Brain Drain or Brain Gain?

The
New Economics of Brain Drain
Reconsidered
Jan Brzozowski, Cracow University of
Economics

Cracow, 22th October 2008

Jan Brzozowski∗, Cracow University of Economics

Brain Drain or Brain Gain? The New Economics of Brain Drain Reconsidered∗∗.

Abstract

The debate on the economic implications of skilled migration for the home countries is
a long-lasting phenomenon. This issue has been discussed for almost fifty years. During this
period, most of the scholars (eg. Bhagwati and Hamada 1974, Portes, 1976) believed that
skilled migration is detrimental for the countries of origin, while the host economies benefited
from the inflow of skilled labor. Thus the notion of brain drain – harmful for the developing
economies, and brain gain – profitable for developed countries – came into being, and is still
present in the literature.
However, in the mid of 1990s, a new strand of research on skilled migration became
visible. This new school – the new economics of brain drain – argued that brain drain must
not be detrimental for the countries of origin. Under certain circumstances, migration of
professionals from developing economies may be in fact a “blessing in disguise” – and the
potential gains could be higher than costs.
The economists (such as Mountford, 1997, Beine et al., 2001 and 2003, Stark, 2005)
from the new economics of brain drain have renewed the discussion on the economic
consequences of skilled migration. However, their optimistic view of brain drain has been
heavily criticized. The paper presents the main propositions of this new approach. Then it
discusses the claims of the opponents of new economics of brain drain and brings new
explanations why the brain drain is detrimental: both on theoretical and empirical ground.

Keywords: brain drain, survey of literature, brain waste

JEL classification: F22, F43, J24

∗
Corresponding author. E-mail: jan_brzozowski@poczta.onet.pl
∗∗
Paper presented at the postgraduate seminar at the UFPR, Setor de Ciências Sociais Aplicadas, Departamento
de Economia ,Curitiba, 9th September 2008. I would like to thank Regina Przybycien, Mauricio Bittencourt,
Józef Pociecha and the participants of the seminar for helpful comments on paper. Research project supported
by Polish Ministry of Science and Higher Education (grant No. N N114 210934).
2
1. Introduction

The brain drain phenomenon has been intensively discussed and analyzed by
economists since the 1960s. First, the proponents of the neoclassical approach argued that the
skilled migration is favorable at the international level: both for the home and host countries.
The main gains from this process resulted in advances in world’s science and technology for
both developing and developed economies (Grubel and Scott, 1966). Second, scholars from
the world systems approach claimed that the brain drain is to a large extent detrimental, at
least for the sending countries. The world system theory proponents have perceived the
migration of highly trained individuals as a manifestation of economic backwardness of
developing nations of the South and the development of the richer countries of the North
(Portes, 1976). The international flow of skilled labor has been responsible for augmenting the
economic imbalances and lowering the economic potential of the poor South, especially when
turning to the productivity levels (Kannappan, 1968). This process is seen as ethically
questionable, as the poor countries to a large extent financed the education of the skilled
emigrants. So the brain drain could constitute a subsidy of wealthy nations by the poor
(Massey et al., 1998).
The negative aspects of brain drain for the developing countries have been also
described by Bhagwati and Hamada (1974). They turned attention to the social (i.e. strong
externalities in production provided by skilled workers) and fiscal (foregone tax income) costs
of emigration. The brain drain also caused distortions on the local labor markets, augmenting
the unemployment and lowering the potential GDP. To compensate such losses for the home
economies, Bhagwati proposed to tax the income (i.e. “Bhagwati Tax”) of skilled émigrés.
The revenues from the “Bhagwati Tax” should had been channeled back to countries of
emigration through United Nations development programs (Bhagwati, 1976).
This discussion between the optimistic and pessimistic approach continued till the
1980s, when it was to a large extent abandoned. The main reason for discarding the analysis
of brain drain was the lack of reliable and systematic data. Thus the analysis on skilled
migration and its economic effects was purely theoretical1.
The theoretical analysis on skilled migration has been revitalized in the 1990s within
the endogenous growth framework. The initial works still turned attention to the negative
economic effects of brain drain. Miyagiwa (1991) underscored the role of increasing returns

1
For detailed survey of the brain drain literature, see: Bhagwati and Rodriguez (1975), Commander et al. (2002),
Giannoccolo (2006), Docquier and Rapoport (2007) or Stark and Fan (2007).
3
to scale in education: the brain drain increased the national income and the returns to
education in host countries, but on the other hand lowered the propensity to study and the
income at home. Haque and Kim (1995) argued that brain drain slowed the accumulation of
human capital in home economies, thus contributing to the permanent reduction of the
economy’s growth rate.
In mid 1990s a new strand of research, named the new economics of brain drain2
appeared. This new proposal has to a large extent renewed the analysis of economic
consequences of the process of skilled migration to the home countries. The scholars from this
approach argue that skilled migration may have beneficial impact on both home and host
countries. Thus they turned their attention to the positive aspects of brain drain, which had
been neglected or omitted in earlier literature. But the main value of the new economics of
brain drain is the empirical analysis. Thanks to pioneering works of Carrington and
Detragiache (1998), and following efforts of Docquier and Marfouk (2005), Dumont and
Lemaître (2005) and Beine et al. (2006), who created harmonized databases of skilled
migration rates, the theoretical models where tested and some of the positive effects of brain
drain were (at least to some extent) verified.
The main purpose of this paper is both theoretical and empirical. First, a theoretical
analysis of the impact of the brain drain on the economic well-being of the sending countries
is discussed. Second, some empirical considerations are also included to show that the
reasoning of the new economics of brain drain has been overoptimistic. As for the structure of
the article, it is as follows: section two presents briefly the main concepts of the new
economics of brain drain strand. In section three, the criticism of the new economics of brain
drain is presented and analyzed. Fourth section shows additional motives explaining why
there is little place for optimism when describing the brain drain and its economic impact on
the countries of emigration. In section five some empirical issues are discussed, in relation to
the research made by the scholars of the new economics of brain drain. Finally, some
concluding remarks are added about the future of the research on skilled migration. Although
this paper remains to large extent critical of this new approach, however, the impact of the
new economics of brain drain on development literature is extremely valuable. This new
research area has huge potential for development.

2
This term was proposed by Stark (2005).
4
2. The new economics of brain drain

The scholars who represent the new economics of brain drain school argue that -
although being partly detrimental - brain drain may generate, under some circumstances,
some positive effects to the sending economy. Moreover, these effects may countervail the
detrimental impact of skilled outflow on human capital stock and economic growth in these
countries.
The countries of origin may gain from the emigration of skilled workers in four ways:
• effect of induced education (Lucas, 2005) - known also as “brain effect” (Beine et al.,
2001, 2003) or “brain gain” (Schiff, 2005) – the migration perspective increases the
attractiveness of educational investments in the sending economy, thus contributing to
increased accumulation of human capital and faster growth;
• return migration – some of the members of the Diaspora may return back to their
homelands, bringing social, physical and human capital accumulated abroad, thus
contributing to the economic development (Stark et al., 1997);
• remittances – migrants transfer part of their income back home. These transfers in
some cases (eg. Dominican Republic, Jordan) constitute a large part of the national
income, and if properly used may help to boost the economic growth (Ghosh, 2006);
• Diaspora effects – even staying abroad, members of the Diaspora may be a precious
asset for the home country, offering advice, acting as intermediates or simply
investing their money. This effect may be observed directly - as the FDIs of migrants
and their companies, or indirectly when the Diaspora members encourage other
entities to do so (Kugler and Rapoport, 2005).
The most interesting and striking beneficial effect of brain drain, associated with this
new approach is that of induced education. According to some scholars (Stark et al., 1997,
Mountford, 1997, Beine et al., 2001 and 2003, Vidal, 1998, Brücker et al., 2008) migration
probability alone may be a powerful tool, which helps the economies of developing countries
to exit the underdevelopment trap, and increase the long-run rate of growth. As compared to
the hypothetical autarky (where no migration is allowed), migration increases the
attractiveness of education, thereby encouraging more people to acquire additional schooling.
This in turn means that the developing economy raises the ex ante (before the educated
migrants leave the country) stock of human capital, which is beneficial for growth. In some
theoretical models, a possibility of beneficial brain drain has been suggested – the situation

5
when the positive induced education effect is strong to the extent that it overweighs the
detrimental outflow of skilled people. Per saldo the developing economy ends up with more
skilled individuals that would have been otherwise, in case the borders would have been
closed (Beine et al., 2001 and 2003). The hypothesis of Beneficial Brain Drain (henceforth:
BBD) is very tempting indeed, because its existence alone may be used to argue that brain
drain is no more detrimental, even while not taking into the consideration additional positive
effects of the phenomenon.
Moreover, thanks to the seminal contribution of Carrington and Detragiache (1998),
and later on of Docquier and Marfouk (2005), Dummont and Lemaître (2005), Bhargava and
Docquier (2006) – a number of harmonized datasets on skilled migration appeared, giving
scholars the chance of testing empirically the hypothesis put forward in their models. Beine et
al. (2003) have demonstrated that the Beneficial Brain Drain is something more than a simple
curiosity. In their research, they tested the hypothesis of BBD on a group of 50 developing
countries. Their empirical analysis has shown that BBD is possible when the migration
probability (i.e. skilled migration rate) is of small (ie. less than 5 per cent) size. Although
more developing countries still seemed to be “losers” of brain drain, there is a small group of
“winners”. To this group belong the biggest developing economies, such as India or Brazil.
The empirical analysis of Beine et al. (2003) remains nowadays the most important voice in
favor of the new economics of brain drain - the optimistic point of view on skilled migration.

3. Criticism of the new economics of brain drain

On the other hand, there are many authors who do not share the optimistic view of
new economics of brain drain literature. The most important opponent of this approach is
Maurice Schiff (2005). He argues that most assumptions of this new approach are unrealistic,
i.e.:
• the assumption of exogenous migration probability – migration probability may be
endogenized by rational agents who seek to maximize their lifetime income, while
deciding on educational investment. Thus, the effect of induced education decreases
over time, and on the steady state the economy ends up in a situation of brain loss;
• the assumption of exclusive migration prospects for skilled individuals – as unskilled
agents can migrate as well, the effect of induced education is at best much weaker,
than in situations where only skilled people are allowed to move;

6
 • the assumption of imperfect screening – in fact, migrants are screened for skills quite
effectively, and only the most capable are successful in finding a good job abroad – so
there is little incentive left for less able to acquire education in order to migrate
afterwards.
The last remark is reinforced by the threat of brain waste, i.e. situation, where skilled migrants
work in menial jobs in the destination country, having the same occupations as their unskilled
counterparts. Schiff points out that in this case the educational investment seems useless for
less-able agents, an issue that would be analyzed in detail later on.
The new economics of brain drain has been heavily criticized on the empirical ground.
Ricardo Faini (2002) has found little support for the existence of induced education effect. He
applied regression analysis on the enrollment rates on group of 50 countries and found
migration rates negatively correlated with educational investments, excluding the enrollment
at the secondary level. This led him to claim that migration perspectives might have in fact
encouraged people in developing countries to study, but most of those who wanted to succeed
in migrating, have gone to study at the tertiary level already in the destination country. Faini
has also demonstrated that the countries with higher skilled migration rates receive smaller
amounts of remittances, so the additional, potentially beneficial effect of skilled migration
becomes questionable (Faini, 2006).
Quite similar results were obtained by Checchi et al. (2007). They found also that
migration rates are negatively correlated with the enrollment rates. However, they claim that
this is caused by the impact of brain drain on domestic population. When many skilled agents
leave, the rest of society may perceive this outflow as a signal that there is no job for tertiary
educated. This in turn may reduce incentives to acquire additional education. So instead of
beneficial brain effect, they suggest that there is detrimental effect of reduced ex post (after
the migration takes place) enrollment rate.
Thus, on the macro level the effect of induced education has been confirmed only by
the authors of new economics of brain drain (Beine et al., 2003) and recently, by Brücker et
al. (2008). As I would claim later, these particular analyses have been biased by the fact that
the demographic composition of population in the developing countries has not been taken
into account.
Moreover, the effect of induced education has been also questioned at the micro level.
Kangasniemi et al. (2004) have surveyed the overseas doctors working in the UK. Most of the
respondents argued, that the migration perspectives played no role in their educational

7
decisions. They also confirmed that the screening system, at least in case of the UK, works
quite effectively – those who came from best medical universities in their home countries,
succeeded on local labor market. On the other hand, those who graduated at the peripheral
medical schools have had serious problems in finding a job. The research of Kangasniemi et
al. (2004) offers strong support to the claims of Schiff about the screening system.

4. Additional theoretical problems of beneficial brain drain

The claims discussed in the previous section can already cast some doubts on the
possible benefits of brain drain. However, there are some reasons to think, that in fact brain
drain might be more detrimental than suggested by the new economics of brain drain strand.
In my opinion, the main deficiency of this new approach is that it is too deeply enrooted in the
field of economics, while paying too little or virtually no attention to the achievement of other
disciplines. When one wants to research such complex and complicated issue as migration
and its economic consequences, he (or she) must be aware of what have been researched by
sociologists, demographers, political scientists and historians in the same field. This
knowledge may help in the theoretical work, while the analytical models are created, and in
empirical research as well. Moreover, such knowledge might be extremely useful when one
looks at the errors that other scholars from distinct fields have made. In this way, one might
understand what barriers lay ahead and how to overcome them.
Nearly a half century ago, Frank Thistlethwaite has made a statement that has been a
milestone in the development of the history of migration. While assessing the state of art in
the research of 19th Century migration overseas from Europe to Americas, Thistlethwaite
(1960, p. 19-20) said:

“It has been the consequences and not the causes of migration which we have received most
attention, and moreover, the consequences for receiving country, not the sending country.
The causes, if not exactly taken for granted, have been given more perfunctory investigation.
(...) Recent American scholarship has wonderfully enriched our knowledge of immigrant
adjustment but there still appears to be a salt water curtain inhibiting the understandings of
European origins”.

Thistlethwaite simply argued that there was a fragmentarization of historical research on

transatlantic migration – American historians were interested only in causes of migration
8
(settlement, adaptation, integration, assimilation etc.) while paying no attention to its origins –
thus having the incomplete or partial picture of the process. This statement was a
revolutionary remark, and the historians researching migration during the last 50 years have
made a considerable effort to lift the “salt water curtain”.
What has the statement of Thistlethwaithe in common with the new economics of
brain drain, or with the whole migration and development research? Quite a lot, I think. The
“salt water curtain” in our field is firmly established, and the economists who research
migration put little effort to lift it up. Quoting Thistlethwaite once more, I think that in the
case of new economics of brain drain “it has been the consequences and not the causes of
migration which have received most attention, and moreover, the consequences for the
sending country”, not the receiving one. When one look at the economic literature on
migration, he (she) sees a big gap between economics of migration (i.e. mostly migration and
development issues) and the economics of immigration. Both fields seem to develop
independently from each other, and the exchange of experience seems unsatisfactory (see
figure 1).

Figure 1. Salt water curtain in the economic research on migration

Economics of migration Economics of immigration

Ec
• Migration perspectives and • Selection of immigrants;
accumulation of human • Gains in productivity due to
capital; brain gain;
• Inflow of remittances and • Economic integration of
how the remittances are immigrants;
spent; • Segmented labor markets
• Inflow of FDIs generated by and economic ethnic
the Diaspora; niches;
• Return migration; • Discrimination on labor
• Classical brain drain – market, over-qualification
depletion of human capital and brain waste.
stock.

As a consequence of the existence of salt water curtain in the economic research of

migration, some issues already discovered by the economists interested in immigration remain
9
unknown, or are not considered in the economic analysis of migration. To be more precise,
the new economics of brain drain literature neglects or ignores the relation between skilled
and unskilled migration. This issue has been already discussed by Schiff (2005), but here
some other aspects should also be mentioned. Although there are visible signs that the scope
of skilled migration is increasing, the labor migration still dominates in the international flows
of people. Many models of beneficial brain drain analyze the educational choice of agents
only within the frame of skilled migration probability3. In reality, agents must not invest in
education to have a chance to emigrate. And even more – many agents may enter that labor
market more rapidly, leaving the school, lured by a chance to get better-paid job abroad. So
the introduction of unskilled migration probability lowers the ex ante (before migration)
“brain effect” in two ways: i) earlier migration possibility of less educated workers (skilled
workers have to stay longer in school in order to migrate abroad) ii) possibility of migration
for unskilled alone may turn tertiary education useless for those who only considered to study,
lured by the possibility to migrate.
Figure 2. Linkages between migrants and sending country

Sending Country Destination country

trade

FDIs

Migration
networks:
Social capital
information

remittances

In addition, the migration networks that most of developing economy’s societies have
access to (figure 2), give possibilities of work in the sector of the economy where wages are
low and occupations require no or little qualifications. Jobs in this sector are those that natives

3
One known exception is a model developed by Brücker et al. (2008). They consider migration probabilities
both for skilled and unskilled agents, although assuming that migration probability is higher for the skilled
individuals. They also consider that migration is possible only in the second period of life of each agent,
irrespectively of his educational attainment. This means that unskilled agents seem to “wait” to migrate together
with the skilled individuals, instead of leaving the home country earlier.
10
do not want, often called 3 D Jobs (i.e. difficult, dirty and dangerous). The importance of
these networks in stimulating migration from developing countries has been already stressed
in the sociological literature. The social networks provide social capital (contacts, linkages,
mutual trust) and information about the situation on the labor market in the country of
destination. Thus, the future migrants not only are pulled by the networks and their relatives
abroad, but also they remain aware of the conditions they will face there. When they know
that in the foreign country they may work only as taxi drivers, waiters, cleaning staff or as
construction workers, it is very unlikely that such information will encourage them to invest
additionally in tertiary education.
This issue is related to another problem, not included in the new brain drain literature.
New models usually assume perfect or almost ideal transferability of human capital across
borders. Consequently, immigrants get jobs which correspond to their qualifications and are
paid accordingly to the quantity of human capital embodied in them. However, the situation
of many immigrants in receiving economies creates the impression of brain waste
phenomenon. Due to numerous reasons, skilled migrants cannot use their human capital
properly, often working on posts for unskilled staff. It is not only the segmentation of labor
market that is responsible for brain waste, but also:
• administrative barriers created to restrict entry of foreign workers to specific sectors
(especially the governmental one);
• discrimination (xenophobia) on the labor market;
• human capital acquired during the studies may be applicable only in the countries of
origin – this is the case of (most of) lawyers, sociologists, philosophers, philologists
etc.;
• problems with the recognition of the university diploma (lack of harmonization of
educational systems);
• disparity between the real and nominal skills – while public spending on education is
many developing countries is low, so is the quality of tertiary education. So in fact
many immigrants remain “skilled” only on paper, and they lack basic skills needed in
the foreign country – the most striking example is the knowledge of foreign language.
Recent studies show that the immigrant groups are most exposed to the over-
qualificational occupation problems (OECD, 2006 and 2007). Matto et al. (2005) have
investigated the brain waste phenomenon in the United States, using the data from 2000
census. They found that skilled immigrants from many developing and transforming

11
economies perform poorly on the US labor market. The main countries of origin hit by the
brain waste problem are Latin America and Eastern European countries. Matto et al. argue
that brain waste lowers the return to human capital in this group, and therefore in this case
emigration offers little incentive to invest in additional education – the effect of induced
education is very unlikely to occur. There is even a possibility that due to the existence of
brain waste, future migrants may in fact resign to invest in additional schooling. In this case a
threat of negative brain effect appears4: agents would leave the school earlier in order to enter
the labor market more rapidly and to migrate abroad, lowering the ex ante (before the
migration is netted out) stock of skilled individuals. This detrimental outcome of migration
has been demonstrated in theoretical model, but also some empirical evidence has been
presented (Brzozowski, 2008).
Other problems in relation to the theoretical analysis of the new economics of brain
drain are:
• the relation between push and pull factors of migration – most of the authors
underscore the importance of pull factors (mainly: higher wages abroad) while
analyzing the emigration motives of agents, and pay little (or no) attention to push
factors. Nevertheless, in many sending countries the forces that make people go
abroad have its source mainly in domestic conditions of economy: high
unemployment, political instability, low wages, lack of perspectives etc. These in turn,
may have additional influence on investments in education, as well as on the rate of
emigration. This problem had been already pointed out by Bhagwati and Hamada in
their classical model (1974). They argued that migration perspectives might in fact
raise the returns to investments in education, but the overall effect for the sending
country’s economy would be detrimental. The country might end up with
overproduction of skilled individuals, who cannot find a job, while the state must pay
for the increasing costs of public education system. The issue of “educated
unemployment” has been touched upon lately by Stark and Fan (2008 b,c). They argue
that this overproduction of skilled citizens is detrimental on macro level only for a
short period of time, but on the longer horizon it helps the economy take-off and enter

4
First remarks that migration may in fact lower the educational attainments were made by McKenzie and
Rapoport (2006) in relation to migration from rural areas in Mexico to the US. When the irregular migration is
considered, the tertiary education is no more needed, because such immigrants can only work in menial, low-
skilled jobs. In fact, the possible outcome of irregular migration in case of skilled workers is return migration,
when the possibility of legalizing entry is low (Coniglio et al., 2005).
12
 the higher growth path. However, their model remains purely theoretical and some
empirical research on this subject is still to come;
• the omission of short-term movements of skilled people – most authors analyze
(except in some cases, as Stark et al., 1993) only long-term, or even permanent
migration. However, most of the international mobility of skilled workers are circular,
short-term flows. And due to the expansion of communication systems, the role of
internet, the falling costs of transportation the growing importance of transnational
skilled migrants must be recognized and investigated with greater care;
• the analysis of only one-sided flow (inflow) of FDIs, migrant remittances and trade –
underscoring gains for the sending countries. Migrants also receive remittances from
their families and invest physical capital in the destination country. And the
intensification of bilateral trade between sending and receiving countries means not
only the expansion of export for the country of emigration - but some goods and
services are also imported (figure 2).

5. Empirical analysis of induced education – what went wrong?

In terms of empirical research on beneficial effects of brain drain for developing

countries, there are two opposite approaches:
• the authors of Beneficial Brain Drain model (Beine et al., 2003) confirm the existence
of “brain effect” on a large group (50) of developing countries, and show that in some
cases even the BBD is possible (i.e. “brain effect” prevails over the “drain effect”). In
their analysis, the explained variable (the investment in education) in the human
capital equation is the “increment of tertiary educational attainment”. They found it
positively and significantly correlated with the variable “skilled migration rate” (proxy
for migration probability). The very similar method was applied in the research carried
out by Brücker et al. (2008). They also used the increment in educational attainment as
a measure of investment in human capital5 (the explained variable). They found that
higher migration probability for skilled agents was associated with higher investments

5
However, they considered only two educational groups: agents with less than nine years of schooling were
classified as unskilled, while individuals with more than nine school years were treated as skilled. The same
holds true for the migration rates – empirical approximations of migration probability. Most of the researchers
(eg. Docquier and Marfouk, 2005) classified skilled agents as agents with tertiary education (i.e. 13 years of
schooling or more) – a definition which is quite different from this used in the paper written by Brücker et al.
(2008).
13
 in human capital. On the other hand, a rising probability of migration for unskilled
individuals was negatively correlated with investments in human capital;
• Critics of the new approach, including Faini (2002), Checchi et al. (2007) and
Brzozowski (2008) used the tertiary enrollment rate as the explained variable – and
found it significantly and negatively correlated with the skilled migration rate.
It is obvious that something is wrong – either in the first - or the second approach.
Skilled migration cannot be positively and negatively correlated with the investments in
human capital at the same time. In this section, I try to demonstrate that the usage of tertiary
educational attainment as the measure of the investment in education, although very plausible
for calculation (it allows to compare potential “brain effect” with “drain effect” and to
measure the overall net effect), is heavily biased by the demographic composition of society
in a given country. There might be an increase in the percentage of skilled individuals in the
countries with higher skilled migration rates. However this increment in skilled population
stock must not be attributed to higher migration probability (as an incentive to invest in
education), but mainly to the large share of younger individuals in the developing countries.
As the younger cohort reaches the age 18-25, so rises the number of students in a given
country, because the tertiary enrollment rates worldwide are continuously rising. The measure
of tertiary educational attainment increase is also biased, as Faini (2002) rightly points out6,
by the unskilled migration – the more unskilled leave the country, the bigger increment in
educational attainment. But this increment is not necessarily due to higher migration
probability for skilled agents, as new economics of brain drain models suggest. Thus it is
much safer to use the enrollment rates, as more “neutral” measures of investment in
education.
To show this reasoning, I carried out a similar empirical analysis as Beine et al.
(2003). However, the sample is restricted to 23 Latin American and Caribbean countries, and
the small countries (such as St. Kitts and Nevis), for which the migration rates are very high
were excluded7. In the empirical analysis, two equations are estimated:

6
“The finding that educational levels in sending countries are positively associated with migration does not
necessarily indicate that migration encourages investing in education, but is also compatible with the simple
notion that migrants from relatively poor countries are mostly unskilled. Large flows of unskilled migrants
would then almost automatically lead to a rise in the average skill level of those left behind in the home country”
Faini (2002, p. 9)
7
The purpose of sample selection was to choose those countries, for which migration plays important role in
economic development and where the “brain effect” should be particularly strong. Sample includes: Argentina,
Bolivia, Brazil, Chile, Dominican Republic, Ecuador, Guyana, Guatemala, Haiti, Honduras, Jamaica, Colombia,
Costa Rica, Mexico, Nicaragua, Panama, Paraguay, Peru, El Salvador, Suriname, Trynidad and Tobago,
Uruguay, Venezuela.
14
 • migration equation – to deal with the endogenization problem8, one should use the
Instrumental Variable method. Migration rate is regressed in order to find the most
proper instrument for the next equation;
• human capital equation – where the increment of tertiary educated population is the
explained variable, and migration rate is one of the explanatory variables. This
equation measures if there is a positive brain effect, as new economics of brain drain
suggests.
In the empirical analysis, the data on skilled migration collected by Docquier and
Marfouk (2005) is used. However, the measure of skilled migration rate employed in their
work has been adjusted to include net outflows of skilled from analyzed countries – so in fact
we apply variable “net skilled migration rate” (mig) for years 1990-20009:
s
m2000 − m1990
s
+ 0,1 * (m1990
s
)
mig = (1)
s
[m2000 − m1990
s
+ 0,1 * (m1990 )] + [ pop 2000 − pop1990
s s s
+ 0,1 * ( pop1990
s
)]
where m means migrants, pop – population in the sending country, and indexes are s for
skilled, and 1990 and 2000 for a given year.
The migration equation is estimated in OLS in order to identify potential exogenous
instruments (i.e. variables correlated with migration rate and uncorrelated with human
capital):

mig = - 0,112319 + 0,052711 lstock + 0,001353 dens - 0,000000 pop - 0,078690 racial
(-0,18625) (1,02705) (2,69828) (-0,91665) (-2,75209)
R2(adjusted) = 0, 5219774, F = 7,0057, N=23. The t-statistics are reported between brackets.
For the description of variables, see table 1.

8
I believe that migration probability (i.e. migration rate) influences the investment in education, which in my
analysis is a measure of educational attainment. However, the migration rate can also be influenced by the
composition of educated people in the sending country – the more skilled is the population, the “richer” is also
the outflow of workforce.
9
The depreciation rate of human capital has been arbitrary set at 10 per cent, as in Beine et al. (2003). The
measure “net skilled migration rate” describes net loss of skilled population for the country of emigration
(including return migration).
15
 Table 1
Variables and their empirical counterparts
Variable Definition Empirical counterpart Source
increment of tertiary Docquier and
investments in educated population, 1990- Marfouk
hum education 2000 (2005)
Docquier and
Marfouk
mig migration rate net skilled migration rate (2005)
Docquier and
log of migrant stock in OECD Marfouk
lstock migrant stock area, 1990 (2005)
Population density 1990 World Bank
dens population density (people per sq. km) (2006)
measure of racial tension, Easterly and
racial racial tension 1984 Levine (1997)

The coefficients significant at 5 per cent significance level were marked in red. Thus, one can
see only two potential instruments for the next equation – population density and racial
tension.
The second equation shows the factors which affect the accumulation of human capital
in the LA and Caribbean countries. The explained variable is hum – the increment of the
proportion of tertiary educated individuals between 1990 and 200010:
hum = H 2000 − H 1990 + 0,1H 1990 (2)
where H is the percentage of tertiary educated individuals in the population, and indexes are
for a given year respectively. The estimation results of human capital equation are as follows
(OLS estimation):

hum = - 0,018457 + 0,066862 mig + 1,158298 eduex + 0,162588 rem

(-1,09756) (3,44128) (2,87228) (0,89799)
2
R (adjusted) = 0,54070108, N=23.
The t-statistics are reported between brackets. For the description of variables, see table 2.

10
The depreciation rate of human capital has been arbitrary set at 10%, as in Beine et al. (2003).
16
 Table 2
Variables and their empirical counterparts
Variable Definition Empirical counterpart Source
increment of tertiary Docquier and
investments in educated population, 1990- Marfouk
hum education 2000 (2005)
Docquier and
Marfouk
mig migration rate net skilled migration rate (2005)
public investments in
public investments education as % of GDP, World Bank
eduex in education mean 1990-2000 (2006)
workers remittances as % World Bank
rem remittances of GDP, mean 1990-2000 (2006)
The coefficients significant at 5 per cent significance level were marked in red. This is the
case of the migration rate and public expenditures on education. Moreover, the coefficient of
migration rate is positive, confirming the prediction of the BBD model. The existence of
positive brain effect therefore has been confirmed.
When one estimates the human capital equation using instrumental variable method,
the results are even more interesting11:

hum = -0,020991 + 0,101852 mig + 1,039225 eduex + 0,043471 rem

(-1,37546) (4,30468) (2,80864) (0,25125)
R2(adjusted) = 0,62254803, N=23.

When the racial tension is used as an exogenous instrument, the determination rate is higher,
and the higher (and positive) is the value of migration rate coefficient. In this case, positive
brain effect is nearly two times stronger than in case of Beine et al. (2003).
However, in the case of regression analysis, the main pitfall is that we cannot be sure
whether all factors have been included in the analysis (Ramcharan, 2006). In this case, the
value of determination rate clearly points out that there may be some other variables that have
not been included in the regression. This in turn may lead to wrong or biased results. When
one looks at the countries that have been included in the analysis, one may reach only one
logical conclusion: the demographic structure of the population is missing. It may be an
important explaining (independent) variable: when the population of given country in a given

11
The instrument used is the measure of racial tension. When population density used, estimation results were
worse than in the case of OLS estimation.
17
period is very young, more people enter the university schooling’ age and the percentage of
tertiary education rises, other things being equal. Therefore, one should add the variable ypop,
which includes the average percentage of population aged 20 to 29 in years 1990-2000.
The variable ypop is positively and significantly (at α=0,05) correlated with our
explained variable hum (see table 3). Unfortunately, it is also significantly and positively
correlated with explanatory variable eduex – which is in fact not surprising. Countries which
have relatively larger proportion of young population should also spend more on education
than countries with older population. As we cannot include both variables which are
correlated with each other on the right side of the equation, we drop eduex – in order to show
the impact of young population ratio on the explained variable12.
Another important variable that should have been included in the analysis is the
probability of brain waste for immigrants from a given country. In the previous section it has
been described how the risk of over-qualification in the destination may influence the
accumulation of human capital at home. For a given agent, the relationship between brain
waste and education is as follows: the higher probability of over-qualification in the country
of immigration, the smaller propensity to invest in education at the tertiary level (other things
being equal). Therefore, a variable bwaste has been included in the analysis. The empirical
counterpart of this variable is the probability for a given individual, who holds the bachelor
degree, of working in the unskilled position in the US year 2000 (Matto et al., 2005).
The estimation results of the modified human capital equation are as follows (OLS
estimation):
hum = -0,032 -0,166 bwaste +0,438 rem +1,017 ypop
(-0,296 ) (-2,924) (2,322) (1,894)
R2(adjusted) = 0,421, N=22.
The higher probability of brain waste was negatively and significantly correlated
(α=0,05) with the increment of tertiary educated population (empirical counterpart for the
investments in education). The coefficient for remittances in this case was also significant at 5
per cent. Ypop was found significant at (α=0,1).

12
Additional reason for discarding variable eduex from regressed equation is negative correlation with brain
waste probability – i.e. variable bwaste, introduced below. Public expenditures on education are a good proxy
measure for the quality of education in the home country. Better-qualified ter tiary graduates are less prone to the
over-qualification problems.
18
 Table 3
Variables and their empirical counterparts
Variable Definition Empirical counterpart Source
increment of tertiary Docquier and
investments in educated population, 1990- Marfouk
hum education 2000 (2005)
Docquier and
Marfouk
mig migration rate net skilled migration rate (2005)
probability of brain waste
for bachelor holder, by Mattoo et al..
bwaste brain waste country of origin, US 2000 (2005)
workers remittances as % World Bank
rem remittances of GDP, mean 1990-2000 (2006)
proportion of % of population 20-29 World Bank
ypop young people years, mean 1990-2000 (2006)

The determination rate is rather unsatisfactory, so the results of should be interpreted

with caution. Nevertheless, the empirical analysis has shown that brain waste may affect
negatively the ex ante (before the migration) educational investments in the countries of
migration. It has also demonstrated that the measure of educational attainment is very likely to
be influenced by the demographic structure of population. The most plausible solution in the
further research on the impact of skilled migration on human capital accumulation is to apply
the alternative measure of investment in education. I suggest that the most appropriate
measure is the tertiary gross enrollment rate, because it is “neutral” in relation to demographic
structure of the population. However, most of the empirical analyses so far have demonstrated
that the enrollment rates were negatively correlated with migration probability. This may lead
to the conclusion, that the main beneficial effect of brain drain (i.e. induced education effect),
presented by the new economics of brain drain approach, is more a myth than reality.

6. Conclusion

The theoretical and empirical analyses presented above clearly point out, that the
predictions of “beneficial brain drain” (BBD), made within the new economics of brain drain
school, are to a large extent overoptimistic. There is little evidence for the existence of
induced education effect – a situation when migration probability alone helps to boost the
investments in education at the country of emigration. Moreover, as I have demonstrated in

19
the empirical analysis, the threat of brain waste, i.e. inappropriate use of immigrant’s human
capital in the destination country, may in fact lower the ex ante investments in education.
However, it was not my intention to discard completely the possibility of beneficial
effects of brain drain in the sending country. The new economics of brain drain still has great
potential for development, but the research methods should be modified or at least diversified.
First, the Diaspora effects should be analyzed with greater attention – not only on theoretical,
but also on empirical ground. Second, the issue of transnationalism of skilled persons, and its
impact on economic development of a home country must be investigated13. In both fields the
empirical research is welcomed not on the macro scale, but on the micro level. This means
more survey analyses, when the researcher contacts the immigrant personally, and less macro-
investigations, based on the limited data from censuses and population registers. The same
holds true for the induced education effect and the measurement of remittances.
Moreover, the investigations on induced education should be continued, but in the
areas where human capital is easily transferable. In my opinion, this is not the case of tertiary
education14, but rather vocational education and language learning. The case of Poland may
be quite instructive. After the EU enlargement in 2004 the British and Irish labor market were
opened to Polish workers. Thousands of Poles went to learn English, others started vocational
trainings (eg. to obtain bus driver license). Many of them migrated and were successful on the
foreign labor market – because they responded correctly to the demand from British and Irish
labor market. On the other hand, the university graduates were not so lucky – the risk of over-
qualification abroad was significant. Thereby, many young Poles withdrew from tertiary
education and migrated to Britain, to work in the secondary sector of the economy (i.e. 3D
jobs – difficult, dirty and dangerous).
Finally, in my opinion the analysis of brain drain, but also more general –
investigation of migration and development cannot be done only within the narrow field of
economics. An interdisciplinary approach is a vital necessity, and cooperation between
economists and historians, demographers, sociologists, or social scientists from other
disciplines is the future of research in this area.

13
Some analyses have already been made by sociologists and anthropologists, for instance by Portes and his
associates (Portes et al., 2002), but this research should be more formalized within the economic models.
14
With the exception of certain, limited occupations, as IT Workers or Physicians.
20
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