Abstract
Authors of Working Papers are normally staff members of the Fund or consultants, although on occasion outside authors may collaborate with a staff member in writing a paper. The views expressed in the Working Papers or their summaries are, however, those of the authors and should not necessarily be interpreted as representing the views of the Fund. Copies of individual Working Papers and information on subscriptions to the annual series of Working Papers may be obtained from IMF Publication Services, International Monetary Fund, 700 19th Street, Washington, D.C. 20431. Telephone: (202) 623-7430 Telefax: (202) 623-7201 This compilation of summaries of Working Papers released during July-December 1994 is being issued as a part of the Working Paper series. It is designed to provide the reader with an overview of the research work performed by the staff during the period.
This paper examines the impact of the migration of human capital on the growth and levels of incomes in the context of an endogenous growth model. A two-country endogenous growth model with heterogeneous agents is used to study the impact on growth and incomes of migration of human capital that could arise from wage differentials. The paper shows that wage differentials can truncate the distribution of talent in the country of emigration in the presence of migration and assimilation costs. The aftertax wage differential between the home and the foreign country determines where the domestic human capital distribution will be truncated: the higher the tax differential, the lower the point of truncation. This point of truncation is reduced with decreases in migration and assimilation costs, as well as with increases in average levels of education in the home country.
It can be shown that “brain drain” reduces the growth rate of the effective human capital that remains in the economy and, hence, generates a permanent reduction of per capita income growth in the home country. Brain drain also can induce an increase in the growth rate of the country to which migration has taken place although the effect can vary over time, depending on the evolution of the ratio between the average human capital in the two countries. The paper also shows that migration of human capital can lead in the long run to differences in both the growth rates and the levels of per capita incomes across countries. The magnitude of the adverse impact of the brain drain depends on the contribution of the quality of differing levels of human capital in the production process. Unfortunately, this is an area on which little theoretical work has been done, and for which it is extremely difficult to develop empirical evidence.
The paper also analyzes the impact of policies aimed at fostering human capital accumulation by subsidizing education. In a closed economy, a tax-financed increase in education subsidy that preserves the fiscal balance will induce a positive growth effect while, in an open economy (where labor is mobile), such a policy can have a negative impact on growth because migration takes place beyond a particular education level. The optimal policy should take this information into account and, in the presence of migration, allow the subsidy to increase with the education effort up to this level of education.
The analysis presented in this paper has important implications for economic policy in developing countries. For example, demand management, which is an important element of adjustment programs, is frequently achieved by a combination of increased taxes and wage restraints. To the extent that ability is an important determinant of growth, the design of adjustment programs should be concerned with the consequences of such policies for migration.