational classes

Andrew Mountford

Can a brain drain be good for growth in the source econom

Introduction The eect of Brain Drain on educational incentives The eect of Brain Drain on income distribution dynamics Conclusion

The Theoretical model (2) The eect of general migration on income distribution dynam The eect of Brain Drain on income distribution dynamics Which is better ?

The human capital production function

eti +1 = y(eti , xti ) y1 ,y2 ,y12 ,y21 ≥0 and y11 , y22 ≤0

eti +1 : Accumulation of human capital or efficiency-units of labor by individual "i" born in period" t" eti : Parent’s level of human capital or ’family level’ externality xti : Resources invested in human capital y(e it , 0) = y(0, x it ) = y(0, 0) = m : An agent always has m units of efficiency labor even when investing nothing in education Andrew Mountford

Can a brain drain be good for growth in the source econom

Introduction The eect of Brain Drain on educational incentives The eect of Brain Drain on income distribution dynamics Conclusion

The Theoretical model (2) The eect of general migration on income distribution dynam The eect of Brain Drain on income distribution dynamics Which is better ?

Individual's optimization decision

Overlapping generations model of an agent i born in period t In t : He borrows at rate r ∗ in order to invests in education. The cost of education is c In t+1 : The agent obtains e i efficiency units of labor, pays back the debt of period t and saves money for his retirement In t+2 : The agent is retired and consumes

maxU t ,i (Ct +2 ) = max (1 + r ∗ )[w λψ(e it , xti ) − (1 + r ∗ )x i ] FOC with respect to xti ∗ ψ2 (eti , xti ) = (1w+lr )

:

Andrew Mountford

Can a brain drain be good for growth in the source econom

Introduction The eect of Brain Drain on educational incentives The eect of Brain Drain on income distribution dynamics Conclusion

The Theoretical model (2) The eect of general migration on income distribution dynam The eect of Brain Drain on income distribution dynamics Which is better ?

Dynamics

Income dynamics

xti is an increasing function of eti : xti = x(eti ) The more the parent is educated, the more the agent will invest in education

e it +1 = y(eti , x(eti )) gives dede +t1 ≥ 0 : i t

i

The more the parent is educated, the more his offspring is educated Growth Dynamics : the level of technology in period t+1 is an increasing function of the average level of parental human capital : lt +1 = l(¯ et )

Andrew Mountford

Can a brain drain be good for growth in the source econom

Introduction The eect of Brain Drain on educational incentives The eect of Brain Drain on income distribution dynamics Conclusion

The Theoretical model (2) The eect of general migration on income distribution dynam The eect of Brain Drain on income distribution dynamics Which is better ?

Income distribution dynamics

Only lower and higher steady-state levels of humain capital are stable Andrew Mountford

Can a brain drain be good for growth in the source econom

Introduction The eect of Brain Drain on educational incentives The eect of Brain Drain on income distribution dynamics Conclusion

The Theoretical model (2) The eect of general migration on income distribution dynam The eect of Brain Drain on income distribution dynamics Which is better ?

Hypotheses and individual's optimization decision

λ ∗ > λ with λ ∗is the constant level of technology in the rest of the world Emigration policy is fully anticiped Maximization problem : max pu (c E ) + (1 − p)u (c NE ) x

i t

→FOC : pu 0 (c E )[w λ ∗ ψ2 (eti , xti ) − (1 + r ∗)] + (1 − p)u 0 (c NE )[w λ ψ2 (eti , xti ) − (1 + r ∗)] = 0

The amount invested by an individual i is an increasing function of the probability of emigration

Andrew Mountford

Can a brain drain be good for growth in the source econom

Introduction The eect of Brain Drain on educational incentives The eect of Brain Drain on income distribution dynamics Conclusion

The Theoretical model (2) The eect of general migration on income distribution dynam The eect of Brain Drain on income distribution dynamics Which is better ?

The eects of general emigration (1)

Andrew Mountford

Can a brain drain be good for growth in the source econom

Introduction The eect of Brain Drain on educational incentives The eect of Brain Drain on income distribution dynamics Conclusion

The Theoretical model (2) The eect of general migration on income distribution dynam The eect of Brain Drain on income distribution dynamics Which is better ?

The eects of general emigration (2)

Any positive value of p will increase xti for all members of generation t ⇒The productivity of all workers is increased Even a temporary emigration can have lasting benecial eects on the average level of human capital accumulation in the source economy

Andrew Mountford

Can a brain drain be good for growth in the source econom

Introduction The eect of Brain Drain on educational incentives The eect of Brain Drain on income distribution dynamics Conclusion

The Theoretical model (2) The eect of general migration on income distribution dynam The eect of Brain Drain on income distribution dynamics Which is better ?

Eects of brain Drain (1)

Only workers with a minimum level of human capital γ have a chance p to emigrate

Andrew Mountford

Can a brain drain be good for growth in the source econom

Introduction The eect of Brain Drain on educational incentives The eect of Brain Drain on income distribution dynamics Conclusion

The Theoretical model (2) The eect of general migration on income distribution dynam The eect of Brain Drain on income distribution dynamics Which is better ?

Eects of brain Drain (2)

Brain drain eliminates the low level of human capital steady state

el Average level of human capital and productivity are increased in the long run Brain drain decreases income inequality

Andrew Mountford

Can a brain drain be good for growth in the source econom

Introduction The eect of Brain Drain on educational incentives The eect of Brain Drain on income distribution dynamics Conclusion

The Theoretical model (2) The eect of general migration on income distribution dynam The eect of Brain Drain on income distribution dynamics Which is better ?

Which is better ?

Andrew Mountford

Can a brain drain be good for growth in the source econom

Introduction The eect of Brain Drain on educational incentives The eect of Brain Drain on income distribution dynamics Conclusion

Conclusion

Model with two fixed educational classes Brain Drain can increase the productivity of the source economy A temporary possibility of emigration may permanently increase the productivity of an economy

Model with endogenous formation of educational classes Brain Drain can permanently increase the steady-state level of humain capital as well as income equality Brain Drain can, under certain conditions, be preferable to a general migration

What happens if we relax one or more assumptions at a time ? Andrew Mountford

Can a brain drain be good for growth in the source econom

Can a brain drain be good for growth in the source ...

The effect of Brain Drain on educational incentives. The effect of Brain Drain on .... λt : productivity of labor or state of the technology f (k) > 0; f '(k) > 0; f ”(k)< 0;.

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