Desai, Kapur, and McHale

The following is a paper that was prepared on the topic of Brain Drain. The paper pays special attention to an an artical by Desai, Kapur, and McHale entitled “Sharing The Spoils: Taxing International Human Capital Flows.” that was published in September of 2001

I. Introduction

The topic of “brain drain” has been historically considered with a great deal of intersection between economic and social analysis. In the field of soft sciences, “brain drain” refers to both the sale of knowledge of an individual and the transfer of human capital across the lines of nation-states. Often, mass-media will refer to the “brain drain” of Iraqi scientists, for example. This, while a very important subject in current affairs, isn’t the type of brain drain that most economists consider when writing on the subject. In regards to economics, the largest field of debate about “brain drain” tends to focus on the transfer of human capital from a source country to a country of destination (Carrington and Detragiache). Typically, the source country is the nation from which a person attained their particular skill set or knowledge base. Often, however, the source country is only the place of original residency. Because of the uncertainty in definitions when it comes to what exactly “brain drain” is, it has been repeatedly pointed out that much of the work in regards to the topic of brain drain is very anecdotal in nature. To put it clearly, however, the topic of economic brain drain considers how much movement of human capital is happening and what should be done, if anything to restrict the movement of that human capital. Essentially, the problem of brain drain is one that surrounds migration. Migration of skilled labor is measured by immigration (movement into a country) and emigration (movement out of a country).

Much of the scholarly literature on the topic of brain drain rests on certain assumptions and arguments made in the nineteen-seventies by Indian economist Jagdish Bhagwati. Bhagwati’s revolutionary work viewed the world as market for attracting labor much like a market that would exist for any other good. He actually proposed that a tax be levied on the individual worker and be paid to the country of origin to account for the loss in economic productivity stemming from the loss of skilled human capital. Bhagwati’s work of the 1980’s served as the main focal point in economic literature that was critical of the nineteen-seventies outflow of skilled workers from third world countries. Many other works on the topic since the 1980’s have cited Bhagwati’s work as central to this portion of economic literature. Bhagwati, however, hasn’t stopped his work on the topic of brain drain with the information technology outflow of the nineteen-seventies and eighties from India to the United States. In some of his more recent work, he says that the brain drain of the 1960’s is happening again, but potentially with greater effects than before. (Bhagwati 2003) The ideas of Bhagwati and his defense of migration and arguments for embracing migration of human capital, as well as the 2001 work of Desai, Kapur, and McHale in “Sharing The Spoils: Taxing International Human Capital Flows” will be critical in constructing the argument that this paper will make. This paper will address the concepts of: why brain drain occurs, why human capital flight is an issue in economics and public policy, and what can be done to prevent the flow of human capital resources out of a nations borders and to promote the recirculation of current human capital operating outside their source countries borders. Ultimately, this paper will argue that brain drain is actually positive in it’s economic and social force, but above all that it is inevitable.

II. Why Brain Drain?
Bhagwati points out that there are several key distinctions that must be made when addressing the subject of why human capital movement from one location to another (Bhagwati 2004). First, you must be able to distinguish between rich and poor countries. Though it is likely impossible to characterize every country in the world as fitting into one of these two categories, we can assess them comparatively; meaning, if a person is to migrate from country X to country Y we can comparatively assess country X as being poorer than country Y. The second distinction is between skilled and unskilled workers. Either an individual already has a certain skill set and migrates out of a country to put that knowledge to use elsewhere, or the individual migrates out of a country to learn a particular skill set or to just garner better wages and a better standard of living without necessarily attaining a new skill set. Finally, you must distinguish between legal and illegal immigration. This is important because large amounts of the legal immigration that takes place to richer countries occurs because a individual has a certain skill set that allows them to legally obtain admission to a richer country. Inversely, unskilled laborers have no such special consideration when considering migration. Thus, much of the migration of unskilled labor occurs illegally, whereas skilled labor migration occurs with the destination countries approval.

With these three considerations in mind, it is critical to understand that only 175 million people, less than three percent of the worlds population, migrate across borders every year to reside for more than a year (Bhagwati 2004). Because this set of numbers makes the migration of labor seem small, over time the numbers can be menacing. When laborers stay in a destination country for longer than one year, the number begin to compound to a point where eventually there is a large portion of the worlds population in lesser developed countries living outside their country of origin. Essentially, while the numbers might be small, the effects ultimately can be rather large.

Just as in any segment of economics, things can be broken down to functions of supply and demand. Bhagwati notes in “In Defense of Globalization” that the direction of human capital flight can be broken down to a simple effect of push and pull. Things that influence immigrant’s willingness to leave a country are push variables. These include things like the economic state of the country of origin, the opportunities for financial success at home, the potential for advancement in a given field and the ability to support their family. Pull factors are factors that influence where the laborer will go once they leave their home country. These include things like, the relative ease with which immigration to a specific country can occur, the attractiveness and potential for success in a certain field in a host country, and the ability for advancement. In breaking down Bhagwati’s work, it seems that the pull factors might be integral to migration not only from poor-to-rich countries but also from rich-to-more rich countries. The comparative analysis of rich vs. poor mentioned above is particularly important here. For example, if a doctor would be happier in the United Kingdom than in India, migration from the United Kingdom to India might occur. On a long enough timeline, the doctor might realize that there is a greater potential for work in the United States instead of the United Kingdom. This is an illustration for capital flight from one developed country to another. The question then remains, how does a destination country go about attracting foreign human capital to their country?
It goes without debate that when a rational economic actor has a scarcity of a certain resource, certain trade regimes or purchase agreements are put in place to obtain said resource. When countries like Canada, New Zealand, and Australia found themselves with a scarcity of skilled labor, they seek skilled labor abroad. The major argument for why brain drain happens is that there are greater opportunities in a destination country that are provided in the country of origin. Essentially, the supply side of the equation for workers considering migration far outweighs the demand side of the equation that might keep them in their country of origin. With this clearly being the state of international affairs, the economic ramifications on the destination and origin countries are essentially where the bulk of the debate takes place.

III. Why human capital flight is an issue in economics and public policy?

In the situation in which a skill set is learned in the country of origin and then the individual migrates to another country for employment, there are several major arguments as to how this situation could potentially be beneficial to the destination country. The first major argument for why migration of skilled laborers helps the destination countries is that it is an addition of a skilled individual to the workforce without having to have a correlating expansion of the educational system. When an individual with a post-secondary education, for example, moves to the United States, they add to the production of the U.S. economy without United States taxpayers having to pay for their primary education. Additionally, companies and the federal governments in the host countries don’t have to worry about ever paying things like social security, pension plans, or for long term health care for most of these individuals; the argument being that they usually migrate back to their country of origin due to family ties far before they ever are eligible to receive such services. Another very important argument as to how migration of skilled workers helps the host country is that the individuals are usually making above the average wage in a given country due to their particular skill set. This means that they are being taxed on a greater income than the average illegal, or even legal, unskilled migrant worker. When the above two arguments are combined, one could make a very strong case for the fact that skilled immigrants could potentially save the social services system in the United States. With baby boomers facing retirement and collecting more money from the system than ever before, the United States, for example, needs to import skilled labor to add to the labor force at very little, or no cost to us. Richer countries tend to look fondly on skilled labor because they are viewed as a class of individuals that contribute positively economically and can easily be assimilated into culture. As mentioned before, since much of the skilled labor occurs through the proper legal channels, these individuals are viewed as law-abiding citizens that, for the most part, can do nothing but positively influence the growth of community and society. For unskilled labor, however, it seems that almost the inverse is true. Those that don’t possess a certain skill set to obtain legal entrance into a richer country like the United States are viewed as a plague on our society and a drain on our resources. These individuals don’t enjoy the same befits of citizenship that skilled laborers do. This can be viewed through a simple supply and demand function. From a supply and demand model, there is excess supply of unskilled workers wanting to migrate to rich countries and a excess demand for skilled workers. Rich countries are faced with the constant task of constantly balancing this asymmetry in supply and demand . This places richer countries in a paradox of creating policy. Rich countries attempt to craft immigration policy and immigration reform that simultaneously encourages and discourages immigration.

IV. What is the net effect of capital flight?

Once a destination country takes on a skilled laborer, their country of origin can do very little to attract the individual back. This can be seen through the large amount of exchange students in the United States in the fields of engineering and mathematics that obtain terminal degrees at United States institutions and then largely remain in the United States, a large portion of which become U.S. citizens. The best that many countries can hope for is a lagged migration back to the country of origin at a later date after wealth has been accumulated. There has, however, been very little work to this point studying the aggregate effect on economies upon return at a date much later than departure.
The best lens for countries of origin to view capital flight is one that ultimately remains very pro-globalization. The “network effect” of capital flight is on way that a country that is losing a large amount of skilled labor might not ultimately lose out when it comes to economic growth. Essentially, the argument is that when a country develops a positive relationship with a more developed country, bilateral trade and economic relationships can increase. India seems to be a prime example with which to view this potential economic effect. The positive reputation that many Indian IT professionals began to receive in Silicon Valley essentially meant that the market began to view Indian products when it came to technology as a respected brand name. This so-called “brand name effect” (Desai, Kapur, and McHale 2001) is one of the critical reasons that many Indian firms have been very successful in attracting large software contracts from countries that played host to many highly skilled Indian nationals. Ultimately, this is one area in which it is quite possible to argue that brain drain actually stimulates trade and economic connectivity that would otherwise be impossible. The counter-argument, however, is that India might have been much better off if their skilled laborers might have remained at home during the nineteen-seventies, eighties, and nineties. This argument, however, fails because there is no guarantee that Indian software markets would have ever attained the positive relationship with United States markets if it weren’t for the capital flight from Indian to Silicon Valley during the technology boom.

V. What can be done about capital flight?

Ultimately, when debating brain drain, the easiest argument to win is that capital flight is inevitable; that is, there is very little that can be done to stop it. Working on the basis that no matter what controls on human capital are put in place that human capital will still migrate, what ought policymakers consider when making decisions that regulate or tax the flow of human capital? First, I believe that in all of the scholarly literature on the subject of capital flight, it seems that a resounding argument that many social scientists make is that the effects of capital flight can be minimized in a regime of dual citizenship. The argument is plainly stated that: when a person is allowed to hold dual allegiance, they are more likely to maintain economic connectivity to the country of origin.

Potentially the most important argument about how to handle the international flow of human capital comes from Bhagwati and is elaborated on by Desai, Kapur, and McHale in “Sharing The Spoils: Taxing International Human Capital Flows”. The Bhagwati tax proposal essentially argues that there should be a small tax on the income of a worker in the rich country that goes back to the country of origin. Desai, Kapur, and McHale argue that the aggregate income of Indians living in the United States accounts for 10% of the Indian national income. This is true, withstanding the fact that Indian born residents are only .1% of the American population. The argument that Bhagati and the Desai, Kapur, and McHale paper construct is that even a small tax would go a long way in relieving the effects of capital flight in the country of origin. The feasibility of such a tax is something that has been debated on the subject at length. Even if there was a workable way to impose such a tax, one fear is that it might be too restrictive and prevent human capital migration.

Though this paper will only briefly discussed the concept of “reverse brain drain”, this is another one of the potential aspects of capital flight that can ultimately end up helping the source country. It is possible, in many instances that an unskilled individual would come to the United States or other rich countries and attain terminal degrees and then return to their source countries economy. As mentioned above, a majority, around seventy percent, of foreign-born students that are educated in the United States stay after they have competed their education. This means that nearly thirty percent of these individuals return to their home countries. Though the number is low, the impact that these individuals can have on their native country cannot be understated. Also, potentially under the heading of “reverse brain drain” is the outflow of college-educated individuals who are native United States citizens to poorer countries. Examples of this include non-profit organizations like the Red Cross, Doctors Without Borders, and the United States Peace Corps. These are all areas in which there is a great potential for an out-flow of United States trained laborers to proved developmental assistance that is necessary for the transition from a struggling developing nation to a more developed, advanced nation. It is incredibly important to note that this argument clearly intersects with arguments about illegal immigration mentioned before. Richer nations provide a relatively low amount of outflow of skilled laborers to assist in development not because of a selfless philanthropic policies, but because richer countries want to discourage illegal immigration from those countries by unskilled laborers.

VI. Conclusion
From the look of international trade agreements and overall globalization, it seems that borders are becoming more and more porous with each passing day. Globalization has created a world in which disallowing immigration isn’t a viable policy option. With the growth and increasing average age of the world’s population in many richer countries, the demand for skilled labor certainly isn’t going to decline. Rich countries will be faced with the task of devising immigration policy that selectively chooses skilled labor over unskilled labor while still understanding that some unskilled labor will always exist and is a necessity. As previously mentioned, if there is one major argument to take from this paper, it is that the transfer of human capital across borders is inevitable and that rich countries will continue to benefit from their attractiveness to skilled laborers abroad and, at best, source countries can hope to marginalize the negative economic effects by embracing what positive can come of capital flight and potential taxation regimes.

VII. Critical comments on Desai, Kapur, and McHale
One major criticism that I have of the Desai, Kapur, and McHale paper is actually an exact line from the paper. It says that, “this paper raises more questions than it resolves.” This is quite troublesome to me because it seems to undermine the previous thirty-seven pages of reading and writing that was done prior to that statement.
It does, however seem to continually make the point that any discussion of brain drain must come from a social as well as economic perspective. Much like large amounts of the literature within the field of economics, the topic of brain drain is one that essentially forces any scholar to continually account for different variables that are difficult to quantify economically.

Another subject that I believe is an important aspect of my criticism of the paper also comes from a one line blip in the conclusion of their work. They ask, “How will this affect North-South bargaining in global trade negotiations?” I believe that this is one area of the paper where the economic analysis seems to be rather lacking. I think that a much stronger correlation could be drawn between brain drain and the idea of economic interconnectivity and trade. The farthest that the paper goes is to potentially suggest that there could be a positive correlation between trade and brain drain, but they never fully discuss why this is true other than a “brand loyalty” to a country.

My final aspect of criticism of the Desai, Kapur, and McHale paper is simply the organization of all of the graphics at the end of the paper. While I’m usually not too receptive to interspersed graphs and tables, in this instance I think it would have made their argument much more compelling. The reader is left with a felling of misunderstanding throughout large portions of the paper that could be solved with more information at any given point. Essentially, I would argue that the elements of data that Desai, Kapur, and McHale leave for the end of the paper could be very useful in constructing a stronger more coherent argument throughout the paper.