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We are grateful to Paul Cashin, Ricardo Caballero, Jose De Gregorio, Elhanan Helpman, Mohsin Khan, Don Mathieson, Sergio Rebelo and Xavier Sala-i-Martin for some very useful comments on an earlier draft. All remaining errors are, of course, the authors’ responsibility.
The higher rate of return or wage rate could be calculated adjusting for an equalizing difference for a preference for location in home country.
Recent endogenous growth models suggest that government tax policy can affect long-run growth rates. Among them are Lucas (1990), King and Rebelo (1990), Kim (1992), Jones, Manuelli and Rossi (1993), Rebelo and Stokey (1993) and Cashin (1994). However, these models are restricted within a closed economy model, which cannot allow for the effects of taxes on economic growth through inducing brain drain.
This proposal received very serious attention among academics in the mid seventies. A major conference was held on the issue of instituting a tax on the brain drain in Bellagio in 1975. The proceedings of this conference are published in Bhagwati and Partington (1976) and Bhagwati (1976).
Such flows of human capital may also affect the speed of convergence of per-capita incomes among the economies of the world. See Barro and Sala-i-Martin (1994), chapter 9.
See also De Gregorio and Kim (1994) who use this type of model to study the effects of credit markets on education, income distribution and growth.
See Bhagwati (1976) and Bhagwati and Partington (1976) for evidence on wage differentials between the domestic country and the country of migration as well as some description of government intervention in developing country labor markets.
This specification of subsidies for growing economies is fairly flexible. If education subsidies are not growing as fast as human capital and output, they will be negligible in the long-run. The steady state for such case of slow growing subsidies is considered as the case where α is equal to zero.
The subscripts “d” and “f” will be used to denote “home: and foreign country variables respectively.
Of course, there might be some rare people who are more productive in foreign countries than at home and whose q is greater than one. However, even an allowance of q greater than one does not change our main results.
We could assume that the transaction cost varies inversely with the skill level of agents. This might reflect that the more smart people can adjust to new environment with less costs or that some countries admit people with higher skills more readily than with lower skills. However, such modification does not change the main results on the growth effects of brain drain, although it will affect the path of transitional dynamics.
Instead we could assume the fixed cost is constant over time. Then in growing economies, the magnitude of the effect of fixed cost on the migration decision will decrease over time. Hence, the analysis for the steady state where the fixed cost converges to zero is the same as the case of zero fixed cost studied in the next section.
In order to highlight the effects of differential tax/wage policies, we might make a more specific assumption that firms in both countries operate under identical technologies (i.e., λ = 1). Under this assumption of no technology gap, differential government policies alone generate the main results of this paper including the effects of brain drain on growth.
See De Gregorio and Kim (1994) for a discussion of the role of credit markets in such a model. Allowing domestic credit markets to operate will not change the results of this paper substantially.
In this heterogeneous agent model, the optimal choice of education investment of each individual depends on his ability as well as his residence when old. In particular, the more able agents spend more time on education, as can be easily shown by ∂vj/∂δj > 0.
The emigration of the whole population can take place even though γ is not zero, as far as the fixed cost of migration is small enough, compared to the difference between after tax return in foreign country and home country.
The superscript “E” is used to denote the country of emigration and the “I”, the country to which migration takes place.
See proposition 2 above.
gI,N refers to the component of the growth of the receiving country which is due to the residents of the country and gI,F refers to the component which is due to the migrants. As Figure 2 illustrates and as discussed above, the first part of these components remains fixed, whereas the latter is varying, over time in accordance with the relative human capital levels of the two countries.
In endogenous growth models where human capital accumulation depends on time spent on education, the sign of (dH/dτd) depends on the existence of subsidies. In case of no subsidies, the wage tax rate does not affect the growth rate since it affects the current and future after-tax wage equivalently (see Lucas(1990)).
This phenomenon is probably observed quite frequently in most developing countries since migrant workers tend to be either highly educated such as doctors, researchers, engineers etc. or low skilled manual laborers like cab drivers. This phenomenon is also quite frequently induced by policy which allows only for migration from the two ends of the ability distribution (e.g., the U.S.).
As long as human capital grows at a constant rate, so does output.
In recent years, remittances from migrant workers, have been an important source of inflows to many developing countries.